UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








Form
10-Q





(Mark
One)


T
            Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended March 31,
  2010





£
            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 Incorporation or
      Organization)
            
            (IRS
      Employer Identification No.)102
      South Main Street, Greenville, South Carolina
            
            29601(Address
      of Principal Executive Offices)
            
            (Zip
      Code)





(864)
255-7900


Registrant's
telephone number, including area code





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No£.




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes £ No£





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):


Large
      Accelerated Filer £
            Accelerated
      filer TNon-accelerated
      filer£
            Smaller
      reporting company £


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ NoT.





The
number of outstanding shares of the issuer's $1.00 par value common stock as of
May 3, 2010 was 215,670,558.












PART
      I. FINANCIAL INFORMATIONItem
      1. Financial
      StatementsTHE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share data) (Unaudited)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009AssetsCash
      and due from banks
            
            $
            156,568
            
            
            $
            147,297
            
            
            $
            190,346Interest-bearing
      bank balances
            
            
            1,059,598
            
            
            
            5,429
            
            
            
            192,962SecuritiesAvailable
      for sale, at fair value
            
            
            2,220,551
            
            
            
            2,060,448
            
            
            
            2,095,401Held
      to maturity (fair value $101,715, $18,460, and $129,496,
      respectively)
            
            
            99,452
            
            
            
            18,039
            
            
            
            127,516Total
      securities
            
            
            2,320,003
            
            
            
            2,078,487
            
            
            
            2,222,917Loans
      held for sale (at March 31, 2009, includes $16,960 measured at fair
      value)
            
            
            13,296
            
            
            
            29,726
            
            
            
            15,758Loans
      held for investment
            
            
            8,002,694
            
            
            
            9,986,681
            
            
            
            8,386,127Less:  Allowance
      for loan losses
            
            
            (373,146
            )
            
            
            (280,156
            )
            
            
            (365,642
            )Net
      loans held for investment
            
            
            7,629,548
            
            
            
            9,706,525
            
            
            
            8,020,485Bank-owned
      life insurance
            
            
            301,498
            
            
            
            295,855
            
            
            
            302,830Premises
      and equipment, net
            
            
            257,499
            
            
            
            285,580
            
            
            
            261,523Accrued
      interest receivable
            
            
            37,538
            
            
            
            42,927
            
            
            
            37,304Goodwill
            
            
            214,118
            
            
            
            224,161
            
            
            
            214,118Other
      intangible assets, net
            
            
            14,698
            
            
            
            20,568
            
            
            
            15,707Other
      assets
            
            
            423,788
            
            
            
            448,692
            
            
            
            421,032Total
      assets
            
            $
            12,428,152
            
            
            $
            13,285,247
            
            
            $
            11,894,982Liabilities
      and Shareholders' EquityLiabilitiesDepositsNoninterest-bearing
      retail and commercial deposits
            
            $
            1,109,153
            
            
            $
            1,067,953
            
            
            $
            1,124,404Interest-bearing
      retail and commercial deposits
            
            
            6,696,069
            
            
            
            6,316,548
            
            
            
            6,225,707Total
      retail and commercial deposits
            
            
            7,805,222
            
            
            
            7,384,501
            
            
            
            7,350,111Brokered
      deposits
            
            
            1,958,948
            
            
            
            1,842,577
            
            
            
            1,946,101Total
      deposits
            
            
            9,764,170
            
            
            
            9,227,078
            
            
            
            9,296,212Short-term
      borrowings
            
            
            300,647
            
            
            
            1,342,088
            
            
            
            322,702Long-term
      debt
            
            
            1,115,984
            
            
            
            931,977
            
            
            
            1,116,869Accrued
      interest payable
            
            
            44,942
            
            
            
            74,032
            
            
            
            36,658Other
      liabilities
            
            
            282,759
            
            
            
            157,889
            
            
            
            129,367Total
      liabilities
            
            
            11,508,502
            
            
            
            11,733,064
            
            
            
            10,901,808Commitments
      and contingencies (Note 9)Shareholders'
      equityPreferred
      stock-no par value; authorized 10,000,000 shares; issued and outstanding
      351,650, 537,026, and 351,650 shares, respectively
            
            
            336,681
            
            
            
            518,549
            
            
            
            335,783Common
      stock-par value $1 per share; authorized 325,000,000 shares; issued and
      outstanding 215,624,517, 84,781,160, and 215,455,541 shares,
      respectively
            
            
            215,625
            
            
            
            84,781
            
            
            
            215,456Surplus
            
            
            1,345,397
            
            
            
            1,182,423
            
            
            
            1,344,984Retained
      deficit
            
            
            (1,016,090
            )
            
            
            (291,199
            )
            
            
            (934,598
            )Accumulated
      other comprehensive income, net of deferred taxes
            
            
            37,426
            
            
            
            57,018
            
            
            
            30,938Other,
      net
            
            
            611
            
            
            
            611
            
            
            
            611Total
      shareholders' equity
            
            
            919,650
            
            
            
            1,552,183
            
            
            
            993,174Total
      liabilities and shareholders' equity
            
            $
            12,428,152
            
            
            $
            13,285,247
            
            
            $
            11,894,982





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


1





THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except per share data) (Unaudited)Three
      Months EndedMarch
      31,2010
            
            
            2009Interest
      IncomeInterest
      and fees on loans
            
            $
            98,860
            
            
            $
            124,119Interest
      and dividends on securities:Taxable
            
            
            17,486
            
            
            
            20,548Exempt
      from federal income taxes
            
            
            232
            
            
            
            2,234Total
      interest and dividends on securities
            
            
            17,718
            
            
            
            22,782Interest
      on interest-bearing bank balances and short-term
    investments
            
            
            284
            
            
            
            1Total
      interest income
            
            
            116,862
            
            
            
            146,902Interest
      ExpenseInterest
      on deposits
            
            
            37,684
            
            
            
            54,843Interest
      on short-term borrowings
            
            
            229
            
            
            
            1,146Interest
      on long-term debt
            
            
            5,424
            
            
            
            5,895Total
      interest expense
            
            
            43,337
            
            
            
            61,884Net
      Interest Income
            
            
            73,525
            
            
            
            85,018Provision
      for Credit Losses
            
            
            95,123
            
            
            
            142,627Net
      interest income after provision for credit losses
            
            
            (21,598
            )
            
            
            (57,609
            )Noninterest
      Income
            
            
            21,132
            
            
            
            23,741Noninterest
      Expenses
            
            
            83,653
            
            
            
            90,241Loss
      before income taxes
            
            
            (84,119
            )
            
            
            (124,109
            )Income
      tax benefit
            
            
            (3,525
            )
            
            
            (49,706
            )Net
      Loss
            
            
            (80,594
            )
            
            
            (74,403
            )Preferred
      stock dividends
            
            
            (4,337
            )
            
            
            (9,088
            )Deemed
      dividend resulting from accretion of discount
            
            
            (898
            )
            
            
            (844
            )Deemed
      dividend resulting from induced conversion
            
            
            -
            
            
            
            (6,475
            )Amounts
      allocated to participating security holders
            
            
            -
            
            
            
            (1
            )Net
      Loss Available to Common Shareholders
            
            $
            (85,829
            )
            
            $
            (90,811
            )Average
      Common Shares Outstanding, Basic
            
            
            215,523
            
            
            
            82,223Average
      Common Shares Outstanding, Diluted
            
            
            215,523
            
            
            
            82,223Loss
      Per Common Share, Basic
            
            $
            (0.40
            )
            
            $
            (1.10
            )Loss
      Per Common Share, Diluted
            
            
            (0.40
            )
            
            
            (1.10
            )





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


2





THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CHANGESIN
      SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)(in
      thousands, except share and per share data) (Unaudited)Shares
      of CommonStock
            
            
            CommonStock
            
            
            PreferredStock
            
            
            Surplus
            
            
            Retained
      Deficit andOther
            
            
            Accumulated
      Other Comprehensive Income,Net
            
            
            TotalBalance,
      December 31, 2008
            
            
            74,643,649
            
            
            $
            74,644
            
            
            $
            566,379
            
            
            $
            1,135,920
            
            
            $
            (198,970
            )
            
            $
            42,558
            
            
            $
            1,620,531Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (74,403
            )
            
            
            -
            
            
            
            (74,403
            )Other
      comprehensive income, net of income tax of $8,795
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,460
            
            
            
            14,460Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (59,943
            )Common
      dividends declared ($0.01 per share)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (849
            )
            
            
            -
            
            
            
            (849
            )Preferred
      dividends declared
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (9,088
            )
            
            
            -
            
            
            
            (9,088
            )Accretion
      of discount on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            844
            
            
            
            -
            
            
            
            (844
            )
            
            
            -
            
            
            
            -Common
      stock activity:Conversion
      of preferred stock
            
            
            9,988,306
            
            
            
            9,988
            
            
            
            (48,674
            )
            
            
            45,161
            
            
            
            (6,475
            )
            
            
            -
            
            
            
            -Director
      compensation
            
            
            74,706
            
            
            
            75
            
            
            
            -
            
            
            
            55
            
            
            
            -
            
            
            
            -
            
            
            
            130Dividend
      reinvestment plan
            
            
            30,193
            
            
            
            30
            
            
            
            -
            
            
            
            35
            
            
            
            -
            
            
            
            -
            
            
            
            65Employee
      stock purchase plan
            
            
            27,238
            
            
            
            27
            
            
            
            -
            
            
            
            42
            
            
            
            -
            
            
            
            -
            
            
            
            69Restricted
      stock plan
            
            
            17,718
            
            
            
            18
            
            
            
            -
            
            
            
            516
            
            
            
            -
            
            
            
            -
            
            
            
            534Stock
      option expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            685
            
            
            
            -
            
            
            
            -
            
            
            
            685Other,
      net
            
            
            (650
            )
            
            
            (1
            )
            
            
            -
            
            
            
            9
            
            
            
            41
            
            
            
            -
            
            
            
            49Balance,
      March 31, 2009
            
            
            84,781,160
            
            
            $
            84,781
            
            
            $
            518,549
            
            
            $
            1,182,423
            
            
            $
            (290,588
            )
            
            $
            57,018
            
            
            $
            1,552,183Balance,
      December 31, 2009
            
            
            215,455,541
            
            
            $
            215,456
            
            
            $
            335,783
            
            
            $
            1,344,984
            
            
            $
            (933,987
            )
            
            $
            30,938
            
            
            $
            993,174Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (80,594
            )
            
            
            -
            
            
            
            (80,594
            )Other
      comprehensive income, net of income tax of $3,494
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,488
            
            
            
            6,488Comprehensive
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (74,106
            )Accretion
      of discount on preferred stock
            
            
            -
            
            
            
            -
            
            
            
            898
            
            
            
            -
            
            
            
            (898
            )
            
            
            -
            
            
            
            -Common
      stock activity:Dividend
      reinvestment plan
            
            
            41,414
            
            
            
            41
            
            
            
            -
            
            
            
            (18
            )
            
            
            -
            
            
            
            -
            
            
            
            23Employee
      stock purchase plan
            
            
            83,640
            
            
            
            84
            
            
            
            -
            
            
            
            (33
            )
            
            
            -
            
            
            
            -
            
            
            
            51Restricted
      stock plan
            
            
            43,922
            
            
            
            44
            
            
            
            -
            
            
            
            166
            
            
            
            -
            
            
            
            -
            
            
            
            210Stock
      option expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            321
            
            
            
            -
            
            
            
            -
            
            
            
            321Other,
      net
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (23
            )
            
            
            -
            
            
            
            -
            
            
            
            (23
            )Balance,
      March 31, 2010
            
            
            215,624,517
            
            
            $
            215,625
            
            
            $
            336,681
            
            
            $
            1,345,397
            
            
            $
            (1,015,479
            )
            
            $
            37,426
            
            
            $
            919,650





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


3





THE
      SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands) (Unaudited)Three
      Months Ended March 31,2010
            
            
            2009Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (80,594
            )
            
            $
            (74,403
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activitiesProvision
      for credit losses
            
            
            95,123
            
            
            
            142,627Depreciation,
      amortization, and accretion, net
            
            
            12,518
            
            
            
            9,420Write-downs/loss
      on other real estate owned
            
            
            5,492
            
            
            
            124Share-based
      compensation expense
            
            
            549
            
            
            
            1,370Loss
      on securities
            
            
            389
            
            
            
            2,954Gain
      on sale of mortgage loans
            
            
            (888
            )
            
            
            (439
            )Gain
      on certain derivative activities
            
            
            (59
            )
            
            
            (1,135
            )(Gain)
      loss on disposition of premises and equipment
            
            
            (5
            )
            
            
            3Loss
      on non-mortgage loans held for sale
            
            
            -
            
            
            
            1,838Gain
      on early extinguishment of debt
            
            
            -
            
            
            
            (52
            )Origination
      of loans held for sale
            
            
            (51,054
            )
            
            
            (73,539
            )Sale
      of loans held for sale and principal repayments
            
            
            55,891
            
            
            
            75,716Decrease
      (increase) in other assets
            
            
            28,636
            
            
            
            (47,851
            )Decrease
      in other liabilities
            
            
            (4,004
            )
            
            
            (7,825
            )Net
      cash provided by operating activities
            
            
            61,994
            
            
            
            28,808Cash
      Flows from Investing ActivitiesSale
      of securities available for sale
            
            
            -
            
            
            
            5,729Maturity,
      redemption, call, or principal repayments of securities available for
      sale
            
            
            126,144
            
            
            
            92,948Maturity,
      redemption, call, or principal repayments of securities held to
      maturity
            
            
            26,937
            
            
            
            4,665Purchase
      of securities available for sale
            
            
            (93,520
            )
            
            
            (67,437
            )Repayments
      of loans held for investment, net of originations
            
            
            234,521
            
            
            
            47,867Sale
      of loans originally held for investment
            
            
            24,334
            
            
            
            9,783Sale
      of other real estate owned
            
            
            9,176
            
            
            
            2,964Sale
      of premises and equipment
            
            
            234
            
            
            
            5Purchase
      of premises and equipment
            
            
            (2,009
            )
            
            
            (15,780
            )Net
      cash provided by investing activities
            
            
            325,817
            
            
            
            80,744Cash
      Flows from Financing ActivitiesIncrease
      (decrease) in deposits, net
            
            
            467,094
            
            
            
            (178,525
            )Decrease
      in short-term borrowings
            
            
            (22,054
            )
            
            
            (284,313
            )Issuance
      of long-term debt
            
            
            -
            
            
            
            250,000Payment
      of long-term debt
            
            
            (44
            )
            
            
            (26,413
            )Cash
      dividends paid on common stock
            
            
            -
            
            
            
            (747
            )Cash
      dividends paid on preferred stock
            
            
            -
            
            
            
            (9,341
            )Other
      common stock activity
            
            
            51
            
            
            
            128Net
      cash provided by (used for) financing activities
            
            
            445,047
            
            
            
            (249,211
            )Net
      change in cash and cash equivalents
            
            
            832,858
            
            
            
            (139,659
            )Cash
      and cash equivalents at beginning of year
            
            
            383,308
            
            
            
            292,385Cash
      and cash equivalents at end of period
            
            $
            1,216,166
            
            
            $
            152,726Supplemental
      Cash Flow DataInterest
      paid, net of amounts capitalized
            
            $
            35,237
            
            
            $
            59,376Income
      tax (refunds) payments, net
            
            
            (1,641
            )
            
            
            487Significant
      non-cash investing and financing transactions:Unrealized
      gain on available for sale securities
            
            
            13,332
            
            
            
            32,306Purchase
      of available for sale securities settled subsequent to
      period-end
            
            
            163,171
            
            
            
            -Loans
      transferred to other real estate owned
            
            
            35,213
            
            
            
            32,092Loans
      transferred from held for investment to held for sale
            
            
            27,678
            
            
            
            10,710Conversion
      of preferred stock into common stock
            
            
            -
            
            
            
            48,674





See 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 Consolidated Financial Statements included in TSFG's Annual
Report on Form 10-K for the year ended December 31, 2009 should be referred to
in connection with the reading of these unaudited interim Consolidated Financial
Statements. The Consolidated Balance Sheet at December 31, 2009 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. TSFG has evaluated
subsequent events for potential recognition and/or disclosure through the date
the Consolidated Financial Statements included in this Quarterly Report on Form
10-Q were issued.





Nature
of Operations





TSFG is a
bank holding company headquartered in Greenville, South Carolina that offers a
broad range of financial products and services, including banking, treasury
management, investments, wealth management, and private banking services. TSFG’s
banking subsidiary Carolina First Bank conducts banking operations in South
Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
TSFG also owns several non-bank subsidiaries. At March 31, 2010, TSFG operated
through 83 branch offices in South Carolina, 66 in Florida, and 27 in North
Carolina. In South Carolina, the branches are primarily located in the state’s
largest metropolitan areas. The Florida operations are principally concentrated
in the Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville
areas. The North Carolina branches are primarily located in the Hendersonville
and Asheville areas of western North Carolina and in the Wilmington area of
eastern North Carolina.





Regulatory
Matters





Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into a Consent
Order with the Federal Deposit Insurance Corporation (“FDIC”) and the South
Carolina State Board of Financial Institutions (the “Consent Order”). This
Consent Order provides for various things, including (among other things) the
following: (1) within 120 days of entering into the Consent Order, Carolina
First Bank must increase its Tier 1 leverage ratio to 8% and its total
risk-based capital ratio to 12%, (2) Carolina First Bank must prepare strategic,
capital, liquidity and earnings plans and related projections within certain
timetables set forth in the Consent Order and on an ongoing basis, (3) Carolina
First Bank must provide plans and meet timeframes set forth in the Consent Order
for reducing criticized assets, (4) Carolina First Bank is precluded from
extending credit to classified borrowers absent express board approval and must
ensure compliance with updated concentration limits implemented with respect to
its loan portfolio, (5) Carolina First Bank is subject to certain limitations
with respect to brokered deposits and the rates it can pay on certain customer
deposits, (6) Carolina First Bank cannot make dividends or bonus payments
without the consent of the FDIC and (7) Carolina First Bank must limit its
growth to 10% per year unless the FDIC consents otherwise. The foregoing summary
is not complete and is qualified in all respects by reference to the actual
language of the Consent Order. As a result of the Consent Order, the Bank is no
longer deemed to be “well capitalized” although all ratios at March 31, 2010
exceeded well-capitalized thresholds.





Effective
May 4, 2010, The South Financial Group, Inc. entered into a written agreement
(the “Fed Agreement”) with the Board of Governors of the Federal Reserve System
(the “Federal Reserve”). The Fed Agreement provides, among other things, that
the holding company must serve as a source of strength to Carolina First Bank,
and that except upon consent of the Federal Reserve, the holding company may not
pay dividends to shareholders or receive dividends from Carolina First Bank, the
holding company and its nonbank subsidiaries may not make payments on trust
preferred securities or subordinated debt, and the holding company cannot incur,
increase or guarantee debt or repurchase any capital securities. The Fed
Agreement also requires that the holding company submit a capital plan which
reflects sufficient capital and a cash flow plan, both of which must be
acceptable to the Federal Reserve, and follow certain guidelines with respect to
the appointment or change in responsibilities of senior officers. The foregoing
summary is not complete and is qualified in all respects by reference to the
actual language of the Fed Agreement.


5





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Going
Concern Considerations





The
Consolidated Financial Statements have been prepared on a going concern basis,
which contemplates the realization of assets and the discharge of liabilities in
the normal course of business for the foreseeable future. These Consolidated
Financial Statements do not include any adjustments relating to the
recoverability or classification of assets or the amounts and classification of
liabilities that may be necessary should we be unable to continue as a going
concern. Management continues to assess a number of factors including liquidity,
capital, asset quality, and profitability that affect our ability to continue in
operation.





Management
is in the process of evaluating various alternatives to increase tangible common
equity and regulatory capital through (i) the conversion of certain debt and
non-common equity instruments into common stock and/or cash; (ii) the issuance
of additional equity through one or more public and/or private offerings; and/or
(iii) a strategic sale of all or a portion of the Company. Additionally, TSFG is
actively evaluating asset reductions and other balance sheet management
strategies to ensure that the projected level of regulatory capital can support
its balance sheet long-term.





Current
market conditions for banking institutions, the overall uncertainty in financial
markets, uncertainty around TSFG’s potential future credit losses, and the
Company’s depressed stock price present significant challenges to the Company’s
ability to issue additional equity in public or private offerings. An equity
financing transaction that would result in capital in the amount being
considered by TSFG would result in substantial dilution to the Company's current
shareholders and could adversely affect the market price of the Company's common
stock.





There can
be no assurance as to whether these efforts will be successful, either on a
short-term or long-term basis. Should these efforts be unsuccessful, due to
existing regulatory restrictions on cash payments between Carolina First Bank
and TSFG, TSFG may be unable to discharge its liabilities in the normal course
of business. There can be no assurance that TSFG will be successful in any
efforts to raise additional capital during 2010. The pursuit of strategic
transaction alternatives may also involve significant expenses and management
time and attention.





Both the
parent company and the banking subsidiary actively manage liquidity and cash
flow needs. The parent company does not have any debt maturing during 2010 or
2011. TSFG has suspended its common and preferred dividends to shareholders. At
March 31, 2010, the parent company had $26.2 million of cash and cash
equivalents. During first quarter 2010, the parent company contributed $30
million to its subsidiary bank as a capital contribution.





Cash and
cash equivalents at the banking subsidiary at March 31, 2010 were approximately
$1.2 billion. Carolina First Bank has $134,000 of long-term debt maturing in the
remaining nine months of 2010. Liquidity at the bank level is dependent upon the
deposit franchise which funds 78.6% of the Company’s assets (or 62.8% excluding
brokered CDs). During April 2010, the FDIC approved an interim final rule
extending the Transaction Account Guarantee Program (“TAGP”), which provides
full FDIC coverage for noninterest-bearing transaction deposit accounts and
certain interest-bearing checking accounts, from June 30, 2010 to December 31,
2010 (and subject to extension for an additional one year as determined by the
FDIC). Deposit balances which are not covered by FDIC insurance total
approximately $804 million currently, and would increase to approximately $1.6
billion without the benefit of the FDIC’s TAGP. A significant portion of
uninsured deposits are public fund deposits which are collateralized by
investment securities. Loss of collateralized deposits in a liquidity crisis
would be essentially liquidity-neutral to the extent released collateral could
be sold or used to secure replacement wholesale funding. Thus, the primary
deposit-related liquidity risk relates to balances which are neither insured nor
collateralized, which total approximately $327 million currently, and would
increase to approximately $810 million without the benefit of the TAGP. Public
deposits which are currently insured but which would be uninsured and would
therefore require collateralization without the benefit of the TAGP totaled
approximately $301 million at March 31, 2010. Free securities of $1.2 billion
would meet incremental collateral needs and, along with surplus cash, represent
reserves to address liquidity needs in a crisis scenario. If a liquidity issue
presents itself, deposit promotions would be expected to yield significant
in-flows of cash, but could be limited based on limitations on maximum interest
rates imposed on TSFG by the Consent Order.





As
discussed above, effective April 30, 2010, Carolina First Bank entered into the
Consent Order. If the Company is unable to raise the capital required or
otherwise comply with the terms of the Consent Order, further regulatory actions
could be taken, and its ability to operate as a going concern could be
negatively impacted. Furthermore, because such consent orders are public, there
could be an adverse customer or market reaction to the announcement of the
Consent Order.


6





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Based on
current and expected liquidity needs and sources, management expects TSFG to be
able to meet its obligations at least through March 31, 2011. If unanticipated
market factors emerge, or if the Company is unable to raise additional capital,
successfully execute its plans, or comply with the Consent Order, its banking
regulators could take further action, which could include actions (including the
implementation of a receivership) that may have a material adverse effect on the
Company’s business, results of operations and financial position.





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.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and reserve for
unfunded lending commitments, the effectiveness of derivative and other hedging
activities, the fair value of certain financial instruments (securities,
derivatives, privately held investments, and, for purposes of goodwill
impairment evaluation, loans), income tax assets or liabilities (including
deferred tax assets and any related valuation allowance), share-based
compensation, and accounting for acquisitions, including the fair value
determinations, the analysis of goodwill impairment and the analysis of
valuation allowances in the initial accounting of loans acquired. To a lesser
extent, significant estimates are also associated with the determination of
contingent liabilities, discretionary compensation, and other employee benefit
agreements.





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 2010 presentation
with no impact on shareholders’ equity or net loss as previously reported. In
particular, beginning first quarter 2010, TSFG reclassified interest-bearing
balances held at the Federal Reserve from cash and due from banks to
interest-bearing bank balances. Amounts for prior periods (including $192.8
million at December 31, 2009 and $5.4 million at March 31, 2009) have been
reclassified to conform to the current presentation.





Cash
and Cash Equivalents





Cash and
cash equivalents include cash and due from banks, interest-bearing bank
balances, and federal funds sold. Generally, both cash and cash equivalents have
maturities of three months or less, and accordingly, the carrying amount of
these instruments is deemed to be a reasonable estimate of fair value. At March
31, 2010, interest-bearing cash balances held at the Federal Reserve totaled
$1.1 billion and are included in interest-bearing bank balances.





Loans
Held for Sale





Loans
held for sale include loans originated and intended for sale in the secondary
market, primarily residential mortgage loans and the guaranteed portion of Small
Business Administration (“SBA”) loans, as well as other loans that management
has an active plan to sell. Loans held for sale are carried at the lower of cost
or estimated fair value, generally on an individual asset basis for commercial
and mortgage loans, and on an aggregate basis for other consumer loans. Prior to
sale, decreases in fair value and subsequent recoveries in fair value up to the
cost basis are included in noninterest income or expense. Gains or losses on
sales of loans are recognized in noninterest income or expense at the time the
transfer qualifies as a sale and are determined by the difference between net
sales proceeds and the carrying value of the loans sold. Transactions that
constitute a legal sale of a portion of the loan but do not qualify to be
accounted for as a loan sale are recorded as secured borrowings.





Loans or
pools of loans are transferred from the held for investment portfolio to the
held for sale portfolio when the intent to hold the loans has changed due to
portfolio management or risk mitigation strategies and when there is a
plan


7





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


to sell
the loans within a reasonable period of time. At the time of transfer, if the
fair value is less than the cost, the difference related to the credit quality
of the loan is recorded as an adjustment to the allowance for loan losses.
Decreases in fair value subsequent to the transfer are recognized in noninterest
income or expense.





Loans or
pools of loans are transferred from the held for sale portfolio to the held for
investment portfolio when the intent to sell the loans has changed. Any
previously recorded lower of cost or market adjustments are amortized to
interest income over the remaining life of the loans.





Recently
Adopted Accounting Pronouncements





Accounting
for Transfers of Financial Assets





Accounting
Standards Update 2009-16 (“ASU 2009-16”), “Accounting for Transfers of Financial
Assets,” amends Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 860, “Transfers and Servicing,” primarily to (1)
eliminate the concept of a qualifying special-purpose entity, (2) limit the
circumstances under which a financial asset (or portion thereof) should be
derecognized when the entire financial asset has not been transferred to a
non-consolidated entity, and (3) require additional information to be disclosed
concerning a transferor's continuing involvement with transferred financial
assets. TSFG adopted this standard effective January 1, 2010 with no significant
impact on its Consolidated Financial Statements. However, this guidance could
have a significant impact on the accounting for future transfers, if
any.





Accounting
for Variable Interest Entities





Accounting
Standards Update 2009-17 (“ASU 2009-17”), “Accounting for Variable Interest
Entities,” amends FASB ASC 810, “Consolidation,” to require a comprehensive
qualitative analysis to be performed to determine whether a holder of variable
interests in a variable interest entity also has a controlling financial
interest in that entity. In addition, FASB ASC 810 has been amended to require
that the same such analysis be applied to entities previously designated as
qualified special-purpose entities under FASB ASC 860. TSFG adopted this
standard effective January 1, 2010 with no significant impact on its
Consolidated Financial Statements.





Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent)





Accounting
Standards Update No. 2009-12 (“ASU 2009-12”), “Fair Value Measurements and
Disclosures: Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent),” offers guidance on how to use a NAV per share to
estimate the fair value of investments in hedge funds, private equity funds,
real estate funds, venture capital funds, offshore fund vehicles, and funds of
funds. TSFG adopted this standard effective January 1, 2010 with no significant
impact on its Consolidated Financial Statements.





Improving
Disclosures about Fair Value Measurements





Accounting
Standards Update No. 2010-06 (“ASU 2010-06”), “Improving Disclosures about Fair
Value Measurements,” amends FASB ASC 820-10, “Fair Value Measurements and
Disclosures,” to require disclosure of transfers in and out of Levels 1 and 2
and gross presentation of items in the Level 3 rollforward. The guidance also
clarifies the level of disaggregation required for fair value measurement
disclosures and requires disclosure of inputs and valuation techniques used in
Levels 2 and 3. With the exception of the gross presentation of items in the
Level 3 rollforward (which is effective for fiscal years beginning after
December 15, 2010), TSFG adopted this guidance effective January 1, 2010 with no
significant impact on its Consolidated Financial Statements.




8





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note
2 – Noninterest Income and Noninterest Expense





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





Three
      Months EndedMarch
      31,2010
            
            
            2009Noninterest
      IncomeService
      charges on deposit accounts
            
            $
            9,223
            
            
            $
            9,268Debit
      card income, net
            
            
            2,216
            
            
            
            1,925Customer
      service fee income
            
            
            1,126
            
            
            
            1,209Total
      customer fee income
            
            
            12,565
            
            
            
            12,402Insurance
      income
            
            
            1,876
            
            
            
            2,457Retail
      investment services, net
            
            
            1,587
            
            
            
            2,010Trust
      and investment management income
            
            
            1,102
            
            
            
            1,465Benefits
      administration fees
            
            
            -
            
            
            
            642Total
      wealth management income
            
            
            4,565
            
            
            
            6,574Bank-owned
      life insurance income
            
            
            2,444
            
            
            
            2,502Mortgage
      banking income
            
            
            1,289
            
            
            
            1,205Gain
      on certain derivative activities
            
            
            59
            
            
            
            1,135Loss
      on securities
            
            
            (389
            )
            
            
            (2,954
            )Merchant
      processing income, net
            
            
            -
            
            
            
            610Other
            
            
            599
            
            
            
            2,267Total
      noninterest income
            
            $
            21,132
            
            
            $
            23,741Noninterest
      ExpensesSalaries
      and wages
            
            $
            29,836
            
            
            $
            35,191Employee
      benefits
            
            
            4,512
            
            
            
            8,923Severance
      related benefits
            
            
            878
            
            
            
            -Total
      salaries and wages and employee benefits
            
            
            35,226
            
            
            
            44,114Occupancy
            
            
            9,700
            
            
            
            9,436Regulatory
      assessments
            
            
            7,150
            
            
            
            4,655Furniture
      and equipment
            
            
            6,606
            
            
            
            6,945Write-downs/loss
      on other real estate owned
            
            
            5,492
            
            
            
            124Professional
      services
            
            
            5,329
            
            
            
            4,507Project
      NOW expense
            
            
            -
            
            
            
            1,298Loan
      collection and foreclosed asset expense
            
            
            4,692
            
            
            
            4,891Telecommunications
            
            
            1,536
            
            
            
            1,526Advertising
      and business development
            
            
            1,169
            
            
            
            1,281Amortization
      of intangibles
            
            
            1,009
            
            
            
            1,291Loss
      on non-mortgage loans held for sale
            
            
            -
            
            
            
            1,838Loss
      on repurchase of auction rate securities
            
            
            -
            
            
            
            676Other
            
            
            5,744
            
            
            
            7,659Total
      noninterest expenses
            
            $
            83,653
            
            
            $
            90,241


9





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note
3 – Accumulated Other Comprehensive Income





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





Three
      Months EndedMarch
      31,2010
            
            
            2009Net
      Unrealized Gains on Securities Available for SaleBalance
      at beginning of period
            
            $
            18,487
            
            
            $
            6,890Other
      comprehensive income:Unrealized
      holding gains arising during the period
            
            
            13,332
            
            
            
            32,301Income
      tax expense
            
            
            (4,666
            )
            
            
            (11,961
            )Less:
      Reclassification adjustment for losses included in net
    income
            
            
            -
            
            
            
            5Income tax benefit
            
            
            -
            
            
            
            (2
            )8,666
            
            
            
            20,343Balance
      at end of period
            
            
            27,153
            
            
            
            27,233Net
      Unrealized Gains on Cash Flow HedgesBalance
      at beginning of period
            
            
            12,451
            
            
            
            35,668Other
      comprehensive loss:Unrealized
      gain on change in fair values
            
            
            1,658
            
            
            
            3,888Income
      tax expense
            
            
            (581
            )
            
            
            (1,361
            )Less:  Reclassification
      adjustment for gains included in net income
            
            
            (5,008
            )
            
            
            (12,939
            )Income tax expense
            
            
            1,753
            
            
            
            4,529(2,178
            )
            
            
            (5,883
            )Balance
      at end of period
            
            
            10,273
            
            
            
            29,785$
            37,426
            
            
            $
            57,018Total
      other comprehensive income
            
            $
            6,488
            
            
            $
            14,460Net
      loss
            
            
            (80,594
            )
            
            
            (74,403
            )Comprehensive
      loss
            
            $
            (74,106
            )
            
            $
            (59,943
            )


10





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note
4 –Securities





The
aggregate amortized cost and estimated fair value of securities available for
sale and securities held to maturity (in thousands) were as
follows:





March 31,
      2010AmortizedCost
            
            
            Gross
      UnrealizedGains
            
            
            Gross
      UnrealizedLosses
            
            
            EstimatedFair ValueSecurities
      Available for SaleU.S.
      Treasury
            
            $
            2,064
            
            
            $
            -
            
            
            $
            9
            
            
            $
            2,055U.S.
      Government agencies
            
            
            284,233
            
            
            
            2,127
            
            
            
            8
            
            
            
            286,352Agency
      residential mortgage-backed securities
            
            
            1,879,062
            
            
            
            42,315
            
            
            
            2,463
            
            
            
            1,918,914Private
      label residential mortgage-backed securities
            
            
            7,802
            
            
            
            68
            
            
            
            242
            
            
            
            7,628State
      and municipals
            
            
            3,653
            
            
            
            4
            
            
            
            -
            
            
            
            3,657Other
      investments
            
            
            1,963
            
            
            
            150
            
            
            
            168
            
            
            
            1,945$
            2,178,777
            
            
            $
            44,664
            
            
            $
            2,890
            
            
            $
            2,220,551Securities
      Held to MaturityState
      and municipals
            
            $
            13,654
            
            
            $
            332
            
            
            $
            8
            
            
            $
            13,978Agency
      residential mortgage-backed securities
            
            
            85,698
            
            
            
            1,939
            
            
            
            -
            
            
            
            87,637Other
      investments
            
            
            100
            
            
            
            -
            
            
            
            -
            
            
            
            100$
            99,452
            
            
            $
            2,271
            
            
            $
            8
            
            
            $
            101,715





December 31,
      2009AmortizedCost
            
            
            Gross
      UnrealizedGains
            
            
            Gross
      UnrealizedLosses
            
            
            EstimatedFair ValueSecurities
      Available for SaleU.S.
      Treasury
            
            $
            2,069
            
            
            $
            -
            
            
            $
            24
            
            
            $
            2,045U.S.
      Government agencies
            
            
            78,696
            
            
            
            1,011
            
            
            
            -
            
            
            
            79,707Agency
      residential mortgage-backed securities
            
            
            1,952,386
            
            
            
            34,984
            
            
            
            7,065
            
            
            
            1,980,305Private
      label residential mortgage-backed securities
            
            
            8,757
            
            
            
            12
            
            
            
            265
            
            
            
            8,504State
      and municipals
            
            
            23,086
            
            
            
            76
            
            
            
            4
            
            
            
            23,158Other
      investments
            
            
            1,964
            
            
            
            24
            
            
            
            306
            
            
            
            1,682$
            2,066,958
            
            
            $
            36,107
            
            
            $
            7,664
            
            
            $
            2,095,401Securities
      Held to MaturityState
      and municipals
            
            $
            16,217
            
            
            $
            411
            
            
            $
            9
            
            
            $
            16,619Agency
      residential mortgage-backed securities
            
            
            111,199
            
            
            
            1,578
            
            
            
            -
            
            
            
            112,777Other
      investments
            
            
            100
            
            
            
            -
            
            
            
            -
            
            
            
            100$
            127,516
            
            
            $
            1,989
            
            
            $
            9
            
            
            $
            129,496


11





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


The
amortized cost and estimated fair value of securities available for sale and
securities held to maturity (in thousands) at March 31, 2010, by contractual
maturity, are shown in the following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. The estimated fair
value of securities was determined using quoted market prices.





March 31,
      2010AmortizedCost
            
            
            EstimatedFair ValueSecurities
      Available for SaleDue
      in one year or less
            
            $
            24,610
            
            
            $
            25,075Due
      after one year through five years
            
            
            1,442,024
            
            
            
            1,459,859Due
      after five years through ten years
            
            
            244,490
            
            
            
            251,663Due
      after ten years
            
            
            465,691
            
            
            
            482,011No
      contractual maturity
            
            
            1,962
            
            
            
            1,943$
            2,178,777
            
            
            $
            2,220,551Securities
      Held to MaturityDue
      in one year or less
            
            $
            3,889
            
            
            $
            3,920Due
      after one year through five years
            
            
            94,829
            
            
            
            97,066Due
      after five years through ten years
            
            
            734
            
            
            
            729$
            99,452
            
            
            $
            101,715





Proceeds
from sales of securities available for sale, gross realized gains and losses on
sales, and maturities and other securities transactions (in thousands) are
summarized as follows. The net gains or losses are shown in noninterest income
as gain/loss on securities.




Three
      Months EndedMarch 31,2010
            
            
            2009Proceeds
      from sales of securities available for sale
            
            $
            -
            
            
            $
            5,729Sales
      transactions of securities available for sale:Gross
      realized losses
            
            $
            -
            
            
            $
            (5
            )Other
      securities transactions (investments included in other
      assets):Gross
      realized gains
            
            
            71
            
            
            
            -Other-than-temporary
      impairment
            
            
            (460
            )
            
            
            (2,949
            )Net
      loss on securities
            
            $
            (389
            )
            
            $
            (2,954
            )





Securities
with estimated fair values of $1.3 billion and $1.1 billion at March 31, 2010
and December 31, 2009, respectively, were pledged to secure public deposits and
for other purposes. The amortized cost totaled approximately $1.2 billion and
$1.1 billion for these same periods.


12





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


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,
      2010Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFairValue
            
            
            UnrealizedLosses
            
            
            FairValue
            
            
            UnrealizedLosses
            
            
            FairValue
            
            
            UnrealizedLossesSecurities
      Available for SaleU.S.
      Treasury
            
            $
            2,055
            
            
            $
            9
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,055
            
            
            $
            9U.S.
      Government agencies
            
            
            42,413
            
            
            
            8
            
            
            
            -
            
            
            
            -
            
            
            
            42,413
            
            
            
            8Agency
      residential mortgage-backed securities
            
            
            203,184
            
            
            
            2,463
            
            
            
            -
            
            
            
            -
            
            
            
            203,184
            
            
            
            2,463Private
      label residential mortgage-backed securities
            
            
            -
            
            
            
            -
            
            
            
            2,394
            
            
            
            242
            
            
            
            2,394
            
            
            
            242Other
      investments
            
            
            364
            
            
            
            89
            
            
            
            975
            
            
            
            79
            
            
            
            1,339
            
            
            
            168$
            248,016
            
            
            $
            2,569
            
            
            $
            3,369
            
            
            $
            321
            
            
            $
            251,385
            
            
            $
            2,890Securities
      Held to MaturityState
      and municipals
            
            $
            1,059
            
            
            $
            5
            
            
            $
            506
            
            
            $
            3
            
            
            $
            1,565
            
            
            $
            8





December 31,
      2009Less
      than 12 Months
            
            
            12
      Months or Longer
            
            
            TotalFairValue
            
            
            UnrealizedLosses
            
            
            FairValue
            
            
            UnrealizedLosses
            
            
            FairValue
            
            
            UnrealizedLossesSecurities
      Available for SaleU.S.
      Treasury
            
            $
            2,045
            
            
            $
            24
            
            
            $
            -
            
            
            $
            -
            
            
            $
            2,045
            
            
            $
            24Agency
      residential mortgage-backed securities
            
            
            758,427
            
            
            
            7,053
            
            
            
            2,572
            
            
            
            12
            
            
            
            760,999
            
            
            
            7,065Private
      label residential mortgage-backed securities
            
            
            -
            
            
            
            -
            
            
            
            2,392
            
            
            
            265
            
            
            
            2,392
            
            
            
            265State
      and municipals
            
            
            -
            
            
            
            -
            
            
            
            648
            
            
            
            4
            
            
            
            648
            
            
            
            4Other
      investments
            
            
            399
            
            
            
            116
            
            
            
            830
            
            
            
            190
            
            
            
            1,229
            
            
            
            306$
            760,871
            
            
            $
            7,193
            
            
            $
            6,442
            
            
            $
            471
            
            
            $
            767,313
            
            
            $
            7,664Securities
      Held to MaturityState
      and municipals
            
            $
            1,237
            
            
            $
            9
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,237
            
            
            $
            9





At March
31, 2010, TSFG had 24 individual investments that were in an unrealized loss
position. The unrealized losses summarized above, except for other investments,
were primarily attributable to changes 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 and TSFG’s private
label mortgage-backed securities are AAA-rated. TSFG does not intend to sell
these securities and it is not more likely than not that it will be required to
sell the securities before recovery of the amortized cost basis. Therefore, at
March 31, 2010, these investments are not considered impaired on an
other-than-temporary basis.





At March
31, 2010, the securities included in other investments were not considered
impaired on an other-than-temporary basis based on either the short duration of
the unrealized loss, or, to the extent that an investment has been in an
unrealized loss position for more than a year, improving trends in fair
value.





TSFG also
invests in limited partnerships, limited liability companies (LLC's) and other
privately held companies. These investments are included in other assets. In
first quarter 2010 and 2009, TSFG recorded $460,000 and $2.9 million,
respectively, in other-than-temporary impairment on these investments. At March
31, 2010, TSFG's investment in these entities totaled $14.1 million, of which
$7.1 million were accounted for under the cost method and $7.0 million were
accounted for under the equity method.


13





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note5 –
Loans





The
following is a summary of loans by category (in thousands):





March 31,
      2010
            
            
            December 31,
      2009Commercial
      LoansCommercial
      and industrial
            
            $
            1,924,014
            
            
            $
            2,080,329Commercial
      owner - occupied real estate
            
            
            1,280,010
            
            
            
            1,271,525Commercial
      real estate
            
            
            3,321,544
            
            
            
            3,501,8096,525,568
            
            
            
            6,853,663Consumer
      LoansIndirect
      - sales finance
            
            
            202,504
            
            
            
            230,426Consumer
      lot loans
            
            
            132,307
            
            
            
            144,315Direct
      retail
            
            
            79,617
            
            
            
            83,460Home
      equity
            
            
            783,868
            
            
            
            787,6451,198,296
            
            
            
            1,245,846Mortgage
      Loans
            
            
            278,830
            
            
            
            286,618Total
      loans held for investment
            
            
            8,002,694
            
            
            
            8,386,127Loans
      held for sale
            
            
            13,296
            
            
            
            15,758Total
      loans
            
            $
            8,015,990
            
            
            $
            8,401,885Included
      in the above:Nonaccrual
      loans held for investment
            
            $
            374,156
            
            
            $
            399,046Loans
      past due 90 days still accruing interest
            
            
            3,442
            
            
            
            10,465





During
the three months ended March 31, 2010, TSFG transferred (and sold) $27.7 million
of loans from the held for investment portfolio to the held for sale portfolio.
In connection with the sales, TSFG charged-off $3.3 million against the
allowance for loan losses prior to transferring them to loans held for
sale.





Loans are
considered to be impaired when, in management’s judgment and based on current
information, the full collection of principal and interest becomes doubtful. A
loan is also considered impaired if its terms are modified in a troubled debt
restructure. At March 31, 2010, TSFG did not have any material commitments to
lend additional money to borrowers whose loans had been restructured in a
troubled debt restructure. The following table summarizes information on
impaired loans (in thousands):





At
      and For the Three Months Ended
            
            
            At
      and For the Year EndedMarch 31,
      2010
            
            
            December 31,
      2009Impaired
      loans with specific allowance
            
            $
            193,420
            
            
            $
            197,576Impaired
      loans with no specific allowance
            
            
            193,296
            
            
            
            194,763Total
      impaired loans
            
            $
            386,716
            
            
            $
            392,339Related
      allowance
            
            $
            37,675
            
            
            $
            37,656Interest
      income recognized
            
            
            449
            
            
            
            1,484Foregone
      interest
            
            
            5,676
            
            
            
            15,527


14





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note
6 – Allowance for Credit Losses





The
allowance for loan losses, reserve for unfunded lending commitments, and
allowance for credit losses are presented below (in thousands):





At
      and For the Three Months Ended March 31,
            
            
            At
      and For the Year Ended December 31,2010
            
            
            2009
            
            
            2009Allowance
      for loan lossesBalance
      at beginning of period
            
            $
            365,642
            
            
            $
            247,086
            
            
            $
            247,086Allowance
      adjustment for loans sold
            
            
            -
            
            
            
            -
            
            
            
            (4,471
            )Provision
      for loan losses
            
            
            95,260
            
            
            
            142,146
            
            
            
            664,208Loans
      charged-off
            
            
            (93,619
            )
            
            
            (110,443
            )
            
            
            (556,585
            )Recoveries
      of loans previously charged off
            
            
            5,863
            
            
            
            1,367
            
            
            
            15,404Balance
      at end of period
            
            $
            373,146
            
            
            $
            280,156
            
            
            $
            365,642Reserve
      for unfunded lending commitmentsBalance
      at beginning of year
            
            $
            7,484
            
            
            $
            2,788
            
            
            $
            2,788Provision
      for unfunded lending commitments
            
            
            (137
            )
            
            
            481
            
            
            
            4,696Balance
      at end of period
            
            $
            7,347
            
            
            $
            3,269
            
            
            $
            7,484Allowance
      for credit lossesBalance
      at beginning of year
            
            $
            373,126
            
            
            $
            249,874
            
            
            $
            249,874Allowance
      adjustment for loans sold
            
            
            -
            
            
            
            -
            
            
            
            (4,471
            )Provision
      for credit losses
            
            
            95,123
            
            
            
            142,627
            
            
            
            668,904Loans
      charged-off
            
            
            (93,619
            )
            
            
            (110,443
            )
            
            
            (556,585
            )Recoveries
      of loans previously charged off
            
            
            5,863
            
            
            
            1,367
            
            
            
            15,404Balance
      at end of period
            
            $
            380,493
            
            
            $
            283,425
            
            
            $
            373,126





Note
7 – Other Real Estate Owned





Other
real estate owned (“OREO”), consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of fair value obtained principally from independent sources,
adjusted for estimated selling costs. At the time of foreclosure, any excess of
the loan balance over the fair value of the real estate held as collateral is
recorded as a charge against the allowance for loan losses. Gains or losses on
sale and any subsequent adjustments to the value are recorded as a component of
noninterest expense. The following presents the details for OREO (in
thousands):





Three
      Months EndedMarch
      31,2010
            
            
            2009Balance
      at beginning of period
            
            $
            122,086
            
            
            $
            44,668Loans
      transferred in
            
            
            35,213
            
            
            
            32,092Proceeds
      from sales
            
            
            (9,176
            )
            
            
            (2,964
            )Loss
      on sales
            
            
            (944
            )
            
            
            (124
            )Write-downs
            
            
            (4,548
            )
            
            
            -Balance
      at end of period
            
            $
            142,631
            
            
            $
            73,672





Note
8 – Derivative Financial Instruments and Hedging Activities





TSFG is
exposed to certain risks arising from both its ongoing business operations and
economic conditions. The Company principally manages its exposure to a wide
variety of business and operational risks through management of its core
business activities. TSFG manages economic risks, including interest rate,
liquidity, and credit risk, primarily by


15





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


managing
the amount, sources, and duration of its assets and liabilities and the use of
derivative financial instruments. Specifically, TSFG enters into derivative
financial instruments to manage exposure that arises from business activities
that result in the receipt or payment of future known and uncertain cash
amounts, the value of which are determined by interest rates. The Company’s
derivative financial instruments are used to manage the differences in the
amount, timing, and duration of known or expected cash receipts and known or
expected cash payments, principally related to certain variable-rate loans and
fixed-rate borrowings.





The fair
value of TSFG’s derivative assets and liabilities (included in other assets and
other liabilities on the consolidated balance sheet) and their related notional
amounts (in thousands) are presented below.





March 31,
      2010
            
            
            December 31,
      2009Fair
      Value
            
            
            Notional
            
            
            Fair
      Value
            
            
            NotionalAsset
            
            
            Liability
            
            
            Amount
            
            
            Asset
            
            
            Liability
            
            
            AmountDerivatives
      designated as hedging instruments under GAAP:Cash
      flow hedgesInterest
      rate swaps associated with lending activities
            
            $
            1,504
            
            
            $
            -
            
            
            $
            350,000
            
            
            $
            14,339
            
            
            $
            -
            
            
            $
            780,000Fair
      value hedgesInterest
      rate swaps associated with brokered CDs
            
            
            439
            
            
            
            16
            
            
            
            24,539
            
            
            
            1,895
            
            
            
            48
            
            
            
            54,185Total
      derivatives designated as hedging instruments under GAAP
            
            $
            1,943
            
            
            $
            16
            
            
            $
            374,539
            
            
            $
            16,234
            
            
            $
            48
            
            
            $
            834,185Derivatives
      not designated as hedging instruments under GAAP:Interest
      rate swaps
            
            $
            4,181
            
            
            $
            1,437
            
            
            $
            313,471
            
            
            $
            279
            
            
            $
            480
            
            
            $
            119,755Forward
      foreign currency contracts
            
            
            295
            
            
            
            295
            
            
            
            11,493
            
            
            
            12
            
            
            
            12
            
            
            
            13,331Customer
      swap contracts
            
            
            26,939
            
            
            
            23,382
            
            
            
            827,138
            
            
            
            25,658
            
            
            
            22,067
            
            
            
            850,680Options,
      mortgage contracts and other
            
            
            250
            
            
            
            266
            
            
            
            107,768
            
            
            
            416
            
            
            
            433
            
            
            
            111,328Total
      derivatives not designated as hedging instruments under
    GAAP
            
            $
            31,665
            
            
            $
            25,380
            
            
            $
            1,259,870
            
            
            $
            26,365
            
            
            $
            22,992
            
            
            $
            1,095,094Total
      derivatives
            
            $
            33,608
            
            
            $
            25,396
            
            
            $
            1,634,409
            
            
            $
            42,599
            
            
            $
            23,040
            
            
            $
            1,929,279





Cash
Flow Hedges of Interest Rate Risk





TSFG’s
objectives in using interest rate derivatives are to add stability to interest
income and to manage its exposure to interest rate movements. To accomplish this
objective, the Company primarily uses interest rate swaps as part of its
interest rate risk management strategy. Interest rate swaps designated as cash
flow hedges involve the receipt of fixed-rate amounts from a counterparty in
exchange for the Company making variable-rate payments over the life of the
agreements without exchange of the underlying notional amount.





The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in accumulated other comprehensive
income and is subsequently reclassified into earnings in the period that the
hedged forecasted transaction affects earnings. During 2010 and 2009, such
derivatives were used to hedge the variable cash inflows associated with
existing pools of prime and LIBOR-based loan assets. The ineffective portion of
the change in fair value of the derivatives is recognized directly in earnings.
For first quarter 2010, no hedge ineffectiveness was recognized. For first
quarter 2009, the Company recognized a loss of $174,000 for hedge
ineffectiveness attributable to a mismatch between the swap notional and the
aggregate principal amount of the designated loan pools. In addition, certain
swaps failed to qualify for hedge accounting due to this mismatch; accordingly,
the change in fair value of these swaps during the three months ended March 31,
2009 of $221,000, was recognized directly in earnings as a loss and was included
in the sections entitled “Derivatives Not Designated as Hedging Instruments”
throughout this footnote.





Certain
of these swaps with a notional amount of $265.0 million were terminated or
de-designated in first quarter 2010, which locked in a gain of approximately $12
million that will be amortized to the statement of operations


16





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


as the
hedged cash flows impact earnings. During the three months ended March 31, 2010
and 2009, the Company accelerated the reclassification of an unrealized gain in
accumulated other comprehensive income of $127,000 and $832,000, respectively,
to earnings as a result of the hedged forecasted transactions becoming probable
not to occur. During the next twelve months, the Company estimates that $10.7
million will be reclassified as an increase to interest income. With respect to
cash flow hedges, forecasted transactions are being hedged through
2012.





Fair
Value Hedges of Interest Rate Risk





TSFG is
exposed to changes in the fair value of certain of its fixed-rate obligations
due to changes in the benchmark interest rate, LIBOR, as well as to overall
changes in fair value for certain other fixed-rate obligations. The Company uses
interest rate swaps to convert the payment profile on certain brokered CDs from
a fixed rate to a floating rate based on LIBOR and to similarly convert exposure
taken on through the issuance of equity-linked and inflation-indexed
certificates of deposit. Interest rate swaps designated as fair value hedges
involve the receipt of fixed-rate amounts from a counterparty in exchange for
the Company making variable-rate payments over the life of the agreements
without the exchange of the underlying notional amount.





For
derivatives that are designated and that qualify as fair value hedges, the gain
or loss on the derivative as well as the offsetting loss or gain on the hedged
item attributable to the hedged risk are recognized in earnings. The Company
includes the gain or loss on the hedged items in the same line item as the
offsetting loss or gain on the related derivatives. For the three months ended
March 31, 2010 and 2009, the Company recognized a loss of $5,000 and a gain of
$594,000, respectively, related to hedge ineffectiveness and amounts excluded
from effectiveness testing. The net impact of the Company’s fair value hedges to
interest expense for the three months ended March 31, 2010 and 2009, which
includes net settlements on the derivatives and any amortization of the basis
adjustment on the hedged items, was a reduction to interest expense of $509,000
and $1.2 million, respectively.





Non-designated
Hedges





Derivatives
not designated as hedges are used to manage the Company’s exposure to interest
rate movements and other identified risks but do not meet the strict hedge
accounting requirements under GAAP. Changes in the fair value of derivatives not
designated in hedging relationships are recorded directly in noninterest
income.





Additionally,TSFGoffers programs that
permit its customers to hedge various risks, including fluctuations in interest
rates and foreign exchange rates. Customer contracts are frequently interest
rate swaps in conjunction with floating rate loans to achieve fixed rate
financing and foreign exchange forward contracts to manage currency risk
associated with non-dollar denominated transactions. Through these programs,
derivative contracts are executed between the customers and TSFG. In most cases,
offsetting contracts are executed between TSFG and selected third parties to
hedge market risk created through the customer contracts. The interest rates on
the third party contracts are identical to the interest rates on the customer
contracts, and thus, the change in fair value of the customer contracts will
generally be offset by the change in fair value of the related third-party
contracts, with the exception of any credit valuation adjustments that may be
recorded. However, during 2009 certain counterparties terminated their
third-party contracts as a result of TSFG’s rating downgrades, and TSFG did not
replace a portion of the terminated contracts. As a result, certain customer
contracts are no longer offset by third-party hedges. At March 31, 2010, the
total fair value of TSFG’s interest rate swaps with customers was an asset of
$26.9 million, net of a $3.0 million established reserve for credit losses, and
a liability of $152,000. During first quarter 2010, TSFG recorded credit losses
of $2.1 million on its customer swaps.





From time
to time, TSFG enters into derivative financial contracts that are not designed
to hedge specific transactions or identified assets or liabilities and therefore
do not qualify for hedge accounting, but are rather part of the Company’s
overall risk management strategy. These contracts are marked to market through
noninterest income each period and are generally short-term in
nature.





As part
of its mortgage lending activities, TSFG originates certain residential loans
and commits these loans for sale. The commitments to originate residential loans
(“rate locks’) and the sales commitments are freestanding derivative instruments
and are generally funded within 90 days. The value of the rate locks is
estimated based on indicative market prices being bid on similarly structured
mortgage backed securities.


17





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Effect
of Derivative Instruments on the Consolidated Statements of
Operations





The
effect of derivative instruments on the consolidated statements of operations is
presented in the tables below (in thousands):




Three
      Months EndedMarch 31,2010
            
            
            2009Derivatives
      in Cash Flow Hedging RelationshipsInterest
      rate swaps associated with lending activities:Amount
      of gain recognized in OCI
            
            $
            1,658
            
            
            $
            3,666Amount
      of gain reclassified from accumulated OCI to interest income (effective
      portion)
            
            
            4,881
            
            
            
            9,919Amount
      of gain reclassified from accumulated OCI to gain/loss  on
      certain derivative activities (effective portion)
            
            
            127
            
            
            
            944Amount
      of loss recognized in gain/loss on certain derivative activities
      (ineffective portion and amount excluded from effectiveness
      testing)
            
            
            -
            
            
            
            (174
            )Interest
      rate floor associated with lending activities:Amount
      of gain recognized in OCI
            
            
            -
            
            
            
            222Amount
      of gain reclassified from accumulated OCI to interest income (effective
      portion)
            
            
            -
            
            
            
            2,250





Three
      Months EndedMarch 31,2010
            
            
            2009Derivatives
      in Fair Value Hedging RelationshipsInterest
      rate swaps associated with brokered CDs:Amount
      of gain (loss) recognized in gain on certain derivative activities on
      derivative
            
            $
            64
            
            
            $
            1,210Amount
      of gain (loss) recognized in gain on certain derivative activities on
      hedged item
            
            
            (69
            )
            
            
            (616
            )





Amount
      of Gain (Loss)Recognized in Income on DerivativeDerivatives
      Not Designated as Hedging
            
            Location
      of Gain (Loss)Recognized in Income on
            
            Three
      Months EndedMarch 31,Instruments
            
            Derivative
            
            2010
            
            
            2009Interest
      rate swaps
            
            Gain
      (loss) on certain derivative activities
            
            $
            (61
            )
            
            $
            (221
            )Interest
      rate swaps
            
            Other
      noninterest income
            
            
            (633
            )
            
            
            -Customer
      swaps
            
            Other
      noninterest income
            
            
            (683
            )
            
            
            574Mortgage
      contracts
            
            Mortgage
      banking income
            
            
            4
            
            
            
            49Other
      contracts
            
            Gain
      (loss) on certain derivative activities
            
            
            (2
            )
            
            
            (8
            )$
            (1,375
            )
            
            $
            394





Credit-risk-related
Contingent Features





TSFG has
agreements with its derivative counterparties that contain a provision in which
if the Company defaults on any of its indebtedness, including default where
repayment of the indebtedness has not been accelerated by the lender, then the
Company could also be declared in default on its derivative
obligations.


18





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Furthermore,
certain of TSFG’s derivative instruments contain provisions that require the
Company to maintain its status as a well / adequately capitalized institution
and/or the Company’s debt to maintain a certain credit rating from one or more
of the major credit rating agencies. These provisions enable the counterparties
to the derivative instruments to request immediate payment or require TSFG to
post additional collateral.





As of
March 31, 2010, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk,
related to these agreements was $20.3 million. As of March 31, 2010, the Company
had minimum collateral posting thresholds with certain of its derivative
counterparties and had posted collateral of $37.4 million. Since the Company was
in violation of certain debt rating provisions at March 31, 2010, it could have
been required to settle its obligations under the agreements at the termination
value ($20.3 million) and could have been required to post additional collateral
with the respective counterparty (up to $2.0 million).





Note
9 – Commitments and Contingent Liabilities





Legal
Proceedings





TSFG is
currently subject to various legal proceedings, including the litigation
discussed below, and claims arising in the ordinary course of 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, except to the extent indicated in the discussion below.





In
February 2009, Carolina First Bank was named as a defendant in a complaint filed
in the In re Louis J.
Pearlman bankruptcy pending in the United States Bankruptcy Court, Middle
District of Florida, Orlando Division. The complaint seeks, among other things,
to avoid certain fraudulent transfers Carolina First Bank allegedly received in
connection with repayment of a loan and alleges approximately $24 million in
compensatory damages, plus punitive damages. TSFG is vigorously defending the
allegations and has filed an answer denying liability and asserting affirmative
defenses. The case is currently in the pre-trial discovery stage. In April 2009,
Bank of America, Fifth Third Bank, Carolina First Bank, Sun Trust Bank, and Dun
& Bradstreet, Inc. were named as defendants in a complaint captioned Elizabeth Groom, et. al v.
Bank of America, et.
al, which is pending in the United States District Court for the Middle
District of Florida. The Groom complaint seeks
unspecified damages relating to individual investor losses resulting from a
“Ponzi scheme” allegedly orchestrated by Louis J. Pearlman over a period
spanning several decades. TSFG intends to vigorously defend the allegations and
has moved to dismiss the complaint, or in the alternative, for a more definite
statement. The case is currently stayed pending the outcome of related
litigation pending in the United States District Court in New York, in which
TSFG is not a party. In August 2009, Carolina First Bank was named as a
defendant in a complaint filed in federal court in Minnesota by American Bank of
St. Paul. The complaint, as amended, seeks compensatory damages of $36 million,
plus punitive damages. American Bank of St. Paul alleges that it is the
servicing bank for itself and twenty-six participant banks regarding a loan made
to Pearlman/related entities which paid off a Carolina First Bank loan. TSFG is
vigorously defending the allegations and has filed an answer denying liability
and asserting affirmative defenses. The case is currently in the pre-trial
discovery stage.





While the
Company believes it has meritorious defenses against these three suits, the
ultimate resolution of these matters could result in a loss in excess of the
amount accrued. An adverse resolution of these matters could be material to
TSFG’s financial position and/or results of operations.





Recourse
Reserve





As part
of its 2004 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, 2010, the estimated recourse reserve liability, included in other
liabilities, totaled $6.0 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.





Dividend
Arrearage on Preferred Securities





During
first quarter 2010, TSFG suspended dividend payments on its preferred stock and
all remaining outstanding equity and capital instruments. (This suspension of
dividends does not constitute a default under the


19





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


applicable
documents governing such instruments.) As a result, the Company is in arrears in
the payment of dividends with respect to the Series 2008-T Preferred Stock,
trust preferred securities, and REIT preferred securities, all of which are
cumulative preferred securities. The Company has also suspended the quarterly
dividends (which total $116,000) on its Series 2008D-V and Series 2008D-NV
Preferred Stock, although such dividends are non-cumulative.





The trust
preferred securities are issued by statutory business trusts which are not
consolidated by TSFG. However, the sole assets of the Trusts are subordinated
notes (the “Notes”) of TSFG, which are included in long-term debt on the
Consolidated Balance Sheet. TSFG’s deferral of interest payments on these Notes
effectively defers payment of dividends on the trust preferred securities. The
REIT preferred securities are also included in long-term debt on the
Consolidated Balance Sheet.





As of
March 31, 2010, the arrearage with respect to the Series 2008-T Preferred Stock,
trust preferred securities, and REIT preferred securities held by third parties
was $4.3 million, $661,000, and $785,000, respectively, or $5.8 million in the
aggregate.





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, 2010
            
            
            December 31, 2009Loan
      commitments:Commercial,
      industrial, and other
            
            $
            1,020,033
            
            
            $
            1,085,129Commercial
      owner-occupied and commercial real estate
            
            
            100,535
            
            
            
            119,928Home
      equity loans
            
            
            414,629
            
            
            
            423,151Total
      loan commitments
            
            
            1,535,197
            
            
            
            1,628,208Standby
      letters of credit
            
            
            205,136
            
            
            
            199,237Documentary
      letters of credit
            
            
            2,454
            
            
            
            2,066Unused
      business credit card lines
            
            
            30,874
            
            
            
            31,746Total
            
            $
            1,773,661
            
            
            $
            1,861,257


20





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Note
10 – Preferred Stock





The
following is a summary of TSFG’s preferred stock by series:





March 31, 2010
            
            
            December 31, 2009Number
      ofShares
            
            
            Carrying
      Value($000s)
            
            
            Number
      ofShares
            
            
            Carrying
      Value($000s)Series
      2008D-V
            
            
            1,048
            
            
            $
            1,048
            
            
            
            1,048
            
            
            $
            1,048Series
      2008D-NV
            
            
            3,602
            
            
            
            3,602
            
            
            
            3,602
            
            
            
            3,602Mandatorily
      convertible preferred stock
            
            
            4,650
            
            
            
            4,650
            
            
            
            4,650
            
            
            
            4,650Series
      2008-T
            
            
            347,000
            
            
            
            347,000
            
            
            
            347,000
            
            
            
            347,000Less
      discount originally attributable to the Warrant issued to the Treasury
      Department, net of accretion
            
            
            -
            
            
            
            (14,969
            )
            
            
            -
            
            
            
            (15,867
            )Series
      2008-T, net
            
            
            347,000
            
            
            
            332,031
            
            
            
            347,000
            
            
            
            331,133Total
      preferred stock
            
            
            351,650
            
            
            $
            336,681
            
            
            
            351,650
            
            
            $
            335,783





Note
11 – Regulatory Capital Requirements





TSFG and
Carolina First Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, TSFG and Carolina
First Bank must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. TSFG's and Carolina First
Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.





Quantitative
measures established by regulation to ensure capital adequacy require TSFG and
Carolina First Bank to maintain minimum amounts and ratios (set forth in the
following table) of total and tier 1 capital (as defined in the regulation) to
risk-weighted assets (as defined) and to average assets (as defined). Management
believes, as of March 31, 2010, that TSFG and Carolina First Bank met all
capital adequacy requirements. However, as long as Carolina First Bank is
subject to the Consent Order, it will not be deemed to be well capitalized even
if it maintains the minimum capital ratios to be well
capitalized.


21





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


The
following table presents TSFG's and Carolina First Bank's actual capital amounts
and ratios, as well as the minimum calculated amounts for each
regulatory-defined category (dollars in thousands):





Minimum
      RequirementsActual
            
            
            For
      Capital Adequacy Purposes
            
            
            To
      Be Well Capitalized Under Prompt Corrective Action Provisions (1)March 31,
      2010
            
            
            December 31,
      2009
            
            
            March 31,
      2010
            
            
            December 31,
      2009
            
            
            March 31,
      2010
            
            
            December 31,
      2009TSFGTier
      1 capital
            
            $
            865,438
            
            
            $
            948,762
            
            
            $
            363,614
            
            
            $
            382,008
            
            
            
            n/a
            
            
            
            n/aTotal
      risk-based capital
            
            
            984,564
            
            
            
            1,073,472
            
            
            
            727,228
            
            
            
            764,015
            
            
            
            n/a
            
            
            
            n/aTier
      1 capital ratio
            
            
            9.52
            %
            
            
            9.93
            %
            
            
            4.00
            %
            
            
            4.00
            %
            
            
            n/a
            
            
            
            n/aTotal
      risk-based capital ratio
            
            
            10.83
            
            
            
            11.24
            
            
            
            8.00
            
            
            
            8.00
            
            
            
            n/a
            
            
            
            n/aLeverage
      ratio
            
            
            7.41
            
            
            
            7.91
            
            
            
            4.00
            
            
            
            4.00
            
            
            
            n/a
            
            
            
            n/aCarolina
      First BankTier
      1 capital
            
            $
            802,204
            
            
            $
            854,808
            
            
            $
            362,785
            
            
            $
            381,423
            
            
            $
            544,177
            
            
            $
            572,134Total
      risk-based capital
            
            
            947,373
            
            
            
            1,005,638
            
            
            
            725,570
            
            
            
            762,846
            
            
            
            906,962
            
            
            
            953,557Tier
      1 capital ratio
            
            
            8.85
            %
            
            
            8.96
            %
            
            
            4.00
            %
            
            
            4.00
            %
            
            
            6.00
            %
            
            
            6.00Total
      risk-based capital ratio
            
            
            10.45
            
            
            
            10.55
            
            
            
            8.00
            
            
            
            8.00
            
            
            
            10.00
            
            
            
            10.00Leverage
      ratio
            
            
            6.87
            
            
            
            7.13
            
            
            
            4.00
            
            
            
            4.00
            
            
            
            5.00
            
            
            
            5.00





(1)
            Minimum
      capital amounts and ratios are the amounts to be well capitalized under
      the various regulatory capital requirements administered by the federal
      banking agencies. On April 30, 2010, Carolina First Bank became subject to
      a regulatory Consent Order with the FDIC which requires that, within 120
      days of the agreement, Carolina First Bank must increase its Tier 1
      leverage ratio to 8% and its total risk-based capital ratio to 12%.
      Regardless of the Bank’s capital ratios, it cannot be classified as “well
      capitalized” while it is operating under the Consent
  Order.




Note
12 – Average Share Information





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





Three
      Months EndedMarch 31,2010
            
            
            2009Net
      loss available to common shareholders (numerator)
            
            $
            (85,829
            )
            
            $
            (90,811
            )BasicAverage
      common shares outstanding (denominator)
            
            
            215,522,634
            
            
            
            82,223,190Loss
      per share
            
            $
            (0.40
            )
            
            $
            (1.10
            )DilutedAverage
      common shares outstanding
            
            
            215,522,634
            
            
            
            82,223,190Average
      dilutive potential common shares
            
            
            -
            
            
            
            -Average
      diluted shares outstanding (denominator)
            
            
            215,522,634
            
            
            
            82,223,190Loss
      per share
            
            $
            (0.40
            )
            
            $
            (1.10
            )





For the
three months ended March 31, 2010 and 2009, options to purchase an additional
3.3 million and 4.6 million shares, respectively, of common stock were
outstanding but were not included in the computation of diluted earnings per
share because either their inclusion would have had an antidilutive effect or
the exercise price of the option was greater than the average market price of
the common shares. Also excluded from the computation of diluted earnings per
share for the three months ended March 31, 2010 and 2009 because of their
antidilutive effect were 715,000


22





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


and 29.2
million shares, respectively, of common stock related to mandatorily convertible
preferred stock, 10.1 million shares of common stock related to warrants, and
112,000 and 288,000 shares, respectively, of common stock related to restricted
stock and restricted stock units granted under equity incentive
programs.





Note
13 – Fair Value Disclosures





TSFG
carries certain financial instruments at fair value on a recurring basis,
specifically securities available for sale and derivative assets and
liabilities. Fair value is defined as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. TSFG determines the fair
values of its financial instruments based on the fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:





·
            Level
      1 – Valuations are based on quoted prices in active markets for identical
      assets and liabilities. Level 1 assets include debt and equity securities
      that are traded in an active exchange market, as well as certain U.S.
      Treasury securities that are highly liquid and are actively traded in
      over-the-counter markets.





·
            Level
      2 – Valuations are based on observable inputs other than Level 1 prices,
      such as quoted prices for similar assets or liabilities; quoted prices in
      markets that are not active; inputs that are observable (such as interest
      rates, volatilities, prepayment speeds, credit risks, etc.); or inputs
      that can be corroborated by observable market data. Level 2 assets and
      liabilities include debt securities with quoted prices that are traded
      less frequently than exchange-traded instruments and derivative contracts
      whose value is determined using a pricing model with inputs that are
      observable in the market or can be derived principally from or
      corroborated by observable market data. This category generally includes
      U.S. government agencies, agency mortgage-backed debt securities,
      private-label mortgage-backed debt securities, state and municipal bonds,
      and certain derivative contracts.





·
            Level
      3 – Valuations include unobservable inputs that are supported by little or
      no market activity and that are significant to the fair value of the
      assets. For example, this category includes certain derivative contracts
      for which independent pricing information is not available for a
      significant portion of the underlying
assets.





Assets
and Liabilities Measured at Fair Value on a Recurring Basis





Following
is a description of the valuation methodologies used for the major categories of
financial assets and liabilities measured at fair value on a recurring
basis.





Securities Available for
Sale. Where quoted market prices are available in an active market,
securities are valued at the last traded price by obtaining feeds from a number
of live data sources including active market makers and inter-dealer brokers.
These securities are classified as Level 1 within the valuation hierarchy and
include debt and equity securities that are traded in an active exchange market,
as well as certain U.S. Treasury securities that are highly liquid and are
actively traded in over-the-counter markets. If quoted market prices are not
available, fair values are estimated by using bid prices and quoted prices of
pools or tranches of securities with similar characteristics. These types of
securities are classified as Level 2 within the valuation hierarchy and
generally include U.S. government agencies, agency mortgage-backed debt
securities, private-label mortgage-backed debt securities, and state and
municipal bonds. In certain cases where there is limited activity or less
transparency around inputs to valuation, securities are classified as Level 3
within the valuation hierarchy.





Derivative Assets and Liabilities.TSFG measures the fair value of many of its derivatives using internal
valuation models that use primarily market observable inputs, such as yield
curves and option volatilities, and accordingly, those derivatives are
classified as Level 2. When available, TSFG also obtains dealer quotations for
these derivatives for comparative purposes to assess the reasonableness of the
model valuations. Examples of Level 2 derivatives are basic interest rate swaps.
Level 3 derivative instruments have primary risk characteristics that relate to
unobservable pricing parameters. For purposes of potential valuation adjustments
to its derivative positions, TSFG evaluates the credit risk of its
counterparties as well as that of TSFG. Accordingly, TSFG has considered factors
such as the likelihood of default by


23





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


TSFG and
its counterparties, its net exposures, and remaining contractual life, among
other things, in determining fair value adjustments related to credit
risk.





The
tables below present the balances of assets and liabilities measured at fair
value on a recurring basis (in thousands):





March 31, 2010Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Securities
      available for sale:U.S.
      Treasury
            
            $
            2,055
            
            
            $
            2,055
            
            
            $
            -
            
            
            $
            -U.S.
      Government agencies
            
            
            286,352
            
            
            
            283,349
            
            
            
            3,003
            
            
            
            -Agency
      residential mortgage-backed securities
            
            
            1,918,914
            
            
            
            -
            
            
            
            1,918,914
            
            
            
            -Private
      label residential mortgage-backed securities
            
            
            7,628
            
            
            
            -
            
            
            
            7,628
            
            
            
            -State
      and municipals
            
            
            3,657
            
            
            
            -
            
            
            
            3,407
            
            
            
            250Other
      investments
            
            
            1,945
            
            
            
            1,367
            
            
            
            577
            
            
            
            1Total
      securities available for sale
            
            
            2,220,551
            
            
            
            286,771
            
            
            
            1,933,529
            
            
            
            251Derivative
      assets:Interest
      rate swaps
            
            
            6,124
            
            
            
            -
            
            
            
            5,029
            
            
            
            1,095Forward
      foreign currency contracts
            
            
            295
            
            
            
            -
            
            
            
            295
            
            
            
            -Customer
      swap contracts
            
            
            26,939
            
            
            
            -
            
            
            
            24,986
            
            
            
            1,953Options,
      mortgage contracts and other
            
            
            250
            
            
            
            -
            
            
            
            -
            
            
            
            250Total
      derivative assets
            
            
            33,608
            
            
            
            -
            
            
            
            30,310
            
            
            
            3,298Total
            
            $
            2,254,159
            
            
            $
            286,771
            
            
            $
            1,963,839
            
            
            $
            3,549Derivative
      liabilities:Interest
      rate swaps
            
            $
            1,453
            
            
            $
            -
            
            
            $
            1,453
            
            
            $
            -Forward
      foreign currency contracts
            
            
            295
            
            
            
            -
            
            
            
            295
            
            
            
            -Customer
      swap contracts
            
            
            23,382
            
            
            
            -
            
            
            
            23,382
            
            
            
            -Options,
      mortgage contracts and other
            
            
            266
            
            
            
            -
            
            
            
            71
            
            
            
            195Total
      derivative liabilities
            
            $
            25,396
            
            
            $
            -
            
            
            $
            25,201
            
            
            $
            195





March 31, 2009Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Securities
      available for sale
            
            $
            2,060,448
            
            
            $
            155,091
            
            
            $
            1,904,841
            
            
            $
            516Loans
      held for sale
            
            
            16,960
            
            
            
            -
            
            
            
            16,960
            
            
            
            -Derivative
      assets
            
            
            98,829
            
            
            
            -
            
            
            
            94,294
            
            
            
            4,535Total
            
            $
            2,176,237
            
            
            $
            155,091
            
            
            $
            2,016,095
            
            
            $
            5,051Derivative
      liabilities
            
            $
            51,155
            
            
            $
            -
            
            
            $
            47,793
            
            
            $
            3,362


24


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


December 31, 2009Total
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Securities
      available for sale:U.S.
      Treasury
            
            $
            2,045
            
            
            $
            2,045
            
            
            $
            -
            
            
            $
            -U.S.
      Government agencies
            
            
            79,707
            
            
            
            76,696
            
            
            
            3,011
            
            
            
            -Agency
      residential mortgage-backed securities
            
            
            1,980,305
            
            
            
            -
            
            
            
            1,980,305
            
            
            
            -Private
      label residential mortgage-backed securities
            
            
            8,504
            
            
            
            -
            
            
            
            8,504
            
            
            
            -State
      and municipals
            
            
            23,158
            
            
            
            -
            
            
            
            22,858
            
            
            
            300Other
      investments
            
            
            1,682
            
            
            
            1,229
            
            
            
            452
            
            
            
            1Total
      securities available for sale
            
            
            2,095,401
            
            
            
            79,970
            
            
            
            2,015,130
            
            
            
            301Derivative
      assets
            
            
            42,599
            
            
            
            -
            
            
            
            38,906
            
            
            
            3,693Total
            
            $
            2,138,000
            
            
            $
            79,970
            
            
            $
            2,054,036
            
            
            $
            3,994Derivative
      liabilities
            
            $
            23,040
            
            
            $
            -
            
            
            $
            22,675
            
            
            $
            365





The
changes in Level 3 assets and liabilities measured at fair value on a recurring
basis are summarized as follows (in thousands):





Three
      months ended March 31, 2010Securities
      available for sale
            
            
            Net
      derivative assets (liabilities)State
      and municipals
            
            
            Other
      investments
            
            
            Interest
      rate swaps
            
            
            Customer
      swap contracts
            
            
            OtherBalance,
      beginning of period
            
            $
            300
            
            
            $
            1
            
            
            $
            1,118
            
            
            $
            2,159
            
            
            $
            51Total
      net gains (losses) included in net income
            
            
            -
            
            
            
            -
            
            
            
            (23
            )
            
            
            (1,095
            )
            
            
            4Purchases,
      sales, issuances and settlements, net
            
            
            (50
            )
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Transfers
      into Level 3
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            889
            
            
            
            -Balance,
      end of period
            
            $
            250
            
            
            $
            1
            
            
            $
            1,095
            
            
            $
            1,953
            
            
            $
            55Net
      gains (losses) included in net loss relating to assets/liabilities held at
      period-end
            
            $
            -
            
            
            $
            -
            
            
            $
            (23
            )
            
            $
            (1,095
            )
            
            $
            4





Three
      months endedMarch 31,
      2009Securities
      available for sale
            
            
            Net
      derivative assets (liabilities)Balance,
      beginning of period
            
            $
            566
            
            
            $
            (410
            )Total
      net gains (losses) included in net income
            
            
            -
            
            
            
            1,583Purchases,
      sales, issuances and settlements, net
            
            
            (50
            )
            
            
            -Transfers
      into Level 3
            
            
            -
            
            
            
            -Balance,
      end of period
            
            $
            516
            
            
            $
            1,173Net
      gains (losses) included in net loss relating to assets/liabilities held at
      period-end
            
            $
            -
            
            
            $
            1,583





For the
three months ended March 31, 2010 and 2009, the gains/losses in the tables above
were included in noninterest income. During the three months ended March 31,
2010, certain derivative assets were transferred to Level 3 from Level 2 based
on increases in credit valuation adjustments due to deterioration in the credit
quality of certain bank customers with whom TSFG has entered into customer
swaps. Transfers between levels of the fair value hierarchy are


25





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


recognized
on the actual date of the event or circumstances that caused the transfer, which
generally coincides with the quarterly valuation process. There were no
significant transfers between Level 1 and Level 2 for the three months ended
March 31, 2010.





Assets
Measured at Fair Value on a Nonrecurring Basis





TSFG may
be required, from time to time, to measure certain other assets at fair value on
a nonrecurring basis in accordance with generally accepted accounting
principles. These adjustments to fair value usually result from write-downs of
individual assets.





For
financial assets measured at fair value on a nonrecurring basis that were still
reflected in the balance sheet at period end, the following table provides the
level of valuation assumptions used to determine each adjustment and the
carrying value of the related individual assets at period end (in
thousands).





Carrying value at period
end
            
            
            Total
      losses for periodTotal
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            endedMarch
      31, 2010Loans
      held for investment
            
            $
            213,272
            
            
            $
            -
            
            
            $
            -
            
            
            $
            213,272
            
            
            $
            (34,551
            )Other
      real estate owned
            
            
            28,406
            
            
            
            -
            
            
            
            -
            
            
            
            28,406
            
            
            
            (9,887
            )Private
      equity investments
            
            
            1,700
            
            
            
            -
            
            
            
            -
            
            
            
            1,700
            
            
            
            (460
            )$
            (44,898
            )March
      31, 2009Loans
      held for investment
            
            $
            296,071
            
            
            $
            -
            
            
            $
            -
            
            
            $
            296,071
            
            
            $
            (76,152
            )Loans
      held for sale
            
            
            12,766
            
            
            
            -
            
            
            
            -
            
            
            
            12,766
            
            
            
            (1,356
            )Private
      equity investments
            
            
            3,210
            
            
            
            -
            
            
            
            -
            
            
            
            3,210
            
            
            
            (2,949
            )Other
      real estate owned
            
            
            20,392
            
            
            
            -
            
            
            
            -
            
            
            
            20,392
            
            
            
            (7,552
            )Auction
      rate preferred securities
            
            
            6,174
            
            
            
            -
            
            
            
            -
            
            
            
            6,174
            
            
            
            (676
            )$
            (88,685
            )





The
valuation techniques for the items in the table above are as
follows:





Loans held for investment.
Impaired loans are evaluated for impairment using the present value of expected
future cash flows discounted at the loan’s effective interest rate, or as a
practical expedient, a loan’s observable market value or the fair value of the
collateral if the loan is collateral dependent. The measurement of impaired
loans using future cash flows discounted at the loan’s effective interest rate
rather than the market rate of interest is not a fair value measurement and is
therefore excluded from the requirements of FASB ASC 820-10. Impaired loans
measured by applying the practical expedient are included in the requirements of
FASB ASC 820-10. Under the practical expedient, TSFG measures the fair value of
collateral dependent impaired loans based on the fair value of the collateral
securing these loans. These measurements are classified as Level 3 within the
valuation hierarchy. Substantially all impaired loans are secured by real
estate. The fair value of this real estate is generally determined based upon
appraisals performed by a certified or licensed appraiser using inputs such as
absorption rates, capitalization rates, and comparables. Management also
considers other factors or recent developments which could result in adjustments
to the collateral value estimates indicated in the appraisals such as changes in
absorption rates or market conditions from the time of valuation. Impaired loans
are reviewed and evaluated on at least a quarterly basis for additional
impairment and adjusted accordingly, based on the same factors identified
above.





Loans held for sale.Loans
held for sale are measured at the lower of cost or fair value. If available,
fair value is measured by the price that secondary market investors are offering
for loans with similar characteristics. If quoted market prices are not
available, TSFG may consider outstanding investor commitments, discounted cash
flow analyses with market assumptions, or the fair value of the collateral if
the loan is collateral dependent. Where assumptions are made using significant
unobservable inputs, such loans held for sale are classified as Level 3 within
the valuation hierarchy.


26





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


Other real estate owned. OREO
is adjusted to fair value less costs to sell upon transfer of a loan to OREO.
Subsequently, OREO is carried at the lower of carrying value or fair value less
costs to sell. Fair value is generally based upon current appraisals, comparable
sales, and other estimates of value obtained principally from independent
sources, adjusted for estimated selling costs. However, management also
considers other factors or recent developments which could result in adjustments
to the collateral value estimates indicated in the appraisals such as changes in
absorption rates or market conditions from the time of valuation. In situations
where management adjustments are significant to the fair value measurement in
its entirety, such measurements are classified as Level 3 within the valuation
hierarchy.





Private equity investments.
The fair values of TSFG’s investments in privately held limited partnerships,
corporations and LLCs are not readily available. TSFG evaluates these
investments quarterly for impairment based on information available, which may
include the investee’s ability to generate cash through its operations or obtain
alternative financing, and subjective factors. The valuation of these
investments requires significant management judgment due to the absence of
quoted market prices, inherent lack of liquidity, and the long-term nature of
the investments; as a result, private equity investments subjected to
nonrecurring fair value adjustments are classified as Level 3.





Auction rate preferred securities.Nonrecurring fair value adjustments on auction rate preferred securities
reflect impairment write-downs. The valuation of these securities requires
significant management judgment due to illiquidity in the market; as a result,
auction rate preferred securities subjected to nonrecurring fair value
adjustments are classified as Level 3.





FASB
ASC 825-10, Disclosures about Fair Value of Financial Instruments





FASB ASC
825-10, "Financial Instruments," requires disclosure of fair value information,
whether or not recognized in the statement of financial position, when it is
practical to estimate the fair value. The standard defines a financial
instrument as cash, evidence of an ownership interest in an entity or
contractual obligations, which require the exchange of cash, or other financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including TSFG's common stock, premises and equipment, accrued
interest receivable and payable, and other assets and liabilities.





The
methodologies used to determine fair value for securities, derivative assets and
liabilities, impaired loans held for investment, and loans held for sale are
disclosed elsewhere in this footnote. Fair value approximates book value for
cash and due from banks and interest-bearing bank balances due to the short-term
nature of the instrument. Fair value for loans held for investment which are not
impaired is based on the discounted present value of the estimated future cash
flows. Discount rates used in these computations reflect approximate current
market rates offered for similar types of loans, adjustments that take into
account the credit quality of the loan portfolio and the underlying collateral,
and illiquidity in the market. Loan commitments and letters of credit, which are
off-balance-sheet financial instruments, are short-term and typically based on
current market rates; therefore, the fair values of these items are not included
in the following table.





Fair
value for demand deposit accounts and interest-bearing accounts with no fixed
maturity date is equal to the carrying value. Certificate of deposit accounts
are estimated by discounting cash flows from expected maturities using current
interest rates on similar instruments. Callable brokered deposits are valued in
a similar manner except the cash flow stream may be shorter than the term to
maturity if the call option is exercised. Fair value approximates book value for
federal funds purchased due to the short-term nature of the borrowing. Fair
value for other short-term borrowings and long-term debt is based on discounted
cash flows using current market rates for similar instruments.


27





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)


TSFG has
used management's best estimate of fair value based on the above assumptions.
Thus, the fair values presented may not be the amounts, which could be realized,
in an immediate sale or settlement of the instrument. In addition, any income
taxes or other expenses, which would be incurred in an actual sale or
settlement, are not taken into consideration in the fair values presented. The
estimated fair values of TSFG's financial instruments (in thousands) were as
follows:





March 31,
      2010
            
            
            December 31,
      2009CarryingAmount
            
            
            FairValue
            
            
            CarryingAmount
            
            
            FairValueFinancial
      AssetsCash
      and due from banks
            
            $
            156,568
            
            
            $
            156,568
            
            
            $
            190,346
            
            
            $
            190,346Interest-bearing
      bank balances
            
            
            1,059,598
            
            
            
            1,059,598
            
            
            
            192,962
            
            
            
            192,962Securities
      available for sale
            
            
            2,220,551
            
            
            
            2,220,551
            
            
            
            2,095,401
            
            
            
            2,095,401Securities
      held to maturity
            
            
            99,452
            
            
            
            101,715
            
            
            
            127,516
            
            
            
            129,496Net
      loans
            
            
            7,642,844
            
            
            
            6,898,534
            
            
            
            8,036,243
            
            
            
            7,213,252Derivative
      assets
            
            
            33,608
            
            
            
            33,608
            
            
            
            42,599
            
            
            
            42,599Financial
      LiabilitiesRetail
      and commercial deposits
            
            $
            7,805,222
            
            
            $
            7,829,302
            
            
            $
            7,350,111
            
            
            $
            7,387,521Brokered
      deposits
            
            
            1,958,948
            
            
            
            1,974,003
            
            
            
            1,946,101
            
            
            
            1,956,562Total
      deposits
            
            
            9,764,170
            
            
            
            9,803,305
            
            
            
            9,296,212
            
            
            
            9,344,083Short-term
      borrowings
            
            
            300,647
            
            
            
            300,564
            
            
            
            322,702
            
            
            
            322,545Subordinated
      notes related to trust preferred securities
            
            
            206,704
            
            
            
            49,646
            
            
            
            206,704
            
            
            
            95,977Other
      long-term debt
            
            
            909,280
            
            
            
            915,813
            
            
            
            910,165
            
            
            
            911,924Total
      long-term debt
            
            
            1,115,984
            
            
            
            965,459
            
            
            
            1,116,869
            
            
            
            1,007,901Derivative
      liabilities
            
            
            25,396
            
            
            
            25,396
            
            
            
            23,040
            
            
            
            23,040





Note
14 – Business Segments





TSFG’s
banking subsidiary Carolina First Bank conducts banking operations in South
Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
Carolina First and Mercantile are TSFG’s primary reportable segments for
management financial reporting. This business segment structure along geographic
lines is consistent with the way management internally reviews financial
information and allocates resources. Each geographic bank segment consists of
commercial and consumer lending and full service branches in its geographic
region with its own management team. The branches provide a full range of
traditional banking products as well as treasury services, 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
(including insurance), equity investments, and certain other activities not
currently allocated to the aforementioned segments.





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


28





THE
SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (unaudited)





CarolinaFirst
            
            
            Mercantile
            
            
            Other
            
            
            TotalThree
      Months Ended March 31, 2010Net
      interest income before inter-segment income (expense)
            
            $
            44,030
            
            
            $
            19,676
            
            
            $
            9,819
            
            
            $
            73,525Inter-segment
      interest income (expense)
            
            
            2,214
            
            
            
            7,522
            
            
            
            (9,736
            )
            
            
            -Net
      interest income
            
            
            46,244
            
            
            
            27,198
            
            
            
            83
            
            
            
            73,525Provision
      for credit losses
            
            
            29,023
            
            
            
            40,437
            
            
            
            25,663
            
            
            
            95,123Noninterest
      income
            
            
            12,060
            
            
            
            3,815
            
            
            
            5,257
            
            
            
            21,132Other
      noninterest expenses - direct (1)
            
            
            30,007
            
            
            
            20,875
            
            
            
            32,771
            
            
            
            83,653Contribution
      before allocation
            
            
            (726
            )
            
            
            (30,299
            )
            
            
            (53,094
            )
            
            
            (84,119
            )Noninterest
      expenses - allocated (2)
            
            
            14,293
            
            
            
            8,559
            
            
            
            (22,852
            )
            
            
            -Contribution
      before income taxes
            
            $
            (15,019
            )
            
            $
            (38,858
            )
            
            $
            (30,242
            )
            
            
            (84,119
            )Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,525
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (80,594
            )March 31,
      2010Total
      assets
            
            $
            5,135,304
            
            
            $
            2,823,506
            
            
            $
            4,469,342
            
            
            $
            12,428,152Total
      loans held for investment
            
            
            4,841,083
            
            
            
            2,778,419
            
            
            
            383,192
            
            
            
            8,002,694Total
      deposits
            
            
            4,288,792
            
            
            
            3,478,672
            
            
            
            1,996,706
            
            
            
            9,764,170Total
      goodwill
            
            
            201,628
            
            
            
            -
            
            
            
            12,490
            
            
            
            214,118





Three
      Months Ended March 31, 2009Net
      interest income before inter-segment income (expense)
            
            $
            41,529
            
            
            $
            20,467
            
            
            $
            23,022
            
            
            $
            85,018Inter-segment
      interest income (expense)
            
            
            7,130
            
            
            
            11,859
            
            
            
            (18,989
            )
            
            
            -Net
      interest income
            
            
            48,659
            
            
            
            32,326
            
            
            
            4,033
            
            
            
            85,018Provision
      for credit losses
            
            
            47,536
            
            
            
            90,675
            
            
            
            4,416
            
            
            
            142,627Noninterest
      income
            
            
            13,431
            
            
            
            5,355
            
            
            
            4,955
            
            
            
            23,741Other
      noninterest expenses - direct (1)
            
            
            26,133
            
            
            
            19,988
            
            
            
            44,120
            
            
            
            90,241Contribution
      before allocation
            
            
            (11,579
            )
            
            
            (72,982
            )
            
            
            (39,548
            )
            
            
            (124,109
            )Noninterest
      expenses - allocated (2)
            
            
            22,414
            
            
            
            12,903
            
            
            
            (35,317
            )
            
            
            -Contribution
      before income taxes
            
            $
            (33,993
            )
            
            $
            (85,885
            )
            
            $
            (4,231
            )
            
            
            (124,109
            )Income
      tax benefit
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (49,706
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (74,403
            )March 31,
      2009Total
      assets
            
            $
            6,041,949
            
            
            $
            3,486,848
            
            
            $
            3,756,450
            
            
            $
            13,285,247Total
      loans held for investment
            
            
            5,770,195
            
            
            
            3,464,208
            
            
            
            752,278
            
            
            
            9,986,681Total
      deposits
            
            
            4,250,713
            
            
            
            3,066,580
            
            
            
            1,909,785
            
            
            
            9,227,078Total
      goodwill
            
            
            203,800
            
            
            
            -
            
            
            
            20,361
            
            
            
            224,161





(1)
            Noninterest
      expenses – direct include the direct costs of the segment’s operations
      such as facilities, personnel, and other operating
    expenses.


(2)
            Noninterest
      expenses – allocated includes expenses not directly attributable to the
      segments, such as information services, operations, human resources,
      accounting, finance, treasury, and corporate incentive
    plans.


29


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





The
following discussion and analysis are presented to assist in understanding the
financial condition, changes in financial condition, results of operations, and
cash flows of The South Financial Group, Inc. and its subsidiaries
(collectively, "TSFG"), except where the context requires otherwise. TSFG may
also be referred to herein as "we", "us", or "our.” This discussion should be
read in conjunction with the consolidated financial statements appearing in this
report as well as TSFG’s Annual Report on Form 10-K for the year ended December
31, 2009. Results of operations for the three months ended March 31, 2010 are
not necessarily indicative of results that may be attained for any other
period.





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
            30Forward-Looking Statements
            30Non-GAAP Financial Information
            31Overview
            32Critical Accounting Policies and Estimates
            34Deposit Insurance
            34Balance Sheet Review
            35Capital and Liquidity
            52Results of Operations
            56Enterprise Risk Management
            61Off-Balance Sheet Arrangements
            63Recently Adopted/Issued Accounting
      Pronouncements
            63





Website Availability of Reports Filed with the Securities and
Exchange Commission





All of
TSFG’s electronic filings with the United States Securities and Exchange
Commission (“SEC”), including its Annual Reports 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:


·
            significant
      changes in, or additions to, banking laws or regulations, including,
      without limitation, as a result of the Emergency Economic Stabilization
      Act of 2008 (“EESA”), the Troubled Asset Relief Program (“TARP”),
      including the Capital Purchase Program (the “Capital Purchase Program”) of
      the U.S. Department of Treasury (the “U.S. Treasury”), and related
      executive compensation
requirements;


·
            additional
      losses in our loan portfolio and ability to mitigate credit issues in our
      loan portfolio;


·
            continuation
      or worsening of current recessionary conditions, as well as continued
      turmoil in the financial markets;


·
            continued
      volatility and deterioration of the capital and credit
      markets;


·
            ability
      to maintain adequate sources of funding and
  liquidity;


·
            impact
      of the Consent Order and Fed Agreement and actions to comply with their
      respective provisions;


·
            ability
      to raise capital or otherwise comply with Federal and State capital
      requirements imposed on TSFG and Carolina First under law and the Consent
      Order;


·
            adverse
      customer reaction associated with any public regulatory
      actions;


·
              deposit
      growth, change in the mix or type of deposit products, and cost of
      deposits;


30
 Index


·
            loss
      of deposits due to perceived financial weakness or otherwise, including as
      a result of the decision of the Federal Deposit Insurance Corporation
      (“FDIC”) whether or not the Transaction Account Guarantee Program is
      extended after its proposed termination on December 31,
    2010;


·
            ability
      to maintain key personnel and attract new
  employees;


·
            rating
      agency action such as a ratings
downgrade;


·
            continued
      weakness in the real estate market, including the markets for commercial
      and residential real estate, which may affect, among other things, the
      level of nonperforming assets, charge-offs, and provision
      expense;


·
            continued
      weakness or further deterioration in the residential real estate markets
      in South Carolina, western North Carolina, and larger markets in Florida,
      in which our loans are
concentrated;


·
            risks
      inherent in making loans including repayment risks and changes in the
      value of collateral, and our ability to manage such
  risks;


·
            loan
      growth, loan sales, the adequacy of the allowance for credit losses,
      provision for credit losses, and the assessment of problem loans
      (including loans acquired via
acquisition);


·
            risks
      incurred as a result of trading, clearing, counterparty, or other
      relationships;


·
            changes
      in interest rates, shape of the yield curve, deposit rates, the net
      interest margin, and funding
sources;


·
            market
      risk (including net interest income at risk analysis and economic value of
      equity risk analysis) and
inflation;


·
            changes
      in accounting policies and
practices;


·
            the
      ability of our internal controls and procedures to prevent acts intended
      to defraud, misappropriate assets, or circumvent applicable law or our
      system of controls;


·
            risks
      associated with potential interruptions or breaches with respect to our
      information systems;


·
            the
      exposure of our business to hurricanes and other natural
      disasters;


·
            ability
      to redeem the Series 2008-T Preferred Stock and the warrant sold to the
      U.S. Treasury;


·
            competition
      in the banking industry and demand for our products and
      services;


·
            changes
      in the financial performance and/or condition of the borrowers of the
      subsidiary bank, Carolina First
Bank;


·
            increases
      in FDIC insurance premiums due to market developments, regulatory changes,
      or other reasons;


·
            level,
      composition, and repricing characteristics of the securities
      portfolio;


·
            fluctuations
      in consumer spending;


·
            increased
      competition in our markets;


·
            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 and the inability to reverse valuation allowances on deferred
      tax assets;


·
            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;


·
            valuation
      of goodwill and intangibles and any potential future
      impairment;


·
            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 the evaluation of the effectiveness of our hedging strategies or access
      to derivative instruments; and


·
            changes,
      costs, and effects of litigation and environmental
      remediation.





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


31
 Index


the
periods presented. In discussing its deposits, TSFG presents information
summarizing its funding generated by customers using the following definitions:
“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 sweep accounts. TSFG also discusses its
funding generated from non-customer sources using the following
definition:  “wholesale borrowings,” which are defined by TSFG as
short-term and long-term borrowings less customer sweep accounts plus brokered
deposits. Management believes that these presentations of “core deposits,”
“customer deposits,” “customer funding,” and “wholesale borrowings” aid in the
identification of funding generated by its lines of business versus its treasury
department. 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 bank holding company, headquartered in Greenville, South
Carolina, with $12.4 billion in total assets and 176 branch offices in South
Carolina, Florida, and North Carolina at March 31, 2010. Founded in 1986, TSFG
focuses on Southeastern banking markets, which have historically experienced
long-term growth. TSFG operates Carolina First Bank, which conducts banking
operations in North Carolina and South Carolina (as Carolina First) and in
Florida (as Mercantile). At March 31, 2010, approximately 44% of TSFG’s customer
deposits were in South Carolina, 45% were in Florida, and 11% were in North
Carolina.





TSFG
targets small business, middle market companies, retail consumers, and high-net
worth clients in its markets and surrounding areas. TSFG strives to combine
personalized customer service and local decision-making with a full range of
financial services normally found at larger regional institutions.





As
discussed in Item 1, Note 1 to the Consolidated Financial Statements, the
Company has assessed its ability to continue as a going concern and has
concluded that, based on current and expected liquidity needs and sources,
management expects TSFG to be able to meet its obligations at least through
March 31, 2011. If unanticipated market factors emerge, or if the Company is
unable to raise additional capital, successfully execute its plans, or comply
with regulatory requirements, then its banking regulators could take further
action, which could include actions that may have a material adverse effect on
the Company’s business, results of operations and financial position. Also see
“Capital and Liquidity.”





Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into a Consent
Order with the FDIC and the South Carolina State Board of Financial Institutions
(the “Consent Order”), a copy of which is attached to this filing as Exhibit
10.1. This Consent Order provides for various things, including (among other
things) the following: (1) within 120 days of entering into the Consent Order,
Carolina First Bank must increase its Tier 1 leverage ratio to 8% and its total
risk-based capital ratio to 12%, (2) Carolina First Bank must prepare strategic,
capital, liquidity and earnings plans and related projections within certain
timetables set forth in the Consent Order and on an ongoing basis, (3) Carolina
First Bank must provide plans and meet timeframes set forth in the Consent Order
for reducing criticized assets, (4) Carolina First Bank is precluded from
extending credit to classified borrowers absent express board approval and must
ensure compliance with updated concentration limits implemented with respect to
its loan portfolio, (5) Carolina First Bank is subject to certain limitations
with respect to brokered deposits and the rates it can pay on certain customer
deposits, (6) Carolina First Bank cannot make dividends or bonus payments
without the consent of the FDIC and (7) Carolina First Bank must limit its
growth to 10% per year unless the FDIC consents otherwise. The foregoing summary
is not complete and is qualified in all respects by reference to the actual
language of the Consent Order. As a result of the Consent Order, the Bank is no
longer considered to be “well capitalized” although all ratios at March 31, 2010
exceeded well-capitalized thresholds.





Effective
May 4, 2010, The South Financial Group, Inc. entered into a written agreement
(the “Fed Agreement”) with the Board of Governors of the Federal Reserve System
(the “Federal Reserve”), a copy of which is attached to this filing as Exhibit
10.2. The Fed Agreement provides, among other things, that the holding company
must serve as a source of strength to Carolina First Bank, and that except upon
consent of the Federal Reserve, the holding company may not pay dividends to
shareholders or receive dividends from Carolina First Bank, the holding company
and its nonbank subsidiaries may not make payments on trust preferred securities
or subordinated debt, and the holding company cannot incur, increase or
guarantee debt or repurchase any capital securities. The Fed Agreement also
requires


32
 Index


that the
holding company submit a capital plan which reflects sufficient capital and a
cash flow plan, both of which must be acceptable to the Federal Reserve, and
follow certain guidelines with respect to the appointment or change in
responsibilities of senior officers. The foregoing summary is not complete and
is qualified in all respects by reference to the actual language of the Fed
Agreement.





If the
Company is unable to raise the capital required or otherwise comply with the
terms of the Consent Order, further regulatory actions (including actions up to
the implementation of a receivership) could be taken, and its ability to operate
as a going concern could be negatively impacted. Furthermore, because such
consent orders are public, there could be an adverse customer or market reaction
to the announcement of the Consent Order.





TSFG
reported a net loss available to common shareholders of $85.8 million, or
$(0.40) per diluted share, for first quarter 2010, compared to $193.9 million,
or $(0.90) per diluted share for fourth quarter 2009 and $90.8 million, or
$(1.10) per diluted share, for first quarter 2009. The following is a summary of
the consolidated statements of operations (in thousands, except per share
data):





Three Months EndedMarch 31,
      2010
            
            
            December 31,
      2009
            
            
            March 31,
      2009Net
      interest income
            
            $
            73,525
            
            
            $
            80,546
            
            
            $
            85,018Provision
      for credit losses
            
            
            95,123
            
            
            
            170,761
            
            
            
            142,627Noninterest
      income
            
            
            21,132
            
            
            
            28,550
            
            
            
            23,741Noninterest
      expenses
            
            
            83,653
            
            
            
            103,163
            
            
            
            90,241Income
      tax (benefit) expense
            
            
            (3,525
            )
            
            
            23,843
            
            
            
            (49,706
            )Net
      loss
            
            
            (80,594
            )
            
            
            (188,671
            )
            
            
            (74,403
            )Preferred
      stock dividends and other
            
            
            (5,235
            )
            
            
            (5,221
            )
            
            
            (16,408
            )Net
      loss available to common shareholders
            
            $
            (85,829
            )
            
            $
            (193,892
            )
            
            $
            (90,811
            )Loss
      per common share, diluted
            
            $
            (0.40
            )
            
            $
            (0.90
            )
            
            $
            (1.10
            )





At March
31, 2010, nonperforming assets as a percentage of loans and foreclosed property
increased to 6.35% from 6.13% at December 31, 2009 and 5.08% at March 31, 2009.
Although nonperforming assets decreased to $518.3 million at March 31, 2010 from
$522.4 million at December 31, 2009, continued reductions in loans caused the
ratio to increase. For first quarter 2010, annualized net loan charge-offs
totaled 4.32% of average loans held for investment, compared to 6.52% and 4.36%,
respectively, for fourth quarter 2009 and first quarter 2009. TSFG’s provision
for credit losses decreased to $95.1 million for first quarter 2010 from $170.8
million for fourth quarter 2009 and $142.6 million for first quarter
2009.





At March
31, 2010, all regulatory capital ratios exceeded well-capitalized minimums but,
effective April 30, 2010, as a result of the Consent Order the Bank is
considered to be only adequately capitalized. TSFG’s tangible equity to tangible
asset ratio decreased to 5.66% at March 31, 2010, from 6.54% at December 31,
2009 primarily due to the net loss in first quarter 2010, partially offset by an
increase in unrealized gains on available for sale securities included in
accumulated other comprehensive income. Tangible common equity to tangible
assets was 2.90% at March 31, 2010, compared to 3.67% at December 31, 2009 and
6.05% at March 31, 2009.





Tax-equivalent
net interest income was $73.7 million for first quarter 2010, compared to $81.4
million for fourth quarter 2009 and $86.2 million for first quarter 2009. The
net interest margin decreased to 2.75% for first quarter 2010 from 2.87% for
fourth quarter 2009 and 2.80% for first quarter 2009. The decrease relative to
fourth quarter 2009 was primarily due to the effect of maturing interest rate
hedges, while the decrease relative to first quarter 2009 was primarily due to
excess cash maintained as a liquidity management measure.




Noninterest
income totaled $21.1 million for the first three months of 2010, compared to
$28.6 million for fourth quarter 2009 and $23.7 million for first quarter 2009.
The decrease relative to fourth quarter 2009 was largely attributable to a
$389,000 loss on securities (primarily write-downs on equity investments) in
first quarter 2010 compared to a $6.7 million gain on securities (primarily due
to sales of municipal securities) in fourth quarter 2009. The decrease relative
to first quarter 2009 was largely due to the sale of ancillary businesses in
third quarter 2009.





Noninterest
expenses totaled $83.7 million for first quarter 2010, compared to $103.2
million for fourth quarter 2009 and $90.2 million for first quarter 2009. The
decrease relative to fourth quarter 2009 was primarily due to lower
credit-related expenses and personnel expense. The decrease relative to first
quarter 2009 was partly due to expense


33
 Index


control
initiatives, particularly with regard to personnel expense, as well as the
elimination of operating expenses associated with ancillary businesses sold in
third quarter 2009.





Critical Accounting Policies and Estimates





TSFG's
accounting policies are in accordance with accounting principles generally
accepted in the United States and with general practice within the banking
industry. TSFG makes a number of judgmental estimates and assumptions relating
to reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the Consolidated Financial Statements and
the reported amounts of revenues and expenses during periods presented. Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and reserve for unfunded lending
commitments; the effectiveness of derivatives and other hedging activities; the
fair value of certain financial instruments (securities, derivatives, privately
held investments, and, for purposes of goodwill impairment evaluation, loans);
income tax assets or liabilities; share-based compensation; and accounting for
acquisitions, including the fair value determinations and the analysis of
goodwill for impairment. To a lesser extent, significant estimates are also
associated with the determination of contingent liabilities, discretionary
compensation, and expense associated with 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 and estimates,
refer to the Annual Report of TSFG on Form 10-K for the year ended December 31,
2009, 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.





Deposit Insurance





During
2009, the FDIC required all insured depository institutions, with limited
exceptions, to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of March 31, 2010,
$76.7 million in prepaid deposit insurance is included in other assets in the
consolidated balance sheet. The FDIC also adopted a uniform three-basis point
increase in assessment rates effective on January 1, 2011.





In April
2010, the FDIC approved an interim rule that extends the Transaction Account
Guarantee Program (“TAGP”) which provides full FDIC coverage for
noninterest-bearing transaction deposit accounts and certain interest-bearing
checking accounts. Under the interim rule, the TAGP will be extended from June
30, 2010 to December 31, 2010 and may be extended an additional year to December
31, 2011 without additional rulemaking, provided the FDIC announces the
extension before October 29, 2010. The existing fee structure under the TAGP
will not change; however, the maximum interest rate that can be paid on
qualifying NOW accounts will be reduced from 50 basis points to 25 basis points,
and assessment reporting will be based on average daily account balances rather
than account balances at the end of the quarter as currently required.
Participants in the TAGP have a one-time, irrevocable opportunity to opt out of
the TAGP extension effective July 1, 2010. TSFG has elected not to opt out of
the TAGP extension.





In April
2010, the FDIC also issued a notice of proposed rulemaking to revise the deposit
insurance assessment system for large institutions. The FDIC proposal would
create two scorecards, one for most institutions, including Carolina First Bank,
that have more than $10 billion in assets and another for “highly complex”
institutions as defined. Each scorecard would have a performance score and a
loss-severity score that would be combined to produce a total score, which would
be translated into an initial assessment rate. In calculating these scores, the
FDIC would continue to utilize CAMELS ratings, would introduce certain new
financial measures, and would eliminate the use of risk categories and long-term
debt issuer ratings. In determining the initial base assessment rate, the FDIC
would have the ability to adjust each component of the scorecard where
necessary, based upon quantitative or qualitative measures not adequately
captured in the scorecard, to produce accurate relative risk rankings. The
proposed rule would allow for adjustments to an institution’s initial base
assessment rate as a result of certain long-term unsecured debt, certain secured
liabilities and brokered deposits. After the effect of potential base-rate
adjustments, the total base assessment rate could range from 5 to 85 basis
points on an annualized basis. The final rule related to this proposal is
expected to be effective January 1, 2011. The Company can not provide any
assurance as to the effect of any proposed change in its deposit insurance
premium rate, should such a change occur, as such changes are dependent upon a
variety of factors, some of which are beyond the Company’s
control.


34
 Index


Balance Sheet Review





Loans





TSFG
focuses its lending activities on small and middle market businesses and
individuals in its geographic markets. At March 31, 2010, outstanding loans
totaled $8.0 billion, which equaled 82.1% of total deposits (102.7% of customer
deposits) and 64.5% 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, 2010, approximately 4% 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.





In an
effort to accelerate the sale or resolution of problem loans and to otherwise
divest itself of loans with limited relationship opportunity, during the three
months ended March 31, 2010, TSFG transferred $27.7 million from the held for
investment portfolio to the held for sale portfolio (and subsequently sold or
otherwise settled the loan).





TSFG
generally sells a substantial majority of its residential mortgage loans in the
secondary market. TSFG also retains certain of its mortgage loans in its held
for investment portfolio as part of its overall balance sheet management
strategy. Mortgage loans held for sale decreased to $10.8 million at March 31,
2010 from $15.8 million at December 31, 2009, primarily due to timing of
mortgage sales.





Table 1
summarizes outstanding loans held for investment by loan
purpose.


35
 Index





Table
      1Loan
      Portfolio Composition Based on Loan Purpose(dollars
      in thousands)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Commercial
      LoansCommercial
      and industrial
            
            $
            1,924,014
            
            
            $
            2,645,871
            
            
            $
            2,080,329Commercial
      owner - occupied real estate
            
            
            1,280,010
            
            
            
            1,285,530
            
            
            
            1,271,525Commercial
      real estate (1)
            
            
            3,321,544
            
            
            
            4,042,871
            
            
            
            3,501,8096,525,568
            
            
            
            7,974,272
            
            
            
            6,853,663Consumer
      LoansIndirect
      - sales finance
            
            
            202,504
            
            
            
            573,653
            
            
            
            230,426Consumer
      lot loans
            
            
            132,307
            
            
            
            198,032
            
            
            
            144,315Direct
      retail
            
            
            79,617
            
            
            
            90,999
            
            
            
            83,460Home
      equity
            
            
            783,868
            
            
            
            813,015
            
            
            
            787,6451,198,296
            
            
            
            1,675,699
            
            
            
            1,245,846Mortgage
      Loans
            
            
            278,830
            
            
            
            336,710
            
            
            
            286,618Total
      loans held for investment
            
            $
            8,002,694
            
            
            $
            9,986,681
            
            
            $
            8,386,127Percentage
      of Loans Held for InvestmentCommercial
      and industrial
            
            
            24.0
            %
            
            
            26.4
            %
            
            
            24.8
            %Commercial
      owner - occupied real estate
            
            
            16.0
            
            
            
            12.9
            
            
            
            15.2Commercial
      real estate
            
            
            41.5
            
            
            
            40.5
            
            
            
            41.8Consumer
            
            
            15.0
            
            
            
            16.8
            
            
            
            14.8Mortgage
            
            
            3.5
            
            
            
            3.4
            
            
            
            3.4Total
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %





(1)
            See
      “Commercial Real Estate Concentration,” “Credit Quality,” and “Allowance
      for Loan Losses and Reserve for Unfunded Lending Commitments” for more
      detail on commercial real estate
loans.





Commercial and industrial loansare 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.





Commercial 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 (“CRE”) loansare loans to finance real properties that are acquired, developed, or
constructed for sale or lease to parties unrelated to the borrower. Our CRE
products fall into four primary categories including land, acquisition and
development, construction, and income property. See “Commercial Real Estate
Concentration” below for further details.





Indirect - sales finance
loans are loans to individuals to finance the purchase of motor vehicles.
They are closed at the auto dealership but approved in advance by TSFG for
immediate purchase. Loans are extended on new and used motor vehicles with terms
varying from two years to six years. TSFG has effectively stopped originating
indirect auto loans, with the exception of certain dealers that fit within our
relationship strategy.





Consumer lot loansare loans
to individuals to finance the purchase of residential lots.


36
 Index


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





Home equity loans are loans
to homeowners, secured primarily by junior mortgages on their primary
residences, to finance personal, family, or household needs. These loans may be
in the form of amortizing loans or lines of credit with terms up to 15 years.
TSFG’s home equity portfolio consists of loans to direct customers, with no
brokered loans.





Mortgage loans are loans to
individuals, secured by first 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 in its held
for investment portfolio as part of its overall balance sheet management
strategy. TSFG’s mortgage portfolio is bank-customer related, with minimal
brokered loans or subprime exposure.





Portfolio
risk is partially managed by maintaining a “house” lending limit at a level
significantly lower than the legal lending limit of Carolina First Bank and by
requiring approval by the Risk Committee of the Board of Directors to exceed
this house limit. At March 31, 2010, TSFG’s house lending limit was $35 million,
and nine credit relationships totaling $391.0 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 $510.3 million,
or 6.4% of total loans held for investment at March 31, 2010, compared to 6.9%
of total loans held for investment at December 31, 2009. Approximately $5
million of these loans were considered nonperforming loans as of March 31,
2010.





TSFG,
through its Corporate Banking group, participates in “shared national credits”
(multi-bank credit facilities of $20 million or more, or “SNCs”), primarily to
borrowers who are headquartered or conduct business in or near our markets. At
March 31, 2010, the loan portfolio included outstanding SNC borrowings of $368.9
million, decreasing from $495.6 million at December 31, 2009. The largest
commitment was $28.6 million and the largest outstanding balance was $17.6
million at March 31, 2010. Our strategy targets borrowers whose management teams
are well known to us and whose risk profile is above average. We expect to
continue to reduce the percentage of our portfolio invested in SNCs due to the
lack of relationship opportunity on much of the portfolio.





Late in
2009, TSFG established a U.S. Small Business
Administration ("SBA")lending unit to generate new customers by focusing
on small business lending opportunities.In early 2010, TSFG was
approved as a preferred lender under the SBA Preferred Lender Program ("PLP").
This PLP designation grants TSFG the authority to process, underwrite, close,
and service SBA guaranteed loans without prior SBA review.TSFG plans to
sell substantially all of the SBA-guaranteed portion of the loans into the SBA
loan secondary market, generating gains from the sales, and retain the
un-guaranteed portion (generally 10% to 25% of the principal). At March 31,
2010, loans held for sale included $2.5 million of SBA loans.





Commercial
Real Estate Concentration





The
portfolio’s largest 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. TSFG’s commercial real estate products
include the following:





Commercial
      Real Estate Product
            DescriptionCompleted
      income property
            Loans
      to finance a variety of income producing properties, including apartments,
      retail centers, hotels, office buildings and industrial
      facilitiesResidential
      A&D
            Loans
      to develop land into residential lotsCommercial
      A&D
            Loans
      to finance the development of raw land into sellable commercial
      lotsCommercial
      construction
            Loans
      to finance the construction of various types of income
      propertyResidential
      construction
            Loans
      to construct single family housing; primarily to residential
      buildersResidential
      condo
            Loans
      to construct or convert residential condominiumsUndeveloped
      land
            Loans
      to acquire land for resale or future
development





Underwriting
policies dictate the loan-to-value (“LTV”) limitations at origination for
commercial real estate loans. Table 2 presents selected characteristics of
commercial real estate loans by product type.


37
 Index





Table
      2Selected
      Characteristics of Commercial Real Estate Loans(dollars
      in thousands)March 31,
      2010Policy LTV
            
            Weighted
      Average Time to Maturity(in
      months)
            
            Weighted
      AverageLoan Size
            
            Largest
      TenTotal O/SCompleted
      income property
            
            
            80
            %
            
            
            33.6
            
            
            $
            529
            
            
            $
            147,488Residential
      A&D
            
            
            75
            
            
            
            8.3
            
            
            
            487
            
            
            
            66,115Commercial
      A&D
            
            
            75
            
            
            
            6.0
            
            
            
            965
            
            
            
            42,396Commercial
      construction
            
            
            80
            
            
            
            42.2
            
            
            
            3,025
            
            
            
            64,790Residential
      construction
            
            
            80
            
            
            
            6.5
            
            
            
            298
            
            
            
            41,595Residential
      condo
            
            
            80
            
            
            
            10.7
            
            
            
            748
            
            
            
            62,936Undeveloped
      land
            
            
            65
            
            
            
            9.4
            
            
            
            632
            
            
            
            50,519Overall
            
            
            
            
            
            
            27.4
            
            
            $
            575
            
            
            $
            475,839





For
additional information on other commercial real estate management processes,
refer to the Annual Report of TSFG on Form 10-K for the year ended December 31,
2009, specifically the section captioned “Commercial Real Estate Concentration”
in the “Balance Sheet Review -- Loans” section of Management’s Discussion and
Analysis of Financial Condition and Results of Operations.





Table 3
presents the commercial real estate portfolio by geography, while Table 4
presents the commercial real estate portfolio by geography and property type.
Commercial real estate nonaccruals, past dues, and net charge-offs are presented
in Tables 6, 7, and 11, respectively. TSFG monitors trends in these categories
in order to evaluate the possibility of higher credit risk in its commercial
real estate portfolio.





Table
      3Commercial
      Real Estate Loans by Geographic Diversification (1)(dollars
      in thousands)March 31,
      2010
            
            
            December 31,
      2009%
      of
            
            
            
            
            
            %
      ofBalance
            
            
            Total CRE
            
            
            Balance
            
            
            Total CRESouth
      Carolina, exluding Coastal:Upstate
      South Carolina (Greenville)
            
            $
            544,767
            
            
            
            16.4
            %
            
            $
            569,018
            
            
            
            16.2
            %Midlands
      South Carolina (Columbia)
            
            
            208,965
            
            
            
            6.3
            
            
            
            232,088
            
            
            
            6.6Greater
      South Charlotte South Carolina (Rock Hill)
            
            
            130,386
            
            
            
            3.9
            
            
            
            142,114
            
            
            
            4.1Coastal
      South Carolina:North
      Coastal South Carolina (Myrtle Beach)
            
            
            316,666
            
            
            
            9.5
            
            
            
            331,819
            
            
            
            9.5South
      Coastal South Carolina (Charleston)
            
            
            280,352
            
            
            
            8.4
            
            
            
            292,207
            
            
            
            8.3Western
      North Carolina (Hendersonville/Asheville)
            
            
            603,906
            
            
            
            18.2
            
            
            
            639,264
            
            
            
            18.3Central
      Florida (Orlando/Ocala)
            
            
            349,744
            
            
            
            10.5
            
            
            
            356,239
            
            
            
            10.2North
      Florida:Northeast
      Florida (Jacksonville)
            
            
            205,083
            
            
            
            6.2
            
            
            
            219,202
            
            
            
            6.3North
      Central Florida
            
            
            266,535
            
            
            
            8.0
            
            
            
            271,085
            
            
            
            7.7South
      Florida (Ft. Lauderdale)
            
            
            194,095
            
            
            
            5.9
            
            
            
            198,874
            
            
            
            5.7Tampa
      Bay Florida
            
            
            221,045
            
            
            
            6.7
            
            
            
            249,899
            
            
            
            7.1Total
      commercial real estate loans
            
            $
            3,321,544
            
            
            
            100.0
            %
            
            $
            3,501,809
            
            
            
            100.0
            %





(1)
            Geography
      is primarily determined by the originating operating geographic market and
      not necessarily the ultimate location of the underlying
      collateral.


38
 Index





Table
      4Commercial
      Real Estate Loans by Geography and Product Type(dollars
      in thousands)March 31,
      2010 Commercial Real Estate Loans by GeographySC,
      ExclCoastal
            
            
            CoastalSC
            
            
            WesternNC
            
            
            CentralFL
            
            
            NorthFL
            
            
            SouthFL
            
            
            Tampa
      Bay
            
            
            TotalCRE
            
            
            %
      of LHFICommercial
      Real EstateLoans
      by Product TypeCompleted
      income property
            
            $
            563,739
            
            
            $
            414,203
            
            
            $
            373,243
            
            
            $
            204,508
            
            
            $
            344,930
            
            
            $
            129,673
            
            
            $
            107,379
            
            
            $
            2,137,675
            
            
            
            26.7
            %Residential
      A&D
            
            
            45,510
            
            
            
            47,839
            
            
            
            119,580
            
            
            
            15,632
            
            
            
            37,338
            
            
            
            11,819
            
            
            
            29,817
            
            
            
            307,535
            
            
            
            3.9Commercial
      A&D
            
            
            30,984
            
            
            
            32,000
            
            
            
            25,282
            
            
            
            22,277
            
            
            
            7,147
            
            
            
            15,274
            
            
            
            12,742
            
            
            
            145,706
            
            
            
            1.8Commercial
      construction
            
            
            157,888
            
            
            
            9,663
            
            
            
            21,420
            
            
            
            33,275
            
            
            
            16,129
            
            
            
            9,189
            
            
            
            27,688
            
            
            
            275,252
            
            
            
            3.4Residential
      construction
            
            
            35,595
            
            
            
            5,036
            
            
            
            6,937
            
            
            
            8,845
            
            
            
            16,235
            
            
            
            20,262
            
            
            
            1,411
            
            
            
            94,321
            
            
            
            1.2Residential
      condo
            
            
            10,682
            
            
            
            31,786
            
            
            
            7,284
            
            
            
            14,206
            
            
            
            14,377
            
            
            
            1,826
            
            
            
            10,357
            
            
            
            90,518
            
            
            
            1.1Undeveloped
      land
            
            
            39,720
            
            
            
            56,491
            
            
            
            50,160
            
            
            
            51,001
            
            
            
            35,462
            
            
            
            6,052
            
            
            
            31,651
            
            
            
            270,537
            
            
            
            3.4Total
      CRE Loans
            
            $
            884,118
            
            
            $
            597,018
            
            
            $
            603,906
            
            
            $
            349,744
            
            
            $
            471,618
            
            
            $
            194,095
            
            
            $
            221,045
            
            
            $
            3,321,544
            
            
            
            41.5
            %CRE
      Loans as %of Total Loans HFI
            
            
            11.0
            %
            
            
            7.5
            %
            
            
            7.5
            %
            
            
            4.4
            %
            
            
            5.9
            %
            
            
            2.4
            %
            
            
            2.8
            %
            
            
            41.5
            %





See
“Credit Quality” for additional commercial real estate information.





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 periodic
meetings with credit risk management to review progress. Credit risk management
activities are monitored by the Risk Committee of the Board, which meets
periodically to review credit quality trends, new large credits, loans to
insiders, large problem credits, credit policy changes, and reports on
independent credit reviews.





For
TSFG’s policy regarding impairment on loans, nonaccruals, charge-offs, and
foreclosed property, refer to Item 8, Note 1 – Summary of Significant Accounting
Policies in the notes to the Consolidated Financial Statements in the Annual
Report on Form 10-K for the year ended December 31, 2009.


39
 Index


Table 5
presents our credit quality indicators.





Table
      5Credit
      Quality Indicators(dollars
      in thousands)March 31,
      2010
            
            
            December 31,2010
            
            
            2009
            
            
            2009Loans
      held for sale
            
            $
            13,296
            
            
            $
            29,726
            
            
            $
            15,758Loans
      held for investment
            
            
            8,002,694
            
            
            
            9,986,681
            
            
            
            8,386,127Allowance
      for loan losses
            
            
            373,146
            
            
            
            280,156
            
            
            
            365,642Allowance
      for credit losses (1)
            
            
            380,493
            
            
            
            283,425
            
            
            
            373,126Nonaccrual
      loans - commercial and industrial
            
            
            71,242
            
            
            
            41,877
            
            
            
            77,527Nonaccrual
      loans - commercial owner - occupied real estate
            
            
            48,040
            
            
            
            19,310
            
            
            
            43,701Nonaccrual
      loans - commercial real estate
            
            
            217,542
            
            
            
            301,872
            
            
            
            240,377Nonaccrual
      loans - consumer
            
            
            15,353
            
            
            
            28,743
            
            
            
            16,314Nonaccrual
      loans - mortgage
            
            
            21,979
            
            
            
            31,148
            
            
            
            21,127Total
      nonperforming loans held for investment (2)
            
            
            374,156
            
            
            
            422,950
            
            
            
            399,046Nonperforming
      loans held for sale - CRE
            
            
            -
            
            
            
            12,766
            
            
            
            -Foreclosed
      property (other real estate owned and personal property
      repossessions)
            
            
            144,128
            
            
            
            77,210
            
            
            
            123,314Total
      nonperforming assets
            
            $
            518,284
            
            
            $
            512,926
            
            
            $
            522,360Restructured
      loans accruing interest
            
            $
            45,051
            
            
            $
            11,073
            
            
            $
            26,128Loans
      past due 90 days or more (interest accruing)
            
            $
            3,442
            
            
            $
            6,444
            
            
            $
            10,465Total
      nonperforming assets as a percentage of loans and foreclosed
      property
            
            
            6.35
            %
            
            
            5.08
            %
            
            
            6.13
            %Total
      nonperforming assets as a percentage of total assets
            
            
            4.17
            
            
            
            3.86
            
            
            
            4.39Allowance
      for loan losses to nonperforming loans held for investment
            
            
            1.00
            x
            
            
            0.66
            x
            
            
            0.92
            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, 2010, includes $18.5 million of restructured loans in nonaccrual
      status.





TSFG’s
nonperforming asset ratio (nonperforming assets as a percentage of loans and
foreclosed property) increased to 6.35% at March 31, 2010 from 6.13% at December
31, 2009, due primarily to lower loans outstanding. Comparing March 31, 2010 to
December 31, 2009, nonperforming assets decreased to $518.3 million from $522.4
million as TSFG continued to address its problem loans and inflows of
nonaccruals declined for three consecutive quarters.





Table 6
presents CRE nonaccrual loans by geography and product type, while Table 7
provides detail regarding commercial real estate loans past due 30 days or
more.


40
 Index





Table
      6Commercial
      Real Estate Nonaccrual Loans(dollars
      in thousands)March
      31, 2010 CRE Nonaccrual Loans ("NAL") by GeographySC,
      ExclCoastal
            
            
            CoastalSC
            
            
            WesternNC
            
            
            CentralFL
            
            
            NorthFL
            
            
            SouthFL
            
            
            Tampa
      Bay
            
            
            TotalCRE NAL
            
            
            %
      of NALCRE
      Nonaccrual Loans by Product TypeCompleted
      income property
            
            $
            13,935
            
            
            $
            10,120
            
            
            $
            20,352
            
            
            $
            2,805
            
            
            $
            6,401
            
            
            $
            3,157
            
            
            $
            12,720
            
            
            $
            69,490
            
            
            
            18.6
            %Residential
      A&D
            
            
            5,461
            
            
            
            5,694
            
            
            
            18,747
            
            
            
            6,566
            
            
            
            5,449
            
            
            
            1,092
            
            
            
            3,339
            
            
            
            46,348
            
            
            
            12.4Commercial
      A&D
            
            
            1,785
            
            
            
            5,933
            
            
            
            3,733
            
            
            
            960
            
            
            
            -
            
            
            
            -
            
            
            
            6,420
            
            
            
            18,831
            
            
            
            5.0Commercial
      construction
            
            
            14,810
            
            
            
            -
            
            
            
            2,901
            
            
            
            -
            
            
            
            1,523
            
            
            
            -
            
            
            
            5,193
            
            
            
            24,427
            
            
            
            6.5Residential
      construction
            
            
            495
            
            
            
            -
            
            
            
            919
            
            
            
            6,412
            
            
            
            2,151
            
            
            
            -
            
            
            
            -
            
            
            
            9,977
            
            
            
            2.7Residential
      condo
            
            
            1,131
            
            
            
            13,183
            
            
            
            77
            
            
            
            -
            
            
            
            8
            
            
            
            1,106
            
            
            
            189
            
            
            
            15,694
            
            
            
            4.2Undeveloped
      land
            
            
            3,209
            
            
            
            3,076
            
            
            
            1,320
            
            
            
            5,129
            
            
            
            11,307
            
            
            
            1,391
            
            
            
            7,343
            
            
            
            32,775
            
            
            
            8.7Total
      CRE Nonaccrual Loans
            
            $
            40,826
            
            
            $
            38,006
            
            
            $
            48,049
            
            
            $
            21,872
            
            
            $
            26,839
            
            
            $
            6,746
            
            
            $
            35,204
            
            
            $
            217,542
            
            
            
            58.1
            %CRE
      Nonaccrual Loans as %of Total Nonaccrual Loans HFI
            
            
            10.9
            %
            
            
            10.2
            %
            
            
            12.8
            %
            
            
            5.8
            %
            
            
            7.2
            %
            
            
            1.8
            %
            
            
            9.4
            %
            
            
            58.1
            %





Table
      7Commercial
      Real Estate Loans Past Due 30 Days or More (excluding
      nonaccruals)(dollars
      in thousands)March 31,
      2010
            
            
            December 31,
      2009Balance
            
            
            % of CRE
            
            
            Balance
            
            
            % of CRENorth
      Carolina
            
            $
            15,250
            
            
            
            0.46
            %
            
            $
            17,747
            
            
            
            0.51
            %South
      Carolina
            
            
            16,511
            
            
            
            0.50
            
            
            
            23,714
            
            
            
            0.68Florida
            
            
            34,398
            
            
            
            1.03
            
            
            
            71,877
            
            
            
            2.05Total
      CRE loans past due 30 days or more
            
            $
            66,159
            
            
            
            1.99
            %
            
            $
            113,338
            
            
            
            3.24
            %





Potential
problem loans consist of commercial loans that are performing in accordance with
contractual terms but for which management has concerns about the ability of an
obligor to continue to comply with repayment terms because of the obligor’s
potential operating or financial difficulties. These loans are identified
through our internal risk grading processes. Management monitors these loans
closely and reviews their performance on a regular basis. Table 8 provides
additional detail regarding potential problem loans.





Table
      8Potential
      Problem Loans(dollars
      in thousands)March 31, 2010
            
            
            December 31, 2009#
      of Loans
            
            
            Balance
            
            
            %
      of LHFI
            
            
            #
      of Loans
            
            
            Balance
            
            
            %
      of LHFILarge
      potential problem loans ($5 million or more)
            
            
            42
            
            
            $
            389,064
            
            
            
            4.86
            %
            
            
            40
            
            
            $
            377,230
            
            
            
            4.50
            %Small
      potential problem loans (less than $5 million)
            
            
            1,177
            
            
            
            555,248
            
            
            
            6.94
            
            
            
            1,112
            
            
            
            558,700
            
            
            
            6.66Total
      potential problem loans (1)
            
            
            1,219
            
            
            $
            944,312
            
            
            
            11.80
            %
            
            
            1,152
            
            
            $
            935,930
            
            
            
            11.16
            %





(1)
            Includes
      commercial and industrial, commercial real estate, and commercial
      owner-occupied real estate.





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.





Management’s
ongoing evaluation of the adequacy of the Allowance considers both impaired and
unimpaired loans and takes into consideration TSFG’s past loan loss experience,
known and inherent risks in the portfolio, existing


41
 Index


adverse
situations that may affect the borrowers’ ability to repay, estimated value of
any underlying collateral, an analysis of guarantees and an analysis of current
economic factors and existing conditions.





TSFG,
through its lending and credit functions, continuously reviews its loan
portfolio for credit risk. TSFG employs an independent credit review area that
reviews the lending and credit functions and processes to validate that credit
risks are appropriately identified and addressed and reflected in the risk
ratings. Using input from the credit risk identification process, the Company’s
credit risk management area analyzes and validates the Company’s Allowance
calculations. The analysis includes four basic components: general allowances
for loan pools segmented based on similar risk characteristics, specific
allowances for individually impaired loans, subjective and judgmental
qualitative adjustments based on identified economic factors and existing
conditions and other risk factors, and the unallocated component of the
Allowance (which is determined based on the overall Allowance level and the
determination of a range given the inherent imprecision of calculating the
Allowance).





Management
reviews the methodology, calculations and results and ensures that the
calculations are appropriate and that all material risk elements have been
assessed in order to determine the appropriate level of Allowance for the
inherent losses in the loan portfolio at each quarter end. The Allowance for
Credit Losses Committee is in place to ensure that the process is systematic and
consistently applied.





The
following chart reflects the various levels of reserves included in the
Allowance:





Level
      I
            
            General
      allowance calculated based upon historical lossesLevel
      II
            
            Specific
      reserves for individually impaired loansLevel
      III
            
            Subjective/judgmental
      adjustments for economic and other risk factorsUnfunded
            
            Reserves
      for off-balance sheet (unadvanced) exposureUnallocated
            
            Represents
      the imprecision inherent in the previous calculationsTotal
            
            Represents
      summation of all reserves





Level I Reserves.The first
reserve component is the general allowance for loan pools segmented based on
similar risk characteristics that are determined by applying adjusted historical
loss factors to each loan pool. The general allowance factors are based upon
recent and historical charge-off experience and are applied to the outstanding
portfolio by loan type and internal risk rating. Historical loss analyses of the
previous 12 quarters provide the basis for factors used for homogenous pools of
smaller loans, such as indirect auto and other consumer loan categories which
generally are not evaluated based on individual risk ratings but almost entirely
based on historical losses. The loss factors used in the Level I analyses are
adjusted quarterly based on loss trends and risk rating migrations.





TSFG
generates historical loss ratios from actual loss history for nine subsets of
the loan portfolio over a 12 quarter period (3 years). Commercial loans are
sorted by risk rating into four pools—Pass, Special Mention, Substandard, and
Doubtful. Consumer loans are sorted into five pools by product type—Direct,
Indirect, Home Equity, Consumer Lots, and Mortgage.





The
adjusted loss ratio for each pool is multiplied by the dollar amount of loans in
the pool in order to create a range. We then add and subtract five percent
(5.0%) to and from this amount to create the upper and lower boundaries of the
range. The upper and lower boundary amounts for each pool are summed to
establish the total range. Although TSFG generally uses the actual historical
loss rate, on occasion management may decide to select a higher or lower
boundary based on known market trends or internal behaviors that would impact
the performance of a specific portfolio grouping. The Level I reserves totaled
$210.3 million at March 31, 2010, based on the portfolio historical loss rates,
compared to $193.0 million at December 31, 2009.





Level II Reserves.The second
component of the Allowance involves the calculation of specific allowances for
each individually impaired loan. In situations where a loan is determined to be
impaired (primarily because it is probable that all principal and interest
amounts due according to the terms of the note will not be collected as
scheduled), a specific reserve may or may not be warranted. Upon examination of
the collateral and other factors, it may be determined that TSFG reasonably
expects to collect all amounts due; therefore, no specific reserve is warranted.
Any loan determined to be impaired (whether a specific reserve is assigned or
not) is excluded from the Level I calculations described above.





TSFG
tests a broad group of loans for impairment each quarter (this includes all
large commercial relationships, generally over $1 million, that have been placed
in nonaccrual status or modified as a troubled debt restructure). Once a loan is
identified as impaired, reserves are based on a thorough analysis of the most
probable source of repayment which is normally the liquidation of collateral,
but may also include discounted future cash flows or the


42
 Index


market
value of the loan itself. Generally, for collateral dependent loans, current
market appraisals are utilized for larger credits; however, in situations where
a current market appraisal is not available, management uses the best available
information (including appraisals for similar properties, communications with
qualified real estate professionals, information contained in reputable
publications and other observable market data) to estimate the current fair
value (less cost to sell) of the subject property. TSFG had Level II reserves of
$37.7 million at March 31, 2010 and December 31, 2009.





Level III Reserves.The third
component of the Allowance represents subjective and judgmental adjustments
determined by management to account for the effect of risks or losses that are
not fully captured elsewhere. This part of the methodology reflects adjustments
to historical loss experience to incorporate current economic conditions and
other factors which impact the inherent losses in the portfolio. This component
includes amounts for new loan products or portfolio categories which are deemed
to have risks not included in the other reserve elements as well as
macroeconomic and other factors. The qualitative risk factors of this third
allowance level are more subjective and require a high degree of management
judgment. Currently, Level III Reserves include additional reserves for current
economic conditions, the commercial real estate concentration in the portfolio,
and an additional adjustment to represent declining land values. The Level III
Reserves totaled $125.2 million at March 31, 2010 compared to $135.0 million at
December 31, 2009.





Reserve for Unfunded Commitments.At March 31, 2010 and December 31, 2009, the reserve for unfunded
commitments was $7.3 million and $7.5 million, respectively. This reserve is
determined by formula; historical loss ratios are multiplied by potential usage
levels (i.e., the difference between actual usage levels and the second highest
historical usage level).





Unallocated Reserves.The
calculatedLevel
I, II and III reserves are 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 ranges, and is distributed to the loan categories
based on the mix of loans in each category. The unallocated portion is
calculated as the sum of the differences between the actual calculated Allowance
and the lower boundary amounts for each category in our model. The sum of these
differences at March 31, 2010 was $21.7 million, compared to $21.3 million at
December 31, 2009. The unallocated Allowance is the result of management’s best
estimate of risks inherent in the portfolio, economic uncertainties and other
subjective factors, including industry trends, as well as the imprecision
inherent in estimates used for the allocated portions of the Allowance.
Management reviews the overall level of the Allowance as well as the unallocated
component and considers the level of both amounts in determining the appropriate
level of reserves for the overall inherent risk in TSFG’s total loan
portfolio.





Changes
in the Level II reserves (and the overall Allowance) may not correlate to the
relative change in impaired loans depending on a number of factors including the
collateral type, amounts previously charged off, and the estimated loss severity
on individual loans.





Changes
in the other components of the Allowance (reserves for Level I, Level III,
unallocated, and unfunded commitments) are not related to specific loans but
reflect changes in loss experience and subjective and judgmental adjustments
made by management.





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.





Table 9
summarizes the changes in the allowance for loan losses, reserve for unfunded
lending commitments, and allowance for credit losses and provides certain
related ratios.


43
 Index





Table
      9Summary
      of Loan and Credit Loss Experience(dollars
      in thousands)At
      and For the
            
            
            At
      and For theThree
      Months
            
            
            Year
      EndedEnded
      March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Allowance
      for loan losses, beginning of year
            
            $
            365,642
            
            
            $
            247,086
            
            
            $
            247,086Allowance
      adjustment for loans sold
            
            
            -
            
            
            
            -
            
            
            
            (4,471
            )Net
      charge-offs:Loans
      charged-off
            
            
            (93,619
            )
            
            
            (110,443
            )
            
            
            (556,585
            )Loans
      recovered
            
            
            5,863
            
            
            
            1,367
            
            
            
            15,404(87,756
            )
            
            
            (109,076
            )
            
            
            (541,181
            )Additions
      to allowance through provision expense
            
            
            95,260
            
            
            
            142,146
            
            
            
            664,208Allowance
      for loan losses, end of period
            
            $
            373,146
            
            
            $
            280,156
            
            
            $
            365,642Reserve
      for unfunded lending commitments, beginning of year
            
            $
            7,484
            
            
            $
            2,788
            
            
            $
            2,788Provision
      for unfunded lending commitments
            
            
            (137
            )
            
            
            481
            
            
            
            4,696Reserve
      for unfunded lending commitments, end of period
            
            $
            7,347
            
            
            $
            3,269
            
            
            $
            7,484Allowance
      for credit losses, beginning of year
            
            $
            373,126
            
            
            $
            249,874
            
            
            $
            249,874Allowance
      adjustment for loans sold
            
            
            -
            
            
            
            -
            
            
            
            (4,471
            )Net
      charge-offs:Loans
      charged-off
            
            
            (93,619
            )
            
            
            (110,443
            )
            
            
            (556,585
            )Loans
      recovered
            
            
            5,863
            
            
            
            1,367
            
            
            
            15,404(87,756
            )
            
            
            (109,076
            )
            
            
            (541,181
            )Additions
      to allowance through provision expense
            
            
            95,123
            
            
            
            142,627
            
            
            
            668,904Allowance
      for credit losses, end of period
            
            $
            380,493
            
            
            $
            283,425
            
            
            $
            373,126Average
      loans held for investment
            
            $
            8,240,922
            
            
            $
            10,154,853
            
            
            $
            9,456,636Loans
      held for investment, end of period
            
            
            8,002,694
            
            
            
            9,986,681
            
            
            
            8,386,127Net
      charge-offs as a percentage of average loans held for investment
      (annualized)
            
            
            4.32
            %
            
            
            4.36
            %
            
            
            5.72
            %Allowance
      for loan losses as a percentage of loans held for
    investment
            
            
            4.66
            
            
            
            2.81
            
            
            
            4.36Allowance
      for credit losses as a percentage of loans held for
    investment
            
            
            4.75
            
            
            
            2.84
            
            
            
            4.45





The
provision for credit losses for first quarter 2010 totaled $95.1 million,
compared to $170.7 million for fourth quarter 2009 and $142.6 million for first
quarter 2009, and exceeded net loan charge-offs by $7.4 million. The overall
allowance for credit losses as a percentage of loans held for investment
increased to 4.75% at March 31, 2010 from 4.45% at December 31, 2009. Net
charge-offs in first quarter 2010 decreased to $87.8 million compared to $142.9
million in fourth quarter 2009, partly as a result of fourth quarter 2009 sales
of problem loans. Tables 10 and 11 provide additional detail for net
charge-offs.


44
 Index





Table
      10Net
      Charge-Offs by Product Type(dollars
      in thousands)Three
      Months EndedMarch 31, 2010Amount
            
            
            %
      ofNCOCommercial
      and industrial
            
            $
            25,715
            
            
            
            29.3
            %Commercial
      owner-occupied real estate
            
            
            8,073
            
            
            
            9.2Commercial
      real estate
            
            
            43,111
            
            
            
            49.1Indirect
      - sales finance
            
            
            1,836
            
            
            
            2.1Consumer
      lot loans
            
            
            2,852
            
            
            
            3.2Direct
      retail
            
            
            790
            
            
            
            0.9Home
      equity
            
            
            3,736
            
            
            
            4.3Mortgage
            
            
            1,643
            
            
            
            1.9Total
      net charge-offs
            
            $
            87,756
            
            
            
            100.0
            %





Table
      11Commercial
      Real Estate Net Charge-Offs by Product Type(dollars
      in thousands)Three
      Months Ended March 31, 2010 CRE Net Charge-Offs ("NCO") by
      GeographySC,
      ExclCoastal
            
            
            CoastalSC
            
            
            WesternNC
            
            
            CentralFL
            
            
            NorthFL
            
            
            SouthFL
            
            
            Tampa
      Bay
            
            
            TotalCRE NCO
            
            
            %
      of NCOCRE
      Net Charge-Offs byProduct
      TypeCompleted
      income property
            
            $
            2,194
            
            
            $
            1,059
            
            
            $
            4,685
            
            
            $
            2,095
            
            
            $
            1,023
            
            
            $
            829
            
            
            $
            5,299
            
            
            $
            17,184
            
            
            
            19.6
            %Residential
      A&D
            
            
            3,323
            
            
            
            3,299
            
            
            
            1,314
            
            
            
            1,231
            
            
            
            1,496
            
            
            
            8
            
            
            
            153
            
            
            
            10,824
            
            
            
            12.3Commercial
      A&D
            
            
            67
            
            
            
            -
            
            
            
            45
            
            
            
            -
            
            
            
            80
            
            
            
            435
            
            
            
            3,894
            
            
            
            4,521
            
            
            
            5.2Commercial
      construction
            
            
            -
            
            
            
            135
            
            
            
            1,265
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,400
            
            
            
            1.6Residential
      construction
            
            
            (16
            )
            
            
            874
            
            
            
            1,178
            
            
            
            49
            
            
            
            8,646
            
            
            
            (1,031
            )
            
            
            (1,586
            )
            
            
            8,114
            
            
            
            9.2Undeveloped
      land
            
            
            (162
            )
            
            
            218
            
            
            
            235
            
            
            
            -
            
            
            
            1,108
            
            
            
            (91
            )
            
            
            (240
            )
            
            
            1,068
            
            
            
            1.2Total
      CRE Net Charge-Offs
            
            $
            5,406
            
            
            $
            5,585
            
            
            $
            8,722
            
            
            $
            3,375
            
            
            $
            12,353
            
            
            $
            150
            
            
            $
            7,520
            
            
            $
            43,111
            
            
            
            49.1
            %CRE
      Net Charge-Offs as %of Total Net Charge-Offs
            
            
            6.1
            %
            
            
            6.4
            %
            
            
            9.9
            %
            
            
            3.8
            %
            
            
            14.1
            %
            
            
            0.2
            %
            
            
            8.6
            %
            
            
            49.1
            %





Securities





TSFG uses
the investment securities portfolio for several purposes. It serves as a vehicle
to manage interest rate risk, to generate interest and dividend income, to
provide liquidity to meet funding requirements, and to provide collateral for
pledges on public deposits, treasury tax and loan (“TT&L”) advances, FHLB
advances, derivatives, and securities sold under repurchase agreements. Table 12
shows the carrying values of the investment securities
portfolio.


45
 Index





Table
      12Investment
      Securities Portfolio Composition(dollars
      in thousands)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Available for Sale(at
      fair value)U.S.
      Treasury
            
            $
            2,055
            
            
            $
            2,042
            
            
            $
            2,045U.S.
      Government agencies
            
            
            286,352
            
            
            
            313,159
            
            
            
            79,707Agency
      residential mortgage-backed securities
            
            
            1,918,914
            
            
            
            1,489,583
            
            
            
            1,980,305Private
      label residential mortgage-backed securities
            
            
            7,628
            
            
            
            12,462
            
            
            
            8,504State
      and municipal
            
            
            3,657
            
            
            
            241,478
            
            
            
            23,158Other
      investments:Community
      bank stocks
            
            
            403
            
            
            
            581
            
            
            
            399Other
      equity investments
            
            
            1,542
            
            
            
            1,143
            
            
            
            1,2832,220,551
            
            
            
            2,060,448
            
            
            
            2,095,401Held to Maturity(at
      amortized cost)State
      and municipal
            
            
            13,654
            
            
            
            17,939
            
            
            
            16,217Agency
      residential mortgage-backed securities
            
            
            85,698
            
            
            
            -
            
            
            
            111,199Other
      investments
            
            
            100
            
            
            
            100
            
            
            
            10099,452
            
            
            
            18,039
            
            
            
            127,516Total
            
            $
            2,320,003
            
            
            $
            2,078,487
            
            
            $
            2,222,917Total
      securities as a percentage of total assets
            
            
            18.7
            %
            
            
            15.6
            %
            
            
            18.7
            %Percentage
      of Total Securities PortfolioU.S.
      Treasury
            
            
            0.1
            %
            
            
            0.1
            %
            
            
            0.1
            %U.S.
      Government agencies
            
            
            12.3
            
            
            
            15.1
            
            
            
            3.6Agency
      residential mortgage-backed securities
            
            
            86.4
            
            
            
            71.6
            
            
            
            94.1Private
      label residential mortgage-backed securities
            
            
            0.3
            
            
            
            0.6
            
            
            
            0.4State
      and municipal
            
            
            0.8
            
            
            
            12.5
            
            
            
            1.7Other
      investments
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.1Total
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %





Securities
(i.e., securities available for sale and securities held to maturity) excluding
the unrealized gain on securities available for sale averaged $2.1 billion for
both first quarter 2010 and 2009. The average tax-equivalent portfolio yield
decreased for the quarter ended March 31, 2010 to 3.36% from 3.76% in fourth
quarter 2009 and 4.52% in first quarter 2009. The securities yield decreased
primarily due to an overall decline in interest rates resulting in reinvestment
of scheduled and unscheduled payments and calls at lower yields and the fourth
quarter 2009 sales of higher-yielding mortgage-backed securities and municipal
securities.





The
expected duration of the debt securities portfolio was approximately 2.9 years
at March 31, 2010, a decrease from approximately 3.2 years at December 31, 2009.
If interest rates rise, the duration of the debt securities portfolio may
extend. Conversely, if interest rates fall, the duration of the debt securities
portfolio may decline. Since total securities include some callable bonds and
mortgage-backed securities, security paydowns are likely to accelerate if
interest rates fall or decline if interest rates rise. Changes in interest rates
and related prepayment activity impact yields and fair values of TSFG’s
securities. At March 31, 2010, securities had unamortized premiums of $33.4
million and unamortized discounts of $2.9 million, of which $27.0 million and
$2.8 million, respectively, related to securities which are callable or subject
to prepayment (i.e., mortgage-backed securities). Faster than expected paydowns
would adversely impact yields and market values of securities with unamortized
premiums while slower than expected paydowns would adversely impact yields and
market values of securities with unamortized discounts.





Approximately
61% of mortgage-backed securities (“MBS”) are collateralized mortgage
obligations (“CMOs”) with an average duration of 2.8 years. At March 31, 2010,
approximately 12% of the MBS portfolio was variable rate or hybrid variable
rate, where the rate adjusts on an annual basis after a specified fixed rate
period, generally ranging from one to ten years.


46
 Index


The
majority of these securities are government or agency securities and, therefore,
pose minimal credit risk. The net unrealized gain on securities available for
sale (pre-tax) totaled $41.8 million at March 31, 2010, compared with $28.4
million at December 31, 2009, primarily due to a decrease in interest rates. If
interest rates increase, credit spreads widen, and/or market illiquidity
worsens, TSFG expects its net unrealized gain on securities available for sale
to decrease and possibly become a net unrealized loss. See Item 1, Note 4 to the
Consolidated Financial Statements for information about TSFG’s securities in
unrealized loss positions.





Table 13
shows the credit risk profile of the securities portfolio.





Table
      13Investment
      Securities Portfolio Credit Risk Profile(dollars
      in thousands)March 31,
      2010
            
            
            December 31,
      2009Balance
            
            
            % of Total
            
            
            Balance
            
            
            % of TotalGovernment
      and agencyU.S.
      Treasury
            
            $
            2,055
            
            
            
            0.1
            %
            
            $
            2,045
            
            
            
            0.1
            %U.S.
      Government agencies (1)
            
            
            286,352
            
            
            
            12.3
            
            
            
            79,707
            
            
            
            3.6Agency
      mortgage-backed securities (MBS) (1)(2)(3)
            
            
            2,004,612
            
            
            
            86.4
            
            
            
            2,091,504
            
            
            
            94.0Total
      government and agency
            
            
            2,293,019
            
            
            
            98.8
            
            
            
            2,173,256
            
            
            
            97.7State
      and municipal (3)(4)(5)Pre-funded
      with collateral or AAA-rated backed by Texas Permanent School Fund or
      AAA-rated
            
            
            4,076
            
            
            
            0.2
            
            
            
            19,392
            
            
            
            0.9Underlying
      issuer or collateral rated A or better (including South Carolina State
      Aid)
            
            
            8,909
            
            
            
            0.4
            
            
            
            15,127
            
            
            
            0.7Underlying
      issuer or collateral rated BBB
            
            
            1,987
            
            
            
            0.1
            
            
            
            2,337
            
            
            
            0.1Non-rated
            
            
            2,339
            
            
            
            0.1
            
            
            
            2,519
            
            
            
            0.1Total
      state and municipal
            
            
            17,311
            
            
            
            0.8
            
            
            
            39,375
            
            
            
            1.8Private
      label mortgage-backed securities AAA-rated (2)
            
            
            7,628
            
            
            
            0.3
            
            
            
            8,504
            
            
            
            0.4Community
      bank stocks and other
            
            
            2,045
            
            
            
            0.1
            
            
            
            1,782
            
            
            
            0.1Total
      securities
            
            $
            2,320,003
            
            
            
            100.0
            %
            
            $
            2,222,917
            
            
            
            100.0
            %Percent
      of total securities:Rated
      A or higher
            
            
            
            
            
            
            99.7
            %
            
            
            
            
            
            
            99.7
            %Investment
      grade
            
            
            
            
            
            
            99.8
            
            
            
            
            
            
            
            99.8





(1)
            At
      March 31, 2010, these amounts include, in the aggregate, $206 million and
      $1.7 billion related to senior debt and MBS, respectively, issued by FNMA
      and FHLMC.


(2)
            Current
      policies restrict MBS/CMO purchases to agency-backed and a small percent
      of private-label securities and prohibit securities collateralized by
      sub-prime assets.


(3)
            At
      March 31, 2010 and December 31, 2009, agency mortgage-backed securities
      include $85.7 million and $111.2 million, respectively, of securities held
      to maturity at amortized cost. At March 31, 2010 and December 31, 2009,
      state and municipal securities include $13.7 million and $16.2 million,
      respectively, of securities held to maturity at amortized
      cost.


(4)
            Ratings
      shown above do not reflect the benefit of guarantees by bond insurers. At
      March 31, 2010, $4.1 million of municipal bonds are guaranteed by bond
      insurers. At December 31, 2009, $4.9 million of municipal bonds are
      guaranteed by bond insurers.


(5)
            At
      March 31, 2010, the breakdown by current bond rating is as
      follows:  $0.2 million pre-funded with collateral or AAA-rated
      backed by Texas Permanent School Fund, $3.9 million AAA-rated, $10.9
      million AA or A-rated, and $2.3 million
  non-rated.





Note:  Within
each category, securities are ordered based on risk assessment from lowest to
highest. TSFG holds no collateralized debt obligations.





Investments included in Other
Assets. TSFG also invests in limited partnerships, limited liability
companies (LLC's) and other privately held companies. These investments are
included in other assets. In first quarter 2010, TSFG recorded $460,000 in
other-than-temporary impairment on these investments. At March 31, 2010, TSFG's
investment in these entities totaled $14.1 million, of which $7.1 million were
accounted for under the cost method and $7.0 million were


47
 Index


accounted
for under the equity method. Since certain of these investments are real
estate-related or banking industry-related, additional impairment in future
periods is possible.





Carolina
First Bank, as a member of the Federal Home Loan Bank ("FHLB") of Atlanta, is
required to own capital stock in the FHLB of Atlanta based generally upon its
balances of residential mortgage loans, select commercial loans secured by real
estate, and FHLB advances. FHLB stock is included in other assets at its
original cost basis. At March 31, 2010 and December 31, 2009, FHLB stock totaled
$58.8 million.





Goodwill





TSFG
evaluates its goodwill annually for each reporting unit as of June 30th or
more frequently if events or circumstances indicate that there may be
impairment. The goodwill impairment test is a two-step process, which requires
management to make judgments in determining the assumptions used in the
calculations. The first step (“Step 1”) involves estimating the fair value of
each reporting unit and comparing it to the reporting unit’s carrying value,
which includes the allocated goodwill. If the estimated fair value is less than
the carrying value, then a second step (“Step 2”) is performed to measure the
actual amount of goodwill impairment, if any. Step 2 involves determining the
implied fair value of goodwill. This requires the Company to allocate the
estimated fair value of the reporting unit to all the recognized and
unrecognized assets and liabilities of such unit. The fair values of the assets
and liabilities, primarily loans and deposits, are determined using current
market interest rates, projections of future cash flows, and where available,
quoted market prices of similar instruments. Any unallocated fair value
represents the implied fair value of goodwill, which is then compared to its
corresponding carrying value. If the implied fair value is less than the
carrying value, an impairment loss is recognized in an amount equal to that
deficit.





For
information regarding interim goodwill impairment tests, refer to the Annual
Report of TSFG on Form 10-K for the year ended December 31, 2009, specifically
the section captioned “Goodwill” in “Balance Sheet Review” in Management’s
Discussion and Analysis of Financial Condition and Results of Operations. No
formal interim impairment evaluation was performed at March 31, 2010 since there
were no material changes to the assumptions and expectations used for the
interim evaluation at September 30, 2009.





Other
Real Estate Owned





Other
real estate owned (“OREO”), consisting of properties obtained through
foreclosure or in satisfaction of loans, is reported at the lower of cost or
fair value, determined on the basis of current appraisals, comparable sales, and
other estimates of fair value obtained principally from independent sources,
adjusted for estimated selling costs. At the time of foreclosure, any excess of
the loan balance over the fair value of the real estate held as collateral is
recorded as a charge against the allowance for loan losses. Gains or losses on
sale and any subsequent adjustments to the value are recorded as a component of
noninterest expense.





During
the three months ended March 31, 2010, TSFG sold $10.1 million in OREO and
incurred losses of $944,000. Due to continuing weak market conditions, TSFG
records assets at 70% of the most recent appraised value. At March 31, 2010, the
carrying value of OREO totaled $142.6 million, compared to $122.1 million at
December 31, 2009, and was included in other assets. Table 14 presents a
rollforward of OREO, while Table 15 presents an aging as of March 31, 2010 and
Table 16 presents OREO by property type.





Table
      14OREO
      Rollforward(dollars
      in thousands)Three
      Months EndedMarch 31,2010
            
            
            2009Balance
      at beginning of period
            
            $
            122,086
            
            
            $
            44,668Loans
      transferred in
            
            
            35,213
            
            
            
            32,092Proceeds
      from sales
            
            
            (9,176
            )
            
            
            (2,964
            )Loss
      on sales
            
            
            (944
            )
            
            
            (124
            )Write-downs
            
            
            (4,548
            )
            
            
            -Balance
      at end of period
            
            $
            142,631
            
            
            $
            73,672


48
 Index





Table
      15Number
      of Months in OREO at March 31, 2010(dollars
      in thousands)Less
      than three months
            
            $
            34,102Three
      months or more, but less than six months
            
            
            33,939Six
      months or more, but less than nine months
            
            
            24,508Nine
      months or more, but less than twelve months
            
            
            19,769Twelve
      months or more
            
            
            30,313Total
      OREO
            
            $
            142,631





Table
      16OREO
      by property type at March 31, 2010(dollars
      in thousands)Land
            
            $
            91,393Commercial
            
            
            27,200Residential
            
            
            17,836Other
            
            
            6,202Total
      OREO
            
            $
            142,631





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,
derivatives that do not qualify for hedge accounting but otherwise achieve
economic hedging goals (“economic hedges”), as well as derivatives that are used
in trading and customer hedging programs. For purposes of potential valuation
adjustments to its derivative assets, TSFG evaluates the credit risk of its
counterparties, including bank customers with whom TSFG has entered into
customer swaps. During first quarter 2010, TSFG recorded credit losses of $2.1
million on its customer swaps. Deterioration in customers’ credit and in TSFG’s
ability to collect on the derivative assets associated with customer swaps could
negatively impact TSFG’s consolidated financial statements. If we are in a
receivable position with respect to our interest rate swaps with customers, the
fair value of the derivative asset represents additional credit exposure to the
customer (without additional collateral). At March 31, 2010, the total fair
value of TSFG’s customer swap derivative assets was $26.9 million. See Note
8 to the Consolidated Financial Statements for additional information regarding
derivatives.





In first
quarter 2010, certain cash flow hedges with a notional amount of $265.0 million
were terminated or de-designated, which locked in a gain of approximately $12
million that will be amortized to the statement of operations as the hedged cash
flows impact earnings.





Deposits





Deposits
remain TSFG's primary source of funds. Average customer deposits equaled 69.6%
of average total funding in first quarter 2010. TSFG faces strong competition
from other banking and financial services companies in gathering deposits. TSFG
also maintains short and long-term wholesale sources including federal funds,
repurchase agreements, Federal Reserve borrowings, brokered CDs, and FHLB
advances to fund a portion of loan demand and, if appropriate, any increases in
investment securities.





Table 17
shows the breakdown of total deposits by type of deposit and the respective
percentage of total deposits, while Table 18 shows the breakdown of customer
funding by type.


49
 Index





Table
      17Type
      of Deposits(dollars
      in thousands)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Noninterest-bearing
      demand deposits
            
            $
            1,109,153
            
            
            $
            1,067,953
            
            
            $
            1,124,404Interest-bearing
      checking
            
            
            1,030,056
            
            
            
            1,098,585
            
            
            
            1,060,470Money
      market accounts
            
            
            2,053,388
            
            
            
            1,889,041
            
            
            
            2,072,664Savings
      accounts
            
            
            367,573
            
            
            
            203,106
            
            
            
            322,924Core
      deposits
            
            
            4,560,170
            
            
            
            4,258,685
            
            
            
            4,580,462Time
      deposits under $100,000
            
            
            1,843,184
            
            
            
            1,742,177
            
            
            
            1,632,582Time
      deposits of $100,000 or more
            
            
            1,401,868
            
            
            
            1,383,639
            
            
            
            1,137,067Customer
      deposits (1)
            
            
            7,805,222
            
            
            
            7,384,501
            
            
            
            7,350,111Brokered
      deposits
            
            
            1,958,948
            
            
            
            1,842,577
            
            
            
            1,946,101Total
      deposits
            
            $
            9,764,170
            
            
            $
            9,227,078
            
            
            $
            9,296,212Percentage
      of DepositsNoninterest-bearing
      demand deposits
            
            
            11.4
            %
            
            
            11.6
            %
            
            
            12.1
            %Interest-bearing
      checking
            
            
            10.5
            
            
            
            11.9
            
            
            
            11.4Money
      market accounts
            
            
            21.0
            
            
            
            20.4
            
            
            
            22.3Savings
      accounts
            
            
            3.8
            
            
            
            2.2
            
            
            
            3.5Core
      deposits
            
            
            46.7
            
            
            
            46.1
            
            
            
            49.3Time
      deposits under $100,000
            
            
            18.9
            
            
            
            18.9
            
            
            
            17.6Time
      deposits of $100,000 or more
            
            
            14.3
            
            
            
            15.0
            
            
            
            12.2Customer
      deposits (1)
            
            
            79.9
            
            
            
            80.0
            
            
            
            79.1Brokered
      deposits
            
            
            20.1
            
            
            
            20.0
            
            
            
            20.9Total
      deposits
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %





(1)
            TSFG
      defines customer deposits as total deposits less brokered
      deposits.





Table
      18Type
      of Customer Funding(dollars
      in thousands)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Customer
      deposits (1)
            
            $
            7,805,222
            
            
            $
            7,384,501
            
            
            $
            7,350,111Customer
      sweep accounts(2)
            
            
            289,888
            
            
            
            387,106
            
            
            
            316,690Customer
      funding
            
            $
            8,095,110
            
            
            $
            7,771,607
            
            
            $
            7,666,801





(1)           TSFG
defines customer deposits as total deposits less brokered deposits.


(2)           TSFG
includes customer sweep accounts in short-term borrowings on its consolidated
balance sheet.





At March
31, 2010, period-end customer funding increased $428.3 million from December 31,
2009, due to two time deposit promotions and the incorporation of a new floating
rate time deposit product. Public deposits totaled approximately $821.7 million
at March 31, 2010, compared to $749.1 million at December 31, 2009 and are
generally subject to seasonal fluctuations.





While
reported in short-term borrowings on the consolidated balance sheet, customer
sweep accounts represent excess overnight cash to/from commercial customer
operating accounts and are a source of funding for TSFG. Currently, sweep
balances are generated through two products: 1) collateralized customer
repurchase agreements ($274.8 million at March 31, 2010) and 2) Eurodollar
deposits ($15.1 million at March 31, 2010). These balances are tied directly to
commercial customer checking accounts and generate treasury services noninterest
income.





TSFG has
historically used brokered deposits and other borrowed funds as an alternative
funding source while continuing its efforts to maintain and grow its local
customer funding base. Effective April 30, 2010, Carolina First Bank
is


50
 Index


subject
to certain limitations with respect to brokered deposits and the rates it can
pay on certain customer deposits as stipulated in its Consent
Order.





Average
customer funding equaled 72.2% of average total funding for the first three
months of 2010 and 67.5% for the first three months of 2009. Period-end customer
funding remained relatively flat at 72.4% of total funding at March 31, 2010,
compared to 71.4% at December 31, 2009. Although the Company more aggressively
priced time deposits in first quarter 2010 to build excess liquidity to address
whether the TAGP would be extended and to extend maturities of funding, TSFG
expects to continue its focus on lowering its funding costs by trying to improve
the customer funding level, mix, and rate paid. TSFG attempts to enhance its
deposit mix by working to attract lower-cost transaction accounts through
actions such as new transaction account opening goals, new checking products,
and creating 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 as banks compete for sources of liquidity and funding to
replace funding which may not be available in the current
environment.





In April
2010, the FDIC approved an interim final rule extending the TAGP from June 30,
2010 to December 31, 2010. TSFG elected to continue its participation in the
program, through which all noninterest-bearing transaction accounts and certain
interest-bearing checking accounts are fully guaranteed by the FDIC for the
entire amount in the account (see “Deposit Insurance”). TSFG estimates that
deposits that are neither insured nor collateralized would increase from
approximately $327 million at March 31, 2010 to approximately $810 million
without the benefit of the TAGP.





Table
      19Maturity
      Distribution of and Rates on Time Deposits(dollars
      in thousands)Customer
      Time Deposits
            
            
            Brokered
      Deposits
            
            
            TotalBalance
            
            
            AverageRate
            
            
            Balance
            
            
            AverageRate
            
            
            BalanceApril
      1, 2010 through June 30, 2010
            
            $
            297,745
            
            
            
            1.96
            %
            
            $
            209,554
            
            
            
            2.15
            %
            
            $
            507,299July
      1, 2010 through September 30, 2010
            
            
            1,001,899
            
            
            
            2.94
            
            
            
            184,563
            
            
            
            1.77
            
            
            
            1,186,462October
      1, 2010 through December 31, 2010
            
            
            332,907
            
            
            
            2.32
            
            
            
            235,025
            
            
            
            3.63
            
            
            
            567,932After
      December 31, 2010
            
            
            1,612,501
            
            
            
            2.37
            
            
            
            1,329,806
            
            
            
            2.64
            
            
            
            2,942,307Total
      outstanding
            
            $
            3,245,052
            
            
            
            2.51
            %
            
            $
            1,958,948
            
            
            
            2.62
            %
            
            $
            5,204,000





Borrowed
Funds





Table 20
shows the breakdown of borrowed funds by type.


51
 Index





Table
      20Type
      of Borrowed Funds(dollars
      in thousands)March 31,
            
            
            December 31,2010
            
            
            2009
            
            
            2009Short-Term
      BorrowingsFederal
      funds purchased and repurchase agreements
            
            $
            25
            
            
            $
            197,309
            
            
            $
            25Customer
      sweep accounts
            
            
            289,888
            
            
            
            387,106
            
            
            
            316,690Federal
      Reserve borrowings
            
            
            -
            
            
            
            750,000
            
            
            
            -Secured
      borrowings
            
            
            1,769
            
            
            
            -
            
            
            
            -Treasury,
      tax and loan note
            
            
            8,965
            
            
            
            7,673
            
            
            
            5,987Total
      short-term borrowings
            
            
            300,647
            
            
            
            1,342,088
            
            
            
            322,702Long-Term
      BorrowingsRepurchase
      agreements
            
            
            125,000
            
            
            
            200,000
            
            
            
            125,000FHLB
      advances, net of discount
            
            
            751,776
            
            
            
            467,717
            
            
            
            752,646Subordinated
      notes
            
            
            206,704
            
            
            
            206,704
            
            
            
            206,704Mandatorily
      redeemable preferred stock of REIT subsidiary
            
            
            31,800
            
            
            
            56,800
            
            
            
            31,800Note
      payable
            
            
            704
            
            
            
            756
            
            
            
            719Total
      long term borrowings
            
            
            1,115,984
            
            
            
            931,977
            
            
            
            1,116,869Total
      borrowings
            
            
            1,416,631
            
            
            
            2,274,065
            
            
            
            1,439,571Less:  Customer
      sweep accounts
            
            
            (289,888
            )
            
            
            (387,106
            )
            
            
            (316,690
            )Add:  Brokered
      deposits (1)
            
            
            1,958,948
            
            
            
            1,842,577
            
            
            
            1,946,101Total
      wholesale borrowings
            
            $
            3,085,691
            
            
            $
            3,729,536
            
            
            $
            3,068,982Wholesale
      borrowings as a % of total assets
            
            
            24.8
            %
            
            
            28.1
            %
            
            
            25.8
            %





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





TSFG uses
both short-term and long-term borrowings to fund net growth of assets in excess
of deposit growth. In first quarter 2010, average borrowings totaled $1.4
billion, compared with $2.4 billion in first quarter 2009. Period-end wholesale
borrowings increased $16.7 million since December 31, 2009, primarily due to a
slight increase in brokered CDs. During 2009, TSFG began shifting into
borrowings with remaining maturities of more than one year in order to
strengthen liquidity.





Capital and Liquidity





Capital





Effective
April 30, 2010, Carolina First Bank’s Board of Directors entered into the
Consent Order (see “Overview”). As a result of the Consent Order, the Bank is
considered to be only adequately capitalized although all ratios at March 31,
2010 exceeded well-capitalized thresholds.





Shareholders'
equity totaled $920.0 million, or 7.4% of total assets, at March 31, 2010
compared with $993.2 million, or 8.3% of total assets, at December 31, 2009.
Shareholders’ equity decreased primarily due to the net loss in first quarter
2010, partially offset by an increase in the unrealized gain on securities
available for sale (net of tax) included in accumulated other comprehensive
income. Tangible common equity to tangible assets decreased to 2.90% at March
31, 2010, compared to 3.67% at December 31, 2009. During first quarter 2010,
TSFG contributed $30 million to its subsidiary bank as a capital
contribution.





Management
is in the process of evaluating various alternatives to increase tangible common
equity and regulatory capital through (i) the conversion of certain debt and
non-common equity instruments into common stock and/or cash; (ii) the issuance
of additional equity through one or more public and/or private offerings; and/or
(iii) a strategic sale of all or a portion of the Company. Additionally, TSFG is
actively evaluating asset reductions and other balance sheet management
strategies to ensure that the projected level of regulatory capital can support
its balance sheet long-term.





Current
market conditions for banking institutions, the overall uncertainty in financial
markets, uncertainty around TSFG’s potential future credit losses, and the
Company’s depressed stock price present significant challenges to the Company’s
ability to issue additional equity in public or private offerings. An equity
financing transaction that would result in capital


52
 Index


in the
amount being considered by TSFG would result in substantial dilution to the
Company's current shareholders and could adversely affect the market price of
the Company's common stock. There can be no assurance as to whether these
efforts will be successful, either on a short-term or long-term basis. Should
these efforts be unsuccessful, due to existing regulatory restrictions on cash
payments between Carolina First Bank and TSFG, TSFG may be unable to discharge
its liabilities in the normal course of business. There can be no assurance that
TSFG will be successful in any efforts to raise additional capital during 2010.
The pursuit of strategic transaction alternatives may also involve significant
expenses and management time and attention.




TSFG’s
unrealized gain on securities available for sale and cash flow hedges, net of
tax, which is included in accumulated other comprehensive income, increased to
$37.4 million at March 31, 2010, compared with $30.9 million at December 31,
2009 due primarily to a decrease in long-term interest rates. If interest rates
increase, TSFG expects its unrealized gain on securities available for sale to
decrease, leading to a lower tangible common equity to tangible asset
ratio.





Common
book value per common share at March 31, 2010 and December 31, 2009 was $2.70
and $3.05, respectively. The decrease in common book value per common share was
primarily due to the net loss during the period. Common tangible book value per
common share at March 31, 2010 and December 31, 2009 was $1.64 and $1.98,
respectively. Tangible book value was below book value as a result of goodwill
and intangibles associated with acquisitions of entities and assets accounted
for as purchases. At March 31, 2010, goodwill totaled $214.1 million, or $0.99
per share, and is not being amortized, while other intangibles totaled $14.7
million and will continue to be amortized.





TSFG is
subject to the risk-based capital guidelines administered by bank regulatory
agencies. The guidelines are designed to make regulatory capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Under these guidelines, assets and
certain off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and certain off-balance sheet items.
Table 21 sets forth various capital ratios for TSFG and Carolina First
Bank.





Table
      21Capital
      RatiosMarch 31, 2010
            
            
            To
      Be Well Capitalized Under Prompt Corrective ActionProvisions(1)TSFGTotal
      risk-based capital
            
            
            10.83
            %
            
            
            n/aTier
      1 risk-based capital
            
            
            9.52
            
            
            
            n/aLeverage
      ratio
            
            
            7.41
            
            
            
            n/aCarolina
      First BankTotal
      risk-based capital
            
            
            10.45
            %
            
            
            10.00
            %Tier
      1 risk-based capital
            
            
            8.85
            
            
            
            6.00Leverage
      ratio
            
            
            6.87
            
            
            
            5.00





(1)
            The
      ratios presented are the amounts to be well capitalized under the various
      regulatory capital requirements administered by the federal banking
      agencies. On April 30, 2010, Carolina First Bank became subject to a
      regulatory Consent Order with the FDIC which requires that, within 120
      days of the agreement, Carolina First Bank must increase its Tier 1
      leverage ratio to 8% and its total risk-based capital ratio to 12%.
      Regardless of the Bank’s capital ratios, it is unable to be classified as
      “well capitalized” while it is operating under the Consent
      Order.





At March
31, 2010, trust preferred securities and shares of mandatorily redeemable
preferred stock of a REIT subsidiary (“REIT preferred securities”) included in
tier 1 capital totaled $200.5 million and $26.3 million, respectively. Under
current regulatory guidelines and subject to certain limitations, debt
associated with trust and REIT preferred securities qualifies for tier 1 capital
treatment, although the allowable amounts can change as equity declines below
certain levels. While a complete review of all the rules is beyond the scope of
this document, it is important to be aware of certain limits that may begin to
impact the Company’s ratios. The limitation regarding the inclusion of trust and
REIT


53
 Index


preferred
securities in capital calculations impacts only the ratios calculated at the
consolidated level and, accordingly, is not applicable to the Carolina First
Bank ratios. (The trust preferred securities are not included in Carolina First
Bank’s tier 1 capital since the related subordinated notes were issued by the
parent company.) Regulatory rules allow trust and REIT preferred securities to
be included in tier 1 capital up to 25.0% of the sum of selected tier 1 capital
elements, including the trust and REIT preferred securities. Effective March 31,
2011, the 25.0% limitation will become more restrictive and could cause the
Company’s tier 1 capital ratios to be negatively impacted. At March 31,
2010, trust and REIT preferred securities accounted for 26.2% of TSFG’s tier 1
capital.





Carolina
First Bank is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay. During 2009, TSFG suspended its common
dividend. Future TSFG common dividends will depend upon a number of factors,
including payment of the preferred stock dividends (including trust preferred
and REIT preferred dividends), financial performance, capital requirements and
assessment of capital needs. In first quarter 2010, TSFG suspended dividends on
all remaining outstanding equity and capital instruments. Based on the Consent
Order and the Fed Agreement, currently neither TSFG nor Carolina First Bank, nor
any of their respective subsidiaries (including, but not limited to, the real
estate investment trust subsidiary) are permitted to pay dividends on capital
securities.





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 debt service, manage
operations on an ongoing basis, and capitalize on new business
opportunities.





Liquidity
is managed at two levels. The first is the liquidity of the parent company,
which is the holding company that owns Carolina First Bank, the banking
subsidiary. The second is the liquidity of the banking subsidiary. The
management of liquidity at both levels is essential because the parent company
and banking subsidiary each have different funding needs and sources, and each
are subject to certain regulatory guidelines and requirements. In addition,
Carolina First Bank is subject to limitations on the amount of funds that may be
transferred to the parent company. At March 31, 2010, Carolina First Bank could
not pay any dividend to the parent company. Through the Asset Liability
Committee (“ALCO”), Corporate Treasury is responsible for planning and executing
the funding activities and strategy.





TSFG’s
liquidity policy strives to ensure a diverse funding base, with limits
established by wholesale funding source as well as aggregate wholesale funding
levels. Daily and short-term liquidity needs are principally met with deposits
from customers, payments on loans, maturities and paydowns of investment
securities, and excess cash balances. TSFG is focusing additional efforts at
acquiring new deposits from its customer base through its established branch
network to enhance liquidity and reduce reliance on wholesale
borrowing.





As noted
in Table 22 which follows, we have $2.3 billion of time deposits maturing over
the remainder of 2010, with maturities of customer and brokered CDs accounting
for $1.6 billion and $629.1 million, respectively. We expect to replace maturing
customer CDs through ongoing efforts to grow customer deposits and various
deposit campaigns, replacing any shortfall through wholesale borrowings. Our
ability to replace maturing customer CDs and grow customer funding could be
limited due to the deposit rate restrictions imposed by the Consent Order.
Additionally, the Company cannot replace maturing brokered CDs without the prior
approval of the FDIC.





Longer
term funding needs have typically been met through a variety of wholesale
sources, which have a broader range of maturities than customer deposits and add
flexibility in liquidity planning and management. These wholesale sources
include advances from the FHLB with longer maturities, brokered CDs, and
instruments that qualify as regulatory capital, including trust preferred
securities and subordinated debt. During 2009, TSFG shifted into borrowings with
remaining maturities of more than one year in order to strengthen liquidity.
Continued access to FHLB advances could be significantly diminished or
eliminated based on regulatory restrictions, our financial condition, and/or our
performance.





Under
normal business conditions, the sources above are adequate to meet both the
short-term and long-term funding needs of the Company; however, TSFG’s
contingency funding plan establishes early warning triggers to alert management
to potential negative liquidity trends. The plan provides a framework to manage
through various scenarios – including identification of alternative actions and
an executive management team to navigate through a crisis. Limits ensure that
liquidity is sufficient to manage through crises of various degrees of severity,
triggered by TSFG-specific events, such as regulatory actions, significant
adverse changes to earnings, credit quality or credit ratings, or general
industry or market events, such as market instability or adverse changes in the
economy. Deposit balances which are not covered by FDIC insurance total
approximately $804 million currently, and would increase to approximately $1.6
billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at
December 31, 2010. A significant portion of


54
 Index


uninsured
deposits are public fund deposits which are collateralized by investment
securities. Loss of collateralized deposits in a liquidity crisis would be
essentially liquidity-neutral to the extent released collateral could be sold or
used to secure replacement wholesale funding.  Thus, the primary
deposit-related liquidity risk relates to balances which are neither insured nor
collateralized, which total approximately $327 million currently, and would
increase to approximately $810 million without the benefit of the TAGP. Public
deposits which are currently insured but which would be uninsured and would
therefore require collateralization without the benefit of the TAGP totaled
approximately $301 million at March 31, 2010. Free securities of $1.2 billion
would meet incremental collateral needs and, along with surplus cash (including
$1.1 billion of excess cash held at the Federal Reserve), represent reserves to
address liquidity needs in a crisis scenario. If a liquidity issue presents
itself, deposit promotions would be expected to yield significant in-flows of
cash, but could be limited based on limitations on maximum interest rates
imposed by the Consent Order.





There is
no assurance that TSFG will, if it chooses to do so, be able to obtain new
borrowings or issue additional equity on terms that are satisfactory. As a
result, TSFG is currently maintaining a cash position in excess of normal
levels. TSFG is also evaluating additional capital and cash management
strategies including the potential sale of selected assets. While liquidity is
an ongoing challenge for all financial institutions, management believes that
TSFG’s available borrowing capacity and efforts to grow deposits are sufficient
to provide the necessary funding for the remainder of 2010. However, management
is prepared to take other actions if needed to manage through adverse liquidity
conditions.





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 22 summarizes future contractual obligations based on maturity
dates as of March 31, 2010. Table 22 does not include payments which may be
required under employment and deferred compensation agreements. In addition,
Table 22 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, 2010).





Table
      22Contractual
      Obligations(dollars
      in thousands)Payments
      Due by PeriodTotal
            
            
            Remainder
      of2010
            
            
            2011
      and2012
            
            
            2013
      and2014
            
            
            After2014Customer
      time deposits
            
            $
            3,245,052
            
            
            $
            1,632,551
            
            
            $
            1,555,370
            
            
            $
            39,385
            
            
            $
            17,746Brokered
      deposits
            
            
            1,958,948
            
            
            
            629,142
            
            
            
            1,229,044
            
            
            
            66,979
            
            
            
            33,783Total
      time deposits
            
            
            5,204,000
            
            
            
            2,261,693
            
            
            
            2,784,414
            
            
            
            106,364
            
            
            
            51,529Short-term
      borrowings
            
            
            300,647
            
            
            
            300,647
            
            
            
            -
            
            
            
            -
            
            
            
            -Long-term
      debt - parent company
            
            
            206,704
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            206,704Long-term
      debt - Carolina First Bank
            
            
            910,851
            
            
            
            134
            
            
            
            681,416
            
            
            
            200,267
            
            
            
            29,034Total
      long-term debt
            
            
            1,117,555
            
            
            
            134
            
            
            
            681,416
            
            
            
            200,267
            
            
            
            235,738Operating
      leases
            
            
            170,561
            
            
            
            12,773
            
            
            
            33,673
            
            
            
            29,529
            
            
            
            94,586Total
      contractual obligations
            
            $
            6,792,763
            
            
            $
            2,575,247
            
            
            $
            3,499,503
            
            
            $
            336,160
            
            
            $
            381,853





TSFG
enters into agreements in the normal course of business to extend credit to meet
the financial needs of its customers. For amounts and types of such agreements
at March 31, 2010, 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.


55
 Index


Results of Operations





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 23 presents average balance sheets and a
net interest income analysis on a tax-equivalent basis for the three months
ended March 31, 2010 and 2009.


56
 Index





Table
      23Comparative
      Average Balances - Yields and Costs(dollars
      in thousands)Three
      Months Ended March 31,2010
            
            
            2009Assets
            
            AverageBalance
            
            
            Income/Expense
            
            
            Yield/Rate
            
            
            AverageBalance
            
            
            Income/Expense
            
            
            Yield/RateEarning
      assetsCommercial
      loans
            
            $
            6,733,445
            
            
            $
            75,019
            
            
            
            4.52
            %
            
            $
            8,086,559
            
            
            $
            83,794
            
            
            
            4.20
            %Consumer
      loans
            
            
            1,300,110
            
            
            
            14,886
            
            
            
            4.64
            
            
            
            1,494,261
            
            
            
            17,566
            
            
            
            4.77Indirect
      loans
            
            
            216,604
            
            
            
            4,074
            
            
            
            7.63
            
            
            
            607,548
            
            
            
            10,845
            
            
            
            7.24Risk
      management derivatives tied to loans
            
            
            -
            
            
            
            4,881
            
            
            
            
            
            
            
            -
            
            
            
            11,914Total
      loans (1)
            
            
            8,250,159
            
            
            
            98,860
            
            
            
            4.86
            
            
            
            10,188,368
            
            
            
            124,119
            
            
            
            4.94Investment
      securities, taxable (2)
            
            
            2,098,373
            
            
            
            17,486
            
            
            
            3.33
            
            
            
            1,854,149
            
            
            
            20,548
            
            
            
            4.43Investment
      securities, nontaxable (2)
      (3)
            
            
            28,496
            
            
            
            357
            
            
            
            5.01
            
            
            
            266,600
            
            
            
            3,437
            
            
            
            5.16Total
      investment securities
            
            
            2,126,869
            
            
            
            17,843
            
            
            
            3.36
            
            
            
            2,120,749
            
            
            
            23,985
            
            
            
            4.52Federal
      funds sold and interest-bearing bank balances (4)
            
            
            450,754
            
            
            
            284
            
            
            
            0.26
            
            
            
            124,394
            
            
            
            1
            
            
            
            -Total
      earning assets
            
            
            10,827,782
            
            
            $
            116,987
            
            
            
            4.37
            
            
            
            12,433,511
            
            
            $
            148,105
            
            
            
            4.82Non-earning
      assets
            
            
            1,097,164
            
            
            
            
            
            
            
            
            
            
            
            1,122,617Total
      assets
            
            $
            11,924,946
            
            
            
            
            
            
            
            
            
            
            $
            13,556,128Liabilities
      and Shareholders' EquityLiabilitiesInterest-bearing
      liabilitiesInterest-bearing
      depositsInterest-bearing
      checking
            
            $
            1,061,576
            
            
            $
            698
            
            
            
            0.27
            
            
            $
            1,131,456
            
            
            $
            865
            
            
            
            0.31Savings
            
            
            345,349
            
            
            
            845
            
            
            
            0.99
            
            
            
            196,974
            
            
            
            529
            
            
            
            1.09Money
      market
            
            
            2,056,328
            
            
            
            5,465
            
            
            
            1.08
            
            
            
            1,913,927
            
            
            
            7,779
            
            
            
            1.65Time
      deposits, excluding brokered deposits
            
            
            2,946,198
            
            
            
            18,557
            
            
            
            2.55
            
            
            
            3,199,427
            
            
            
            28,867
            
            
            
            3.66Brokered
      deposits
            
            
            1,862,855
            
            
            
            12,119
            
            
            
            2.64
            
            
            
            1,905,805
            
            
            
            16,803
            
            
            
            3.58Total
      interest-bearing deposits
            
            
            8,272,306
            
            
            
            37,684
            
            
            
            1.85
            
            
            
            8,347,589
            
            
            
            54,843
            
            
            
            2.66Customer
      sweep accounts
            
            
            284,498
            
            
            
            225
            
            
            
            0.32
            
            
            
            455,781
            
            
            
            298
            
            
            
            0.27Other
      borrowings
            
            
            1,126,509
            
            
            
            5,428
            
            
            
            1.95
            
            
            
            1,899,771
            
            
            
            6,743
            
            
            
            1.44Total
      interest-bearing liabilities
            
            
            9,683,313
            
            
            
            43,337
            
            
            
            1.82
            
            
            
            10,703,141
            
            
            
            61,884
            
            
            
            2.34Noninterest-bearing
      liabilitiesNoninterest-bearing
      deposits
            
            
            1,088,131
            
            
            
            
            
            
            
            
            
            
            
            1,021,400Other
      noninterest-bearing liabilities
            
            
            174,009
            
            
            
            
            
            
            
            
            
            
            
            230,741Total
      liabilities
            
            
            10,945,453
            
            
            
            
            
            
            
            
            
            
            
            11,955,282Shareholders'
      equity
            
            
            979,493
            
            
            
            
            
            
            
            
            
            
            
            1,600,846Total
      liabilities and shareholders' equity
            
            $
            11,924,946
            
            
            
            
            
            
            
            
            
            
            $
            13,556,128Net
      interest income (tax-equivalent)
            
            
            
            
            
            $
            73,650
            
            
            
            2.75
            %
            
            
            
            
            
            $
            86,221
            
            
            
            2.80
            %Less:
      tax-equivalent adjustment (3)
            
            
            
            
            
            
            125
            
            
            
            
            
            
            
            
            
            
            
            1,203Net
      interest income
            
            
            
            
            
            $
            73,525
            
            
            
            
            
            
            
            
            
            
            $
            85,018Supplemental
      data:Customer
      funding(5)
            
            $
            7,782,080
            
            
            $
            25,790
            
            
            
            1.34
            %
            
            $
            7,918,965
            
            
            $
            38,338
            
            
            
            1.96
            %Wholesale
      borrowings(6)
            
            
            2,989,364
            
            
            
            17,547
            
            
            
            2.38
            
            
            
            3,805,576
            
            
            
            23,546
            
            
            
            2.51Total
      funding(7)
            
            $
            10,771,444
            
            
            $
            43,337
            
            
            
            1.63
            %
            
            $
            11,724,541
            
            
            $
            61,884
            
            
            
            2.14
            %





(1)
              Nonaccrual
      loans are included in average balances for yield
    computations.


(2)
              The
      average balances for investment securities exclude the unrealized
      gain/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)
              Prior
      to first quarter 2010, interest-bearing balances held at the Federal
      Reserve were included in non-earning assets, and the related interest
      income was utilized  to offset certain Federal Reserve account
      charges. Beginning first quarter 2010, these cash balances were included
      in interest-bearing bank balances, with amounts from prior periods
      reclassified to conform to the current presentation. The related amounts
      of interest income are prospectively included in net interest income
      beginning in first quarter
2010.


(5)
              Customer
      funding includes total deposits (total interest-bearing plus
      noninterest-bearing deposits) less brokered deposits plus customer sweep
      accounts.


(6)
              Wholesale
      borrowings include borrowings less customer sweep accounts plus brokered
      deposits.  For purposes of this table, wholesale borrowings equal the
      sum of other borrowings and brokered deposits, as customer sweep accounts
      are presented separately.


(7)
              Total
      funding includes customer funding and wholesale
  borrowings.


Note:  Average
balances are derived from daily balances.


57
 Index


Comparing
first quarter 2010 to fourth quarter 2009, fully tax-equivalent net interest
income decreased to $73.7 million from $81.4 million as a result of two fewer
days, continued contraction in loan balances, and maturing balance sheet hedges,
partially offset by lower funding costs and a decline in interest reversals on
nonaccrual loans. The tax-equivalent net interest margin for first quarter
decreased to 2.75%, down 12 basis points from 2.87% for fourth quarter 2009. The
margin decline was primarily driven by the impact of $855 million of balance
sheet management hedges that matured in fourth quarter 2009, which reduced net
interest income by $3.2 million and the net interest margin by approximately 12
basis points.





Comparing
first quarter 2010 to first quarter 2009, fully tax-equivalent net interest
income decreased to $73.7 million for first quarter 2010 from $86.2 million for
first quarter 2009. The tax-equivalent net interest margin for first quarter
2010 decreased to 2.75%, down 5 basis points from 2.80% for first quarter 2009,
primarily due to an increased level of excess cash maintained as a liquidity
management measure and maturing balance sheet hedges partially offset by
downward pricing of deposits, particularly time deposits.





TSFG’s
average earning assets were $10.8 billion for first quarter 2010 compared to
$11.3 billion for fourth quarter 2009 and $12.4 billion for first quarter 2009.
Average loans as a percentage of average earning assets were 76.2% for first
quarter 2010 compared to 77.2% for fourth quarter 2009 and 81.9% for first
quarter 2009. At March 31, 2010, approximately 56% of TSFG’s accruing loans were
variable rate loans, the majority of which are tied to the prime rate. At March
31, 2010, loans with floating rates, primarily limited to prime or LIBOR,
included loans with floors totaling $1.3 billion with an average floor of 5.15%.
In addition, TSFG has entered into receive-fixed interest rate swaps to hedge
the forecasted interest income from certain prime-based and LIBOR-based loans as
part of its overall interest rate risk management. Certain of these swaps with a
notional amount of $265.0 million were terminated or de-designated in first
quarter 2010, which locked in a gain of approximately $12 million that will be
amortized to the statement of operations as the hedged cash flows impact
earnings.





Liquidity
initiatives have had and are expected to continue to have a negative impact on
the net interest margin due to the effect of low-yielding interest-bearing bank
balances being included in average earning assets and the higher costs of
longer-term funding exceeding the return on short-term assets. In addition, net
interest income and the net interest margin have been negatively impacted by
elevated levels of nonperforming assets and the reversal of accrued interest
income as loans have been moved to nonaccrual status. In first quarter 2010,
liquidity initiatives had an approximate adverse impact of 19 basis points on
the net interest margin, while credit had an approximate adverse impact of 29
basis points.





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 $95.1 million
in first quarter 2010, compared to $170.8 million and $142.6 million,
respectively, in the three months ended December 31, 2009 and March 31, 2009.
The lower provision largely reflected a decrease in the rate of migration of
loans into higher risk categories combined with lower inflows into nonaccrual
status.





Net loan
charge-offs were $87.8 million, or 4.32% (annualized) of average loans held for
investment, for first quarter 2010, compared with $142.9 million, or 6.52%
(annualized), for fourth quarter 2009 and $109.1 million, or 4.36% (annualized),
for first quarter 2009. The allowance for credit losses equaled 4.75% of loans
held for investment as of March 31, 2010, compared to 4.45% and 2.84%,
respectively, as of December 31, 2009 and March 31, 2009. Despite some
improvement in first quarter 2010, management expects the level of charge-offs
and provision expense to remain elevated relative to historical trends due to
the current credit environment. See “Loans,” “Credit Quality,” and “Allowance
for Loan Losses and Reserve for Unfunded Lending Commitments.”


58
 Index


Noninterest
Income





Table 24
shows the components of noninterest income.





Table
      24Components
      of Noninterest Income(dollars
      in thousands)Three
      Months EndedMarch 31,2010
            
            
            2009Service
      charges on deposit accounts
            
            $
            9,223
            
            
            $
            9,268Debit
      card income, net
            
            
            2,216
            
            
            
            1,925Customer
      service fee income
            
            
            1,126
            
            
            
            1,209Total
      customer fee income
            
            
            12,565
            
            
            
            12,402Insurance
      income
            
            
            1,876
            
            
            
            2,457Retail
      investment services, net
            
            
            1,587
            
            
            
            2,010Trust
      and investment management income
            
            
            1,102
            
            
            
            1,465Benefits
      administration fees
            
            
            -
            
            
            
            642Total
      wealth management income
            
            
            4,565
            
            
            
            6,574Bank-owned
      life insurance income
            
            
            2,444
            
            
            
            2,502Mortgage
      banking income
            
            
            1,289
            
            
            
            1,205Gain
      on certain derivative activities
            
            
            59
            
            
            
            1,135Loss
      on securities
            
            
            (389
            )
            
            
            (2,954
            )Merchant
      processing income, net
            
            
            -
            
            
            
            610Other
            
            
            599
            
            
            
            2,267Total
      noninterest income
            
            $
            21,132
            
            
            $
            23,741





Noninterest
income decreased to $21.1 million in first quarter 2010 from $23.7 million in
first quarter 2009, partly due to the third quarter 2009 sale of three ancillary
businesses: the merchant processing portfolio, a financial planning group, and a
retirement plan administrator. Although these sales resulted in a gain in third
quarter 2009, they reduced the respective line items in which the businesses
were previously included. For first quarter 2009, these businesses reported $2.1
million in noninterest income ($610,000 merchant processing income, $642,000
benefits administration fees, and $845,000 included in wealth management
income).





Debit
card income increased due to increased transactions. Mortgage banking income
increased 7.0% in first quarter 2010 compared to first quarter 2009. Mortgage
loans originated by TSFG originators totaled $52.3 million and $75.3 million in
the first three months of 2010 and 2009, respectively. Gain on certain
derivative activities decreased in first quarter 2010 partly due to a reduction
in both ineffectiveness and acceleration of gains of cash flow hedges (many of
which matured or were terminated in fourth quarter 2009 and first quarter 2010),
while loss on securities decreased primarily as a result of lower other than
temporary impairment charges.





Reductions
in the values of our customer swap portfolio attributable to increased credit
adjustments resulted in a net loss on customer swaps of $1.3 million for first
quarter 2010 (included in other noninterest income), compared to $574,000 of
income in first quarter 2009. At March 31, 2010, the fair value of swaps in this
portfolio which were in an asset position was $26.9 million, net of a $3.0
million established reserve for credit losses.




Comparing
first quarter 2010 to fourth quarter 2009, noninterest income decreased to $21.1
million from $28.6 million, primarily due to a $389,000 loss on securities
(largely attributable to a write-down on certain equity investments) in first
quarter 2010 compared to a $6.7 million gain on securities (largely attributable
to the sale of municipal securities) in fourth quarter 2009. Excluding the
gain/loss on securities, noninterest income decreased slightly, primarily due to
a decline in customer fee and other income, partially offset by an improvement
in bank-owned life insurance income.





NSF fees
are included in service charges on deposit accounts. In November 2009, the
Federal Reserve Board issued a final rule that, effective July 1, 2010,
prohibits financial institutions from charging consumers fees for paying
overdrafts on automated teller machine and one-time debit card transactions,
unless a consumer consents, or opts in, to the overdraft service for those types
of transactions. As a result, this line item may decrease in future
periods.


59
 Index


Noninterest
Expenses





Table 25
shows the components of noninterest expenses.





Table
      25Components
      of Noninterest Expenses(dollars
      in thousands)Three
      Months EndedMarch 31,2010
            
            
            2009Salaries
      and wages
            
            $
            29,836
            
            
            $
            35,191Employee
      benefits
            
            
            4,512
            
            
            
            8,923Severance
      related benefits
            
            
            878
            
            
            
            -Total
      salaries and wages and employee benefits
            
            
            35,226
            
            
            
            44,114Occupancy
            
            
            9,700
            
            
            
            9,436Regulatory
      assessments
            
            
            7,150
            
            
            
            4,655Furniture
      and equipment
            
            
            6,606
            
            
            
            6,945Write-downs/loss
      on other real estate owned
            
            
            5,492
            
            
            
            124Professional
      services
            
            
            5,329
            
            
            
            4,507Project
      NOW expense
            
            
            -
            
            
            
            1,298Loan
      collection and foreclosed asset expense
            
            
            4,692
            
            
            
            4,891Telecommunications
            
            
            1,536
            
            
            
            1,526Advertising
      and business development
            
            
            1,169
            
            
            
            1,281Amortization
      of intangibles
            
            
            1,009
            
            
            
            1,291Loss
      on non-mortgage loans held for sale
            
            
            -
            
            
            
            1,838Loss
      on repurchase of auction rate securities
            
            
            -
            
            
            
            676Other
            
            
            5,744
            
            
            
            7,659Total
      noninterest expenses
            
            $
            83,653
            
            
            $
            90,241





Noninterest
expenses decreased to $83.7 million in first quarter 2010 from $90.2 million in
first quarter 2009, largely due to the continuation of expense control
initiatives throughout the Company. As a result of these initiatives, salaries
and wages (excluding severance related benefits) and employee benefits decreased
$9.8 million for first quarter 2010 compared to first quarter 2009, as full-time
equivalent employees declined to 2,144 at March 31, 2010 from 2,430 at March 31,
2009. In first quarter 2010, TSFG recorded severance related benefits of
$878,000 associated with staff reduction initiatives implemented during the
quarter. First quarter 2010 also reflects a decrease in the 401k match (from 6%
of employee contributions to 3% effective second quarter 2009) and the
restructuring of certain executive retirement plans. Regulatory assessments
increased $2.5 million based in part on TSFG’s participation in the TAGP related
to noninterest-bearing deposit accounts and across-the-board rate increases
designed to replenish the FDIC’s Deposit Insurance Fund. FDIC insurance premiums
are expected to increase based in part on the adoption of a uniform three-basis
point increase to assessment rates effective on January 1, 2011 (see “Deposit
Insurance”). Actions by regulatory agencies could also cause our assessments to
increase. Loss on other real estate owned increased $5.4 million due primarily
to write-downs on OREO. First quarter 2009 included operating expenses
associated with ancillary businesses sold in third quarter 2009.





Comparing
first quarter 2010 to fourth quarter 2009, noninterest expenses decreased to
$83.7 million from $103.2 million, primarily due to lower credit-related
expenses and personnel costs, partially offset by higher professional fees and
FDIC insurance premiums. Credit-related expenses decreased $13.5 million.
Personnel costs (excluding severance related benefits) declined $4.0 million,
partly due to the restructure of certain executive retirement plans during the
quarter. In addition, fourth quarter 2009 included a $3.5 million impairment
charge for long lived assets related to the corporate campus, which is being
marketed for sale.





Noninterest
expenses can be volatile due to the level of collection efforts on nonperforming
loans, holding costs of foreclosed property, and the timing of write-downs on
foreclosed properties due to declines in value of properties or as updated
information is obtained.


60
 Index


Income
Taxes





Income
tax benefit as a percentage of pretax loss was 4.2% for the three months ended
March 31, 2010. Income tax expense differed from the amount computed by applying
TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss for the
three months ended March 31, 2010 primarily due to the valuation allowance
recorded against the net deferred tax asset. The recorded benefit reflects the
impact on the deferred tax valuation allowance of the increase to accumulated
other comprehensive income (“OCI”). Income tax benefit as a percentage of pretax
loss was 40.1% for the three months ended March 31, 2009. Income tax benefit
differed from the amount computed by applying TSFG’s statutory U.S. federal
income tax rate of 35% to pretax income for the three months ended March 31,
2009 primarily as a result of permanent tax preference items and credits. Until
the valuation allowance is released, income taxes from operations will reflect
tax benefits recognized year-to-date from changes in OCI and adjustments to tax
reserves, if any.





At March
31, 2010, TSFG’s net deferred tax asset before the valuation allowance was
$318.5 million, and the Company had federal income tax net operating loss
(“NOL”) carryforwards of approximately $544 million. If an ownership change were
to occur as a result of TSFG’s capital activities, it is possible that
limitations will be placed on our ability to utilize certain pre-change or
recognized built-in losses for which we currently have a net deferred tax asset.
The utilization of such carryforwards may be limited upon the occurrence of
certain ownership changes (including transactions beyond our control), including
the issuance or exercise of rights to acquire stock, the purchase or sale of
stock by 5% stockholders, as defined in the Treasury regulations, and the
offering of stock by TSFG during any three-year period resulting in an aggregate
change of more than 50% in the beneficial ownership of TSFG. Based on available
information, the Company has estimated that the aggregate percentage ownership
change over the testing period through the current date is approximately 45%.
For additional information regarding these potential limitations, refer to
TSFG’s Annual Report on Form 10-K for the year ended December 31, 2009,
specifically the section captioned “Critical Accounting Policies and Estimates –
Income Taxes” in Item 7.





Enterprise Risk Management





Pages 68
through 72 of TSFG’s Annual Report on Form 10-K for the year ended December 31,
2009 provide a discussion of overall Enterprise Risk Management, Derivatives and
Hedging Activities, Economic Risk, Credit Risk, Liquidity Risk, Operational
Risk, and Compliance and Litigation Risk.





Market
Risk and Asset/Liability Management





There has
been no significant change to the market risk and asset/liability management
methodology as disclosed in TSFG’s 2009 Form 10-K. The interest sensitivity
analysis which follows has been updated for March 31, 2010 numbers.





Interest Sensitivity
Analysis. As discussed on pages 68 and 69 of TSFG’s 2009 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 26 and 27 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 26 and
27. These include, but are not limited to, the following:





·
            a
      static balance sheet for net interest income
  analysis;


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


·
            mortgage
      backed securities prepayments are based on historical industry data (given
      the current economic and regulatory environment, uncertainty regarding
      future prepayments is heightened);


·
            loan
      prepayments are based upon historical bank-specific analysis and
      historical industry data;


·
            deposit
      retention and average lives are based on historical bank-specific
      analysis;


·
            whether
      callable/puttable assets and liabilities are called/put is based on the
      implied forward yield curve for each interest rate scenario;
      and


·
            management
      takes no action to counter any
change.





Table 26
reflects the sensitivity of net interest income to changes in interest rates. It
shows the effect that the indicated changes in interest rates would have on net
interest income over the next 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, 2010, and 2009 levels, respectively.The increase in interest
rate sensitivity from March 31, 2009 is primarily due to the increased liquidity
position, which is invested in overnight funding. The increased asset
sensitivity position is partially offset by growth in variable rate customer
time deposits tied to the prime rate.


61
 Index





Table
      26Net
      Interest Income at Risk AnalysisAnnualized
      Hypothetical Percentage Change in Net Interest IncomeInterest
      Rate Scenario (1)
            
            March
      31,2010
            
            
            20092.00%
            
            
            4.5
            %
            
            
            1.8
            %1.00
            
            
            2.2
            
            
            
            1.0Flat
            
            
            -
            
            
            
            -(1.00)(2)
            
            
            n/a
            
            
            
            n/a(2.00)(2)
            
            
            n/a
            
            
            
            n/a





(1)
            Net
      interest income sensitivity is shown for gradual rate shifts over a 12
      month period.


(2)
            Due
      to the current low rate environment, downward rate shifts were not
      run.





Table 27
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 27 shows the effect that the indicated
changes in interest rates would have on the fair value of net assets at March
31, 2010 and 2009, respectively, compared with the base case or flat interest
rate scenario. The base case or flat scenario assumes interest rates stay at
March 31, 2010 and 2009 levels, respectively. The increase in the dollar change
in EVE at March 31, 2010 compared to March 31, 2009 is due to increased
sensitivity of customer and brokered time deposits.





Table
      27Economic
      Value of Equity Risk AnalysisAnnualized
      Hypothetical Dollar Change in Economic Value of EquityInterest
      Rate Scenario (1)
            
            March 31,2010
            
            
            
            20092.00%
            
            $
            9,245
            
            
            $
            (72,675
            )1.00
            
            
            16,449
            
            
            
            (12,460
            )Flat
            
            
            -
            
            
            
            -(1.00)(2)
            
            
            n/a
            
            
            
            n/a(2.00)(2)
            
            
            n/a
            
            
            
            n/a





(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.


(2)
            Due
      to the current low rate environment, downward rate shifts were not
      run.





There are
material limitations with TSFG’s models presented in Tables 26 and 27, 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 interest income or the fair
      value of net assets, but rather the risk to net interest income and the
      fair value of net assets because of changes in interest
    rates;


·
            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.


62
 Index


Off-Balance Sheet Arrangements





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





Lending Commitments. Lending
commitments include loan commitments, standby letters of credit, unused business
credit card lines, and documentary letters of credit. These instruments are not
recorded in the consolidated balance sheet until funds are advanced under the
commitments. TSFG provides these lending commitments to customers in the normal
course of business. TSFG estimates probable losses related to binding unfunded
lending commitments and records a reserve for unfunded lending commitments in
other liabilities on the consolidated balance sheet. See Note 9 to the
Consolidated Financial Statements for disclosure of the amounts of lending
commitments.





Derivatives. 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 8 to
the Consolidated Financial Statements for additional information regarding
derivatives.





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 Risk





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





Item
4.    Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





At March
31, 2010, 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, 2010, 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 was 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 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 its assessment during the quarter ended March 31,
2010 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.


63
 Index


PART II.
OTHER INFORMATION





Item
1.    Legal
Proceedings





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





Item
1A. Risk
Factors





Except as
referenced below,there have been no
material changes to the risk factors previously disclosed under Item 1A (pages
10-19) of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2009
(the “Risk Factors”).





The Risk
Factors should be read in light of the fact that the Consent Order and the Fed
Agreement have been entered into, as discussed above. While the Company cannot
predict the impact of the Consent Order and the Fed Agreement, failure to meet
the obligations set forth in these agreements could have a material adverse
effect on the Company and its operations (including resulting in a
potential receivership with respect to the Bank). If the Company is unable
to raise the capital required or otherwise comply with the terms of the Consent
Order, further regulatory actions (including actions up to the implementation of
a receivership) could be taken, and its ability to operate as a going concern
could be negatively impacted.  Furthermore, because such consent orders are
public, there could be an adverse customer or market reaction to the
announcement of the Consent Order.





The Risk
Factors should be read in light of the fact that the FDIC’s temporary
transactional account guarantee program was extended through December 31,
2010.





The Risk
Factor related to credit ratings should be read in light of the fact that
Standard and Poor’s, Moody’s and DBRS have suspended their ratings of the
Company.





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





TSFG has
repurchased shares of our common stock in private transactions and open-market
purchases, as authorized by our Board. The amount and timing of stock
repurchases will be based on factors, including but not limited to, management’s
assessment of TSFG’s capital structure and liquidity, the market price of TSFG’s
common stock  compared to management’s assessment of the stock’s
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, 2010.





Issuer
      Purchases of Equity SecuritiesPeriod
            
            Total
      Number of SharesPurchased
            
            
            Average
      Price Paid perShare
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plansor Programs
            
            
            Approximate
      Dollar Value of Shares that May Yet Be Purchased Under Plans or
      Programs(in
    thousands)January
      1, 2010 to January 31, 2010
            
            
            5,775
            (1)
            
            $
            0.45
            
            
            
            -
            
            
            $
            -February
      1, 2010 to February 28, 2010
            
            
            708
            (1)
            
            
            0.52
            
            
            
            -
            
            
            
            -March
      1, 2010 to March 31, 2010
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            6,483
            
            
            $
            0.46
            
            
            
            -
            
            
            $
            -





(1)
            These
      shares were canceled in connection with vesting of restricted stock.
      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
      at current market value pursuant to the terms of the applicable stock
      option, restricted stock, or deferred compensation plan and not pursuant
      to publicly announced share repurchase
programs.


64
 Index


Item
3.    Defaults upon Senior
Securities





During
first quarter 2010, TSFG suspended dividend payments on its preferred stock and
all remaining outstanding equity and capital instruments. (This suspension of
dividends does not constitute a default under the applicable documents governing
such instruments.) As a result, the Company is in arrears in the payment of
dividends with respect to the Series 2008-T Preferred Stock, trust preferred
securities, and REIT preferred securities, all of which are cumulative preferred
securities.The
Company has also suspended the quarterly dividends (which total $116,000) on its
Series 2008D-V and Series 2008D-NV Preferred Stock, although such dividends are
non-cumulative. As of the date of the filing of this report, the 

arrearage with respect to the Series
2008-T Preferred Stock, trust preferred securities, and REIT preferred
securities held by third parties was $4.3 million, $896,000, and $1.6 million,
respectively, or $6.8 million in the aggregate.




Item
4.    Reserved





Item
5.    Other
Information





None.





Item
6.    Exhibits





10.1
            Consent
      Order effective April 30, 2010





10.2
            Federal
      Reserve Agreement effective May 4,
2010





31.1
            Certificate
      of the Principal Executive Officer pursuant to Rule 13a-14a/15(d)-14(a) of
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002





31.2
            Certificate
      of the Principal Financial Officer pursuant to Rule 13a-14a/15(d)-14(a) of
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of
2002





32.1+
            Certificate
      of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002





32.2+
            Certificate
      of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002





+ This
exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, or otherwise subject to the liability of that section, and
shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.





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


The above
exhibits may be found on TSFG’s electronic filing of its March 31, 2010
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.


65
 Index


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 5, 2010
            
            /s/ James R. GordonJames
      R. GordonSenior
      Executive Vice President andChief
      Financial Officer(Principal
      Financial Officer)






66