South Financial (TSFG) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)
x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2008
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________

Commission file number 0-15083

The South Financial Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)

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

(864) 255-7900
Registrant’s telephone number, including area code

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

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 x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(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 o No x.

The number of outstanding shares of the issuer’s $1.00 par value common stock as of August 4, 2008 was 72,827,699.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	June 30,
							December 31, 2007
	2008			2007
Assets
Cash and due from banks	$	224,991		$	267,005		$	290,974
Interest-bearing bank balances		55,713			263			5,551
Federal funds sold and securities purchased to resell		50,000			—			—
Securities
Available for sale, at fair value		1,987,232			2,433,341			1,986,212
Held to maturity (fair value $26,775, $41,501, and $39,782, respectively)		26,677			41,892			39,691
Total securities		2,013,909			2,475,233			2,025,903
Loans held for sale (includes $21,871 measured at fair value at June 30, 2008)		21,871			35,718			17,867
Loans held for investment		10,475,731			10,029,228			10,213,420
Less: Allowance for loan losses		(191,727	)		(125,545	)		(126,427	)
Net loans held for investment		10,284,004			9,903,683			10,086,993
Premises and equipment, net		265,853			224,951			233,852
Accrued interest receivable		56,118			75,851			70,464
Goodwill		463,300			650,544			651,003
Other intangible assets, net		24,586			30,939			27,179
Other assets		516,525			475,488			467,798
Total assets	$	13,976,870		$	14,139,675		$	13,877,584
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing retail and commercial deposits	$	1,107,115		$	1,244,834		$	1,127,657
Interest-bearing retail and commercial deposits		6,388,904			6,547,479			6,402,503
Total retail and commercial deposits		7,496,019			7,792,313			7,530,160
Brokered deposits		2,390,350			2,293,493			2,258,408
Total deposits		9,886,369			10,085,806			9,788,568
Short-term borrowings		1,581,601			1,432,650			1,637,550
Long-term debt		772,957			857,248			698,340
Accrued interest payable		55,880			77,751			69,288
Other liabilities		120,861			168,033			133,530
Total liabilities		12,417,668			12,621,488			12,327,276
Commitments and contingencies (Note 10)		—			—			—
Shareholders’ equity
Preferred stock-no par value; authorized 10,000,000 shares; issued and outstanding 250,000 shares at June 30, 2008		250,000			—			—
Common stock-par value $1 per share; authorized 200,000,000 shares; issued and outstanding 72,795,797, 73,698,807, and 72,455,205 shares, respectively		72,796			73,699			72,455
Surplus		1,101,524			1,129,499			1,107,601
Retained earnings		152,567			378,399			386,061
Guarantee of employee stock ownership plan debt		—			(39	)		—
Accumulated other comprehensive income (loss), net of tax		(17,685	)		(63,371	)		(15,809	)
Total shareholders’ equity		1,559,202			1,518,187			1,550,308
Total liabilities and shareholders’ equity	$	13,976,870		$	14,139,675		$	13,877,584

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

1

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Interest Income
Interest and fees on loans	$	158,016		$	191,961	$	329,244		$	378,589
Interest and dividends on securities:
Taxable		20,591			26,879		40,983			55,704
Exempt from federal income taxes		2,479			2,888		5,172			5,936
Total interest and dividends on securities		23,070			29,767		46,155			61,640
Interest on short-term investments		106			97		178			238
Total interest income		181,192			221,825		375,577			440,467
Interest Expense
Interest on deposits		63,180			92,066		140,286			180,545
Interest on short-term borrowings		8,089			21,165		20,289			42,429
Interest on long-term debt		9,718			12,073		22,091			26,434
Total interest expense		80,987			125,304		182,666			249,408
Net Interest Income		100,205			96,521		192,911			191,059
Provision for Credit Losses		63,763			17,125		137,055			26,138
Net interest income after provision for credit losses		36,442			79,396		55,856			164,921
Noninterest Income		32,190			27,683		63,106			54,653
Noninterest Expenses		87,620			80,151		355,799			161,628
(Loss) income before income taxes		(18,988	)		26,928		(236,837	)		57,946
Income taxes		(8,056	)		8,998		(24,613	)		19,498
Net (Loss) Income		(10,932	)		17,930		(212,224	)		38,448
Preferred stock dividends		5,833			—		5,833			—
Net (Loss) Income Available to Common Shareholders	$	(16,765	)	$	17,930	$	(218,057	)	$	38,448
Average Common Shares Outstanding, Basic		72,611			74,050		72,530			74,390
Average Common Shares Outstanding, Diluted		72,611			74,397		72,530			74,815
Earnings Per Common Share, Basic	$	(0.23	)	$	0.24	$	(3.01	)	$	0.52
Earnings Per Common Share, Diluted		(0.23	)		0.24		(3.01	)		0.51
Dividends per common share		0.01			0.18		0.20			0.36

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

2

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

	Shares of Common Stock			Common Stock			Preferred Stock		Surplus			Retained Earnings and Other*			Accumulated Other Comprehensive Income (Loss), Net			Total
Balance, December 31, 2006		75,341,276		$	75,341		$	—	$	1,167,685		$	367,110		$	(48,104	)	$	1,562,032
Net income		—			—			—		—			38,448			—			38,448
Other comprehensive loss, net of income tax of $8,756		—			—			—		—			—			(15,267	)		(15,267	)
Comprehensive income		—			—			—		—			—			—			23,181
Cash dividends declared ($0.36 per common share)		—			—			—		—			(26,750	)		—			(26,750	)
Common stock activity:
Repurchase of stock		(2,150,000	)		(2,150	)		—		(50,522	)		—			—			(52,672	)
Exercise of stock options, including income tax benefit of $849		382,357			383			—		7,224			—			—			7,607
Dividend reinvestment plan		71,002			71			—		1,575			—			—			1,646
Restricted stock plan		29,349			29			—		973			(72	)		—			930
Employee stock purchase plan		10,299			11			—		229			—			—			240
Director compensation		10,237			10			—		250			—			—			260
Acquisitions		4,287			4			—		100			—			—			104
Common stock released by trust for deferred compensation		—			—			—		—			12			—			12
Deferred compensation payable in common stock		—			—			—		—			(12	)		—			(12	)
Cumulative effect of initial application of FIN 48		—			—			—		—			(488	)		—			(488	)
Stock option expense		—			—			—		1,946			—			—			1,946
Other, net		—			—			—		39			112			—			151
Balance, June 30, 2007		73,698,807		$	73,699		$	—	$	1,129,499		$	378,360		$	(63,371	)	$	1,518,187
Balance, December 31, 2007		72,455,205		$	72,455		$	—	$	1,107,601		$	386,061		$	(15,809	)	$	1,550,308
Net loss		—			—			—		—			(212,224	)		—			(212,224	)
Other comprehensive loss, net of income tax of $1,142		—			—			—		—			—			(1,876	)		(1,876	)
Comprehensive loss		—			—			—		—			—			—			(214,100	)
Cash dividends declared:
Common ($0.20 per common share)		—			—			—		—			(14,602	)		—			(14,602	)
Preferred		—			—			—		—			(5,833	)		—			(5,833	)
Issuance of preferred stock		—			—			250,000		(10,953	)		—			—			239,047
Common stock activity:
Dividend reinvestment plan		185,542			186			—		1,532			—			—			1,718
Restricted stock plan		100,150			100			—		1,462			(158	)		—			1,404
Director compensation		29,184			29			—		248			—			—			277
Employee stock purchase plan		17,711			18			—		150			—			—			168
Acquisitions		4,403			4			—		20			—			—			24
Exercise of stock options, including income tax benefit of $6		3,602			4			—		37			—			—			41
Common and preferred stock purchased by trust for deferred compensation		—			—			—		—			(450	)		—			(450	)
Deferred compensation payable in common and preferred stock		—			—			—		—			450			—			450
Cumulative effect of initial application of:
SFAS 159, net of tax		—			—			—		—			60			—			60
EITF 06-4		—			—			—		—			(737	)		—			(737	)
Stock option expense		—			—			—		1,486			—			—			1,486
Other, net		—			—			—		(59	)		—			—			(59	)
Balance, June 30, 2008		72,795,797		$	72,796		$	250,000	$	1,101,524		$	152,567		$	(17,685	)	$	1,559,202

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

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

3

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

	Six Months Ended June 30,
	2008			2007
Cash Flows from Operating Activities
Net (loss) income	$	(212,224	)	$	38,448
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation, amortization, and accretion, net		18,165			16,782
Provision for credit losses		137,055			26,138
Share-based compensation expense		3,772			3,775
Goodwill impairment		188,431			—
(Gain) loss on securities		(2,272	)		3,622
Gain on Visa IPO share redemption		(1,904	)		—
(Gain) loss on certain derivative activities		(248	)		1,400
Gain on sale of mortgage loans		(2,156	)		(2,999	)
Loss on early extinguishment of debt		464			231
Loss on disposition of premises and equipment		327			46
Loss on disposition of other real estate owned		183			163
Excess tax benefits from share-based compensation		(6	)		(849	)
Origination of loans held for sale		(149,661	)		(243,785	)
Sale of loans held for sale and principal repayments		159,600			254,634
Increase in other assets		(17,888	)		(18,839	)
(Decrease) increase in other liabilities		(19,134	)		8,600
Net cash provided by operating activities		102,504			87,367
Cash Flows from Investing Activities
Sale of securities available for sale		155,342			129,781
Maturity, redemption, call, or principal repayments of securities available for sale		317,065			161,177
Maturity, redemption, call, or principal repayments of securities held to maturity		13,010			10,499
Purchase of securities available for sale		(479,119	)		(4,370	)
Purchase of securities held to maturity		—			(140	)
Origination of loans held for investment, net of principal repayments		(376,727	)		(358,682	)
Sale of loans held for investment		22,473			—
Sale of other real estate owned		1,072			3,154
Sale of premises and equipment		5			144
Purchase of premises and equipment		(29,058	)		(16,201	)
Cash equivalents acquired, net of payment for purchase acquisition		3,788			—
Net cash used for investing activities		(372,149	)		(74,638	)
Cash Flows from Financing Activities
Increase in deposits		76,824			577,344
Decrease in short-term borrowings		(56,617	)		(336,953	)
Issuance of long-term debt		200,000			77,320
Payment of long-term debt		(129,047	)		(350,307	)
Issuance of preferred stock, net		239,047			—
Cash dividends paid on common stock		(27,637	)		(27,030	)
Repurchase of common stock		—			(52,672	)
Excess tax benefits from share-based compensation		6			849
Other common stock activity		1,248			8,157
Net cash provided by (used for) financing activities		303,824			(103,292	)
Net change in cash and cash equivalents		34,179			(90,563	)
Cash and cash equivalents at beginning of year		296,525			357,831
Cash and cash equivalents at end of period	$	330,704		$	267,268
Supplemental Cash Flow Data
Interest paid, net of amounts capitalized	$	193,550		$	240,163
Income tax payments, net		2,672			20,583
Significant non-cash investing and financing transactions:
Increase in unrealized loss on available for sale securities		(5,550	)		(19,284	)
Loans transferred to other real estate owned		13,452			3,502

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

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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, 2007 should be referred to in connection with the reading of these unaudited interim Consolidated Financial Statements. The Consolidated Balance Sheet at December 31, 2007 is derived from TSFG’s Consolidated Audited Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments necessary to present a fair statement of the results for the interim periods have been made. All such adjustments are of a normal, recurring nature.

Nature of Operations

          TSFG is a bank holding company headquartered in Greenville, South Carolina that offers a broad range of financial products and services, including banking, merchant processing, mortgage, treasury services, and wealth management (which consists of benefits administration, insurance, private banking, retail investment, and trust and investment management). TSFG’s banking subsidiary Carolina First Bank conducts banking operations in South Carolina and North Carolina (as Carolina First Bank) and in Florida (as Mercantile Bank). TSFG also owns several non-bank subsidiaries. At June 30, 2008, TSFG operated through 81 branch offices in South Carolina, 72 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.

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.

Preferred Stock

          Preferred stock ranks senior to common shares with respect to the dividend and has preference in the event of liquidation. Preferred stock is reported in shareholders’ equity unless it is mandatorily redeemable or it embodies an unconditional obligation that the Company must or may settle in shares whose monetary value at inception is based solely or predominantly on any of the following: (1) a fixed amount known at inception, (2) variations in something other than the fair value of the Company’s equity shares, or (3) variations inversely related to changes in the fair value of the Company’s equity shares as prescribed in Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Dividends declared on preferred stock are accounted for as a reduction in retained earnings. Issuance costs are charged against surplus.

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 2008 presentations.

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

Recently Adopted Accounting Pronouncements

     Fair Value Measurements

          SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. TSFG adopted SFAS 157 for its financial assets and liabilities on January 1, 2008 with no significant impact on its Consolidated Financial Statements. See Note 13 for fair value disclosures. Financial Accounting Standards Board (“FASB”) Staff Position FAS 157-2 (“FSP 157-2”) delays the effective date of SFAS 157 for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis until fiscal years beginning after November 15, 2008. As a result, TSFG will adopt this standard for nonfinancial assets and liabilities effective January 1, 2009.

     Endorsement Split-Dollar Life Insurance Arrangements

          In September 2006, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-4 (“EITF 06-4”), “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 stipulates that an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period is a postretirement benefit arrangement for which a liability must be recorded. The consensus is effective for fiscal years beginning after December 15, 2007. Entities will have the option of applying the provisions of EITF 06-4 as a cumulative effect adjustment to the opening balance of retained earnings or retrospectively to all prior periods. TSFG currently has several arrangements within the scope of EITF 06-4. TSFG adopted this standard effective January 1, 2008, with a $737,000 decrease to retained earnings.

     Fair Value Option for Financial Assets and Financial Liabilities

          SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities,” allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS 159 further establishes certain additional disclosure requirements. TSFG adopted this standard effective January 1, 2008 and elected to account for its portfolio of mortgage loans held for sale at fair value. The impact of adoption was an increase to retained earnings of $60,000, net of income tax of $32,000. For additional information on the fair value option, see Note 13.

     Written Loan Commitments Recorded at Fair Value through Earnings

          Staff Accounting Bulletin No. 109 (“SAB 109”), “Written Loan Commitments Recorded at Fair Value Through Earnings,” supersedes SAB No. 105, “Application of Accounting Principles to Loan Commitments,” and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. TSFG adopted SAB 109 effective January 1, 2008 with no significant impact on its Consolidated Financial Statements.

Recently Issued Accounting Pronouncements

     Business Combinations

          SFAS No. 141R (“SFAS 141R”), “Business Combinations,” requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” would have to be

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

met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS No. 5, “Accounting for Contingencies.” SFAS 141R is effective for business combinations closing in fiscal years beginning after December 15, 2008. TSFG expects SFAS 141R to have a significant impact on its accounting for business combinations, if any, closing on or after January 1, 2009.

     Noncontrolling Interests in Consolidated Financial Statements

          SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51,” establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 is effective for fiscal years beginning after December 15, 2008, and TSFG does not expect the adoption of this standard to have a significant impact on its Consolidated Financial Statements.

     Disclosures about Derivative Instruments and Hedging Activities

          SFAS No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,” amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” to amend and expand the disclosure requirements of SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements.

     Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

          FASB Staff Position EITF 03-6-1 (“FSP EITF 03-6-1”), “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities,” states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements.

     Determination of the Useful Life of Intangible Assets

          FASB Staff Position FAS 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets,” amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008, and TSFG does not expect adoption of this standard to have a significant impact on its Consolidated Financial Statements.

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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 Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Noninterest Income
Service charges on deposit accounts	$	10,986		$	11,223		$	21,415		$	21,836
Debit card income, net (1)		2,056			1,839			3,932			3,406
Customer service fee income		1,358			1,402			2,689			2,693
Total customer fee income		14,400			14,464			28,036			27,935
Insurance income		2,388			2,987			5,448			6,284
Retail investment services, net (2)		2,120			2,021			3,666			3,735
Trust and investment management income		1,857			1,734			3,523			3,328
Benefits administration fees		734			749			1,490			1,491
Total wealth management income		7,099			7,491			14,127			14,838
Bank-owned life insurance income		2,910			4,454			6,057			7,305
Mortgage banking income		1,858			1,877			3,343			3,946
Merchant processing income, net		809			771			1,666			1,506
Gain (loss) on certain derivative activities		236			(1,497	)		248			(1,400	)
Gain (loss) on securities		1,876			(2,237	)		2,272			(3,622	)
Gain on Visa IPO share redemption		—			—			1,904			—
Other		3,002			2,360			5,453			4,145
Total noninterest income	$	32,190		$	27,683		$	63,106		$	54,653
Noninterest Expenses
Salaries and wages	$	38,435		$	34,804		$	73,288		$	71,636
Employee benefits		9,113			9,245			18,411			19,004
Occupancy		8,972			8,545			17,595			17,153
Furniture and equipment		6,733			6,486			13,116			12,948
Professional services		3,579			4,914			7,106			9,017
Advertising and business development		2,731			1,973			5,202			3,904
Regulatory assessments		2,374			436			4,451			864
Loan collection and monitoring		2,167			460			3,137			1,179
Amortization of intangibles		1,589			2,136			3,247			4,137
Goodwill impairment		—			—			188,431			—
Telecommunications		1,476			1,418			2,899			2,811
Branch acquisition and conversion costs		731			—			731			—
(Gain) loss on early extinguishment of debt		(83	)		231			464			231
Visa-related litigation		—			—			(863	)		—
Other		9,803			9,503			18,584			18,744
Total noninterest expenses	$	87,620		$	80,151		$	355,799		$	161,628

(1)

In fourth quarter 2007, TSFG began presenting its debit card income net of related expenses. Debit card expense totaled (in thousands) $696 and $1,343 respectively, for the three and six months ended June 30, 2008, and $564 and $1,174, respectively, for the three and six months ended June 30, 2007. Amounts presented for prior periods have been reclassified to conform to the current presentation.

(2)

In fourth quarter 2007, TSFG began presenting its retail investment services income net of certain revenue sharing arrangements with a third party. Such amounts for these arrangements totaled (in thousands) $270 and $461, respectively, for the three and six months ended June 30, 2008, and $261 and $505, respectively, for the three and six months ended June 30, 2007. Amounts presented for prior periods have been reclassified to conform to the current presentation.

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

Note 3 – Accumulated Other Comprehensive Income (Loss)

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net Unrealized Losses on Securities Available for Sale
Balance at beginning of period	$	(1,912	)	$	(37,601	)	$	(30,765	)	$	(47,378	)
Other comprehensive income (loss):
Unrealized holding losses arising during the period		(52,276	)		(36,732	)		(5,851	)		(22,579	)
Income tax benefit		19,298			13,526			2,133			8,250
Less: Reclassification adjustment for losses included in net (loss) income		927			1,910			301			3,295
Income tax benefit		(324	)		(668	)		(105	)		(1,153	)
		(32,375	)		(21,964	)		(3,522	)		(12,187	)
Balance at end of period		(34,287	)		(59,565	)		(34,287	)		(59,565	)
Net Unrealized Gains (Losses) on Cash Flow Hedges
Balance at beginning of period		27,061			557			14,956			(726	)
Other comprehensive income (loss):
Unrealized (loss) gain on change in fair values		(16,092	)		(6,603	)		2,532			(4,198	)
Income tax benefit (expense)		5,633			2,312			(886	)		1,470
Less: Amortization of terminated swaps		—			(110	)		—			(541	)
Income tax expense		—			38			—			189
		(10,459	)		(4,363	)		1,646			(3,080	)
Balance at end of period		16,602			(3,806	)		16,602			(3,806	)
	$	(17,685	)	$	(63,371	)	$	(17,685	)	$	(63,371	)
Total other comprehensive loss	$	(42,834	)	$	(26,327	)	$	(1,876	)	$	(15,267	)
Net (loss) income		(10,932	)		17,930			(212,224	)		38,448
Comprehensive (loss) income	$	(53,766	)	$	(8,397	)	$	(214,100	)	$	23,181

Note 4 – Branch Acquisition

          In June 2008, Carolina First Bank acquired five branch offices (including related loans and deposits) in Florida from an unrelated financial institution. In connection with this branch acquisition, TSFG acquired loans of $6.4 million, premises and equipment of $13.4 million, and deposits totaling $24.5 million, and recorded a core deposit intangible asset of $654,000. The core deposit intangible asset is being amortized over 5 years using an accelerated method.

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

Note 5 – Gross Unrealized Losses on Investment Securities

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

	June 30, 2008
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities Available for Sale
US government agencies	$	179,554	$	3,644	$	—	$	—	$	179,554	$	3,644
Agency mortgage-backed securities		707,784		14,859		526,800		35,755		1,234,584		50,614
Private label mortgage-backed securities		15,544		728		—		—		15,544		728
State and municipals		87,803		553		3,384		87		91,187		640
Equity investments		96		82		2,719		1,231		2,815		1,313
	$	990,781	$	19,866	$	532,903	$	37,073	$	1,523,684	$	56,939
Securities Held to Maturity
State and municipals	$	5,929	$	48	$	1,290	$	26	$	7,219	$	74

	December 31, 2007
	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Securities Available for Sale
U.S. Government agencies	$	—	$	—	$	51,775	$	230	$	51,775	$	230
Agency mortgage-backed securities		67,150		512		1,003,886		49,702		1,071,036		50,214
State and municipals		4,641		3		157,857		1,105		162,498		1,108
Corporate bonds		4,792		617		—		—		4,792		617
Equity investments		3,044		935		—		—		3,044		935
	$	79,627	$	2,067	$	1,213,518	$	51,037	$	1,293,145	$	53,104
Securities Held to Maturity
State and municipals	$	813	$	1	$	15,136	$	117	$	15,949	$	118

          At June 30, 2008, TSFG had 434 individual investments that were in an unrealized loss position. The unrealized losses summarized above, except for equity investments, were primarily attributable to increases in interest rates, rather than deterioration in credit quality. The majority of these securities are government or agency securities and, therefore, pose minimal credit risk. TSFG believes it has the ability and intent to hold these debt securities until a market price recovery or maturity. Therefore, at June 30, 2008, these investments are not considered impaired on an other-than-temporary basis.

          In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its $18.2 million corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. Subsequent to quarter-end, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. In second quarter 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio.

          TSFG also invests in limited partnerships, limited liability companies (“LLCs”) and other privately held companies. These investments are included in other assets. In the three and six months ended June 30, 2008, TSFG recorded $359,000 and $589,000 in other-than-temporary impairment on these investments. In the three and six months ended June 30, 2007, TSFG recorded $342,000 in other-than-temporary impairment on these investments. At June 30, 2008, TSFG’s investment in these entities totaled $17.4 million, of which $5.3 million were accounted for under the cost method and $12.1 million were accounted for under the equity method.

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

Note 6 – Loans

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

	June 30, 2008		December 31, 2007
Commercial, financial and agricultural	$	2,389,048	$	2,309,294
Real estate - construction		1,827,861		1,763,365
Real estate - residential mortgages (1-4 family)		1,521,974		1,390,729
Commercial secured by real estate		3,909,030		3,946,440
Consumer		827,818		803,592
Loans held for investment	$	10,475,731	$	10,213,420
Included in the above:
Nonaccrual loans	$	218,726	$	80,191
Loans past due 90 days and still accruing interest	$	8,779	$	5,349

          During the second quarter of 2008, TSFG sold $40.0 million of nonperforming loans included in loans held for investment. In the three and six months ended June 30, 2008, TSFG charged-off $16.1 million and $17.6 million, respectively, of these loans against the allowance for loan losses.

          In accordance with SFAS No. 114 (“SFAS 114”), “Accounting by Creditors for Impairment of a Loan,” 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 restructuring. The following table summarizes information on impaired loans (in thousands):

	At and For the Six Months Ended June 30, 2008		At and For the Year Ended December 31, 2007
Impaired loans	$	195,774	$	68,102
Related allowance		39,238		11,340
Interest income recognized		29		59
Foregone interest		7,008		3,437

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

Note 7 – 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 Six Months Ended June 30,						At and For the Year Ended December 31, 2007
	2008			2007
Allowance for loan losses
Balance at beginning of period	$	126,427		$	111,663		$	111,663
Provision for loan losses		137,225			25,987			67,325
Loans charged-off		(76,106	)		(16,233	)		(59,408	)
Recoveries of loans previously charged off		4,181			4,128			6,847
Balance at end of period	$	191,727		$	125,545		$	126,427
Reserve for unfunded lending commitments
Balance at beginning of year	$	2,268		$	1,025		$	1,025
Provision for unfunded lending commitments		(170	)		151			1,243
Balance at end of period	$	2,098		$	1,176		$	2,268
Allowance for credit losses
Balance at beginning of year	$	128,695		$	112,688		$	112,688
Provision for credit losses		137,055			26,138			68,568
Loans charged-off		(76,106	)		(16,233	)		(59,408	)
Recoveries of loans previously charged off		4,181			4,128			6,847
Balance at end of period	$	193,825		$	126,721		$	128,695

Note 8 – Goodwill

          The following summarizes the changes in the carrying amount of goodwill related to each of TSFG’s business segments (in thousands) for the period ended June 30, 2008:

	South Carolina Bank			North Carolina Bank			Florida Bank			Other		Total
Balance, December 31, 2007	$	119,267		$	87,961		$	440,538		$	3,237	$	651,003
Reclassification for change in operating segments		(3,085	)		(343	)		(12,651	)		16,079		—
Revised balance, December 31, 2007		116,182			87,618			427,887			19,316		651,003
Goodwill impairment charge		—			—			(188,431	)		—		(188,431	)
Purchase accounting adjustments		—			—			—			728		728
Balance, June 30, 2008	$	116,182		$	87,618		$	239,456		$	20,044	$	463,300

          Effective January 1, 2008, TSFG changed its operating segments to exclude insurance agencies from the geographic banking segments. The insurance line of business is now included in “Other” (see Note 15). As a result, the goodwill balance as of December 31, 2007 has been reclassified for comparability.

          In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), TSFG evaluates its goodwill annually for each reporting unit as of June 30^th. However, the acceleration of credit deterioration in Florida prompted TSFG to perform an interim impairment evaluation of a significant portion of the recorded goodwill as of March 31, 2008. As a result of this evaluation, during first quarter 2008, TSFG recognized goodwill impairment in the Florida banking segment primarily due to increased projected credit costs and a related decrease in projected loan

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

growth, as well as changes in the measurement of segment profitability. The goodwill impairment charge of $188.4 million was recorded in noninterest expense in the consolidated statements of income. The fair value of the Florida reporting unit evaluated for impairment was determined primarily using discounted cash flow models based on internal forecasts and, to a lesser extent, market-based trading and transaction multiples.

          The annual impairment evaluation as of June 30, 2008 indicated that no additional impairment charge was required, and there have been no events or circumstances since that date indicating impairment.

Note 9 – Derivative Financial Instruments and Hedging Activities

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

	June 30, 2008						December 31, 2007
	Fair Value						Fair Value
					Notional Amount						Notional Amount
	Asset		Liability				Asset		Liability
Cash Flow Hedges
Interest rate swaps associated with lending activities	$	21,315	$	—	$	800,000	$	20,114	$	—	$	830,000
Interest rate floor associated with lending activities		5,427		—		200,000		4,531		—		200,000
Fair Value Hedges
Interest rate swaps associated with brokered CDs		2,299		5,166		326,352		672		8,235		988,477
Other Derivatives
Forward foreign currency contracts		1		1		159		5		5		653
Customer swap contracts		6,564		6,640		615,469		5,065		5,065		238,224
Options, interest rate swaps and other		4,240		4,632		142,098		5,807		7,712		161,832
	$	39,846	$	16,439	$	2,084,078	$	36,194	$	21,017	$	2,419,186

          In the three and six months ended June 30, 2008, noninterest income included a gain of $236,000 and $248,000, respectively, for certain derivative activities. In the three and six months ended June 30, 2007, noninterest income included a loss of $1.5 million and $1.4 million, respectively, for certain derivative activities. These amounts include the following: the change in fair value of derivatives that do not qualify for hedge accounting under SFAS 133, as well as the net cash settlement from these interest rate swaps; hedge ineffectiveness for fair value hedges, which totaled a loss of $388,000 and a gain of $246,000, respectively, for the three and six months ended June 30, 2008, and losses of $601,000 and $742,000, respectively, for three and six months ended June 30, 2007; and other miscellaneous items.

Note 10 – Commitments and Contingent Liabilities

Legal Proceedings

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

13

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

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 June 30, 2008, the estimated recourse reserve liability, included in other liabilities, totaled $6.1 million. TSFG will continue to evaluate the reserve level and may make adjustments through earnings as more information becomes known. There can be no guarantee that any liability or cost arising out of this matter will not exceed any established reserves.

Expanded Corporate Facilities

          During 2005, TSFG initiated plans for a “corporate campus” to meet current and future facility needs and serve as the primary headquarters for its banking operations. Through June 30, 2008, TSFG had invested approximately $45 million in the project (which is included in premises and equipment on the consolidated balance sheet as construction in progress) and had entered into additional contractual commitments of approximately $26 million.

Loan Commitments

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

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

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

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

	Outstanding Commitments
	June 30, 2008		December 31, 2007
Loan commitments:
Commercial, financial, agricultural, and other	$	991,057	$	988,962
Commercial secured by real estate		541,053		698,179
Home equity loans		506,393		530,626
Standby letters of credit		225,823		184,529
Documentary letters of credit		3,112		153
Unused business credit card lines		34,258		32,948
Total	$	2,301,696	$	2,435,397

Note 11 – Preferred Stock

          On May 8, 2008, TSFG issued, in the aggregate, 250,000 shares of no par value, mandatory convertible non-cumulative preferred stock (“Preferred Stock”), at a purchase price and liquidation preference of $1,000 per share. Dividends are payable quarterly, if declared by the Board of Directors, at an annual rate of 10%. Each share of Preferred Stock is mandatorily convertible into 153.846 shares of TSFG’s common stock, based on a conversion price of

14

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

$6.50 per share of common stock, on May 1, 2011. On or after July 18, 2010, the Preferred Stock is also automatically convertible if, for a period of 20 consecutive trading days, the closing price of TSFG’s common stock has been at least $21.00 per share. In addition, the Preferred Stock is convertible at the option of the holder before the mandatory conversion events described above.

          The following is a summary of TSFG’s Preferred Stock outstanding as of June 30, 2008:

	Number of shares		Carrying value (in thousands)
Series 2008ND-V		55,562	$	55,562
Series 2008ND-NV		184,718		184,718
Series 2008D-V		2,248		2,248
Series 2008D-NV		7,472		7,472
Total		250,000	$	250,000

          Under the NASDAQ market rules, the Series 2008ND-V and Series 2008D-V (an aggregate of 57,810 shares) became eligible, at the holder’s option, for conversion into TSFG common stock following the special shareholders’ meeting on July 18, 2008 (at which the voting and conversion rights of the Preferred Stock were voted upon and approved). Such right of conversion would have arisen after the shareholders’ meeting, however, even if shareholder approval had not been obtained. As such, these shares were considered common stock equivalents at June 30, 2008 and approximately 8.9 million shares would have been included in computing diluted earnings per share, if the effect had not been antidilutive. Conversion of the Series 2008ND-NV and Series 2008D-NV (an aggregate of 192,190 shares) was contingent upon shareholder approval. Prior to receipt of shareholder approval, the shares were not considered common stock equivalents and thus were excluded from the computation of diluted earnings per share at June 30, 2008. Since shareholder approval was obtained on July 18, 2008, these shares will be considered common stock equivalents and will add approximately 29.6 million shares to the calculation of diluted earnings per share for future periods, unless such shares are considered antidilutive.

          All four series of Preferred Stock are in parity to each other and rank senior to common shares both as to dividend and liquidation preferences. Since July 18, 2008, except when they are entitled to vote as a separate class, the holders of the Preferred Stock are entitled to vote their shares on an as-converted basis with our common stock as a single class. The affirmative vote of two-thirds of the holders of outstanding Preferred Stock (voting as a separate class) is required for approval of any proposed changes in the preferences and special rights of such stock, or for certain acquisitions announced during the first 18 months following the issuance of the Preferred Stock. The Preferred Stock has no participation rights, unless the quarterly cash dividend on TSFG’s common stock is increased above certain thresholds after May 1, 2010. In that event, the Preferred Stock would be entitled to receive additional dividends in proportion to the increase in the common stock dividend. The Preferred Stock is not redeemable and is not subject to any sinking fund.

15

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

Note 12 – Share Information

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net (loss) income	$	(10,932	)	$	17,930	$	(212,224	)	$	38,448
Preferred stock dividends		(5,833	)		—		(5,833	)		—
Net (loss) income available to common shareholders (numerator)	$	(16,765	)	$	17,930	$	(218,057	)	$	38,448
Basic
Average common shares outstanding (denominator)		72,611,024			74,050,115		72,530,399			74,390,456
(Loss) earnings per share	$	(0.23	)	$	0.24	$	(3.01	)	$	0.52
Diluted
Average common shares outstanding		72,611,024			74,050,115		72,530,399			74,390,456
Average dilutive potential common shares		—			346,976		—			424,465
Average diluted shares outstanding (denominator)		72,611,024			74,397,091		72,530,399			74,814,921
(Loss) earnings per share	$	(0.23	)	$	0.24	$	(3.01	)	$	0.51

          For the three and six months ended June 30, 2008, options to purchase an additional 3.7 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect. Likewise, for the three and six months ended June 30, 2007, options to purchase an additional 2.2 million and 2.1 million shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

          Also excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2008 because of their antidilutive effect were 8.9 million shares of common stock related to Preferred Stock and 656,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs.

Note 13 – Fair Value Disclosures

          Effective January 1, 2008, TSFG adopted SFAS 157 (for its financial assets and liabilities) and SFAS 159. SFAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157 requires, among other things, the Company to maximize the use of observable inputs and minimize the use of unobservable inputs in its fair value measurement techniques. The adoption of SFAS 157 resulted in no change to January 1, 2008 retained earnings. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. TSFG elected the fair value option for its portfolio of mortgage loans held for sale in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the value of derivative instruments used to economically hedge them. As a result of its election, TSFG recorded the following entry to opening retained earnings (in thousands):

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

	Opening Balance Sheet January 1, 2008		Adoption Net Gain (Loss)			Adjusted Balance Sheet January 1, 2008
Mortgage loans held for sale	$	17,867	$	92		$	17,959
Pretax cumulative effect of adoption of the fair value option				92
Tax impact				(32	)
Cumulative effect of adoption of the fair value option (increase to retained earnings)			$	60

          Adoption of these standards did not have a significant impact on earnings for the three and six months ended June 30, 2008.

          SFAS 157 defines fair value 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. SFAS 157 also establishes a 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; or other inputs that are observable or 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, corporate bonds, certain derivative contracts, and mortgage loans held for sale.

• 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, certain available for sale securities included in this category are not readily marketable and may only be redeemed with the issuer at par. This category also includes certain derivative contracts for which independent pricing information is not available for a significant portion of the underlying assets.

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

	June 30, 2008
	Total		Level 1		Level 2		Level 3
Securities available for sale	$	1,987,232	$	159,247	$	1,787,794	$	40,191
Loans held for sale		21,871		—		21,871		—
Derivative assets		39,846		—		33,166		6,680
Total	$	2,048,949	$	159,247	$	1,842,831	$	46,871
Derivative liabilities	$	16,439	$	—	$	11,787	$	4,652

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

          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 June 30, 2008						Six Months Ended June 30, 2008
	Securities Available For Sale			Net Derivative Asset (Liability)			Securities Available For Sale		Net Derivative Asset (Liability)
Balance at beginning of period	$	41,897		$	2,562		$	37,735	$	370
Total net (losses) gains included in net income		—			(150	)		—		2,226
Purchases, sales, issuances and settlements, net		(1,706	)		(384	)		2,456		(568	)
Balance at end of period	$	40,191		$	2,028		$	40,191	$	2,028
Net (losses) gains included in net income relating to assets held at June 30, 2008	$	—		$	(150	)	$	—	$	2,226

          Also, we 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 in the three and six months ended June 30, 2008 that were still held in the balance sheet at quarter 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 quarter end (in thousands).

									Total gains (losses)
	Carrying value at June 30, 2008								Three months ended June 30, 2008			Six months ended June 30, 2008
	Total		Level 1		Level 2		Level 3
Loans held for investment (1)	$	155,111	$	—	$	—	$	155,111	$	(30,260	)	$	(60,233	)

⁽¹⁾ Represents carrying value and related write-downs of loans for which adjustments are based on the appraised value of the collateral.

          During the six months ended June 30, 2008, TSFG also measured certain nonfinancial assets using fair value on a nonrecurring basis, including portions of goodwill and certain foreclosed assets. In accordance with FSP 157-2, we have delayed application of the provisions of SFAS 157 to those measurements, and as such they are not included in the table above.

          Fair Value Option

          At June 30, 2008, loans held for sale for which the fair value option was elected had an aggregate fair value and outstanding principal balance of $21.9 million. Interest income on these loans is calculated based on the note rate of the loan and is recorded in interest income in the income statement. During the three and six months ended June 30, 2008, net losses resulting from changes in fair value of these loans of $55,000 and $74,000, respectively, were recorded in mortgage banking income. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

Note 14 – Income Taxes

          The effective income tax rate as a percentage of pretax income was 42.4% and 10.4%, respectively, for the three and six months ended June 30, 2008. Income tax expense differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax income for the three and six months ended June 30,

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

2008 primarily as a result of the impact of the nondeductible goodwill impairment, other nontaxable and nondeductible items, and management’s projections.

Note 15 – Business Segments

          South Carolina Bank, North Carolina Bank, and Florida Bank are TSFG’s primary reportable segments for management financial reporting. Effective January 1, 2008, TSFG began to exclude its insurance operations from its banking segments due to a change in management responsibility and changed its allocation methodology for provision for credit losses and noninterest expenses. Results for prior periods have been restated for comparability. Each geographic bank segment consists of commercial and consumer lending and full service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as treasury services, merchant services, wealth management and mortgage banking services. The “Other” column includes the investment securities portfolio, indirect lending, treasury, parent company activities, bank-owned life insurance, net intercompany eliminations, various nonbank subsidiaries (including insurance subsidiaries), equity investments, and certain other activities not currently allocated to the aforementioned segments.

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

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

	South Carolina Bank		North Carolina Bank			Florida Bank			Other			Total
Three Months Ended June 30, 2008
Net interest income before inter-segment income (expense)	$	37,355	$	16,879		$	33,100		$	12,871		$	100,205
Inter-segment interest income (expense)		3,802		(3,046	)		(176	)		(580	)		—
Net interest income		41,157		13,833			32,924			12,291			100,205
Provision for credit losses		6,493		7,629			41,284			8,357			63,763
Noninterest income		12,124		2,639			7,934			9,493			32,190
Other noninterest expenses - direct (1)		17,268		5,837			16,439			48,076			87,620
Contribution before allocation		29,520		3,006			(16,865	)		(34,649	)		(18,988	)
Noninterest expenses - allocated (2)		18,679		5,313			15,763			(39,755	)		—
Contribution before income taxes	$	10,841	$	(2,307	)	$	(32,628	)	$	5,106			(18,988	)
Income tax expense													(8,056	)
Net income												$	(10,932	)
Six Months Ended June 30, 2008
Net interest income before inter-segment income (expense)	$	73,155	$	35,092		$	68,376		$	16,288		$	192,911
Inter-segment interest income (expense)		10,423		(6,771	)		1,080			(4,732	)		—
Net interest income		83,578		28,321			69,456			11,556			192,911
Provision for credit losses		14,218		16,048			97,624			9,165			137,055
Noninterest income		23,756		4,958			14,845			19,547			63,106
Goodwill impairment		—		—			188,431			—			188,431
Other noninterest expenses - direct (1)		32,686		11,013			31,013			92,656			167,368
Contribution before allocation		60,430		6,218			(232,767	)		(70,718	)		(236,837	)
Noninterest expenses - allocated (2)		37,449		10,697			31,884			(80,030	)		—
Contribution before income taxes	$	22,981	$	(4,479	)	$	(264,651	)	$	9,312			(236,837	)
Income tax expense													(24,613	)
Net income												$	(212,224	)
June 30, 2008
Total assets	$	4,194,967	$	1,850,015		$	3,939,549		$	3,992,339		$	13,976,870
Total loans held for investment		4,004,049		1,761,563			3,677,743			1,032,376			10,475,731
Total deposits		3,325,003		1,101,587			2,999,039			2,460,740			9,886,369

(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.

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

	South Carolina Bank			North Carolina Bank			Florida Bank			Other			Total
Three Months Ended June 30, 2007
Net interest income before inter-segment income (expense)	$	43,395		$	21,238		$	41,607		$	(9,719	)	$	96,521
Inter-segment interest income (expense)		(72	)		(6,902	)		(3,168	)		10,142			—
Net interest income		43,323			14,336			38,439			423			96,521
Provision for credit losses		1,297			12,612			1,883			1,333			17,125
Noninterest income		12,267			2,312			7,251			5,853			27,683
Noninterest expenses - direct (1)		15,286			4,899			13,851			46,115			80,151
Contribution before allocation		39,007			(863	)		29,956			(41,172	)		26,928
Noninterest expenses - allocated (2)		18,059			6,141			14,597			(38,797	)		—
Contribution before income taxes	$	20,948		$	(7,004	)	$	15,359		$	(2,375	)		26,928
Income tax expense														8,998
Net income													$	17,930
Six Months Ended June 30, 2007
Net interest income before inter-segment income (expense)	$	84,879		$	41,397		$	81,516		$	(16,733	)	$	191,059
Inter-segment interest income (expense)		1,009			(13,408	)		(4,596	)		16,995			—
Net interest income		85,888			27,989			76,920			262			191,059
Provision for credit losses		4,167			12,471			6,342			3,158			26,138
Noninterest income		23,324			4,410			14,077			12,842			54,653
Noninterest expenses - direct (1)		30,700			9,900			28,950			92,078			161,628
Contribution before allocation		74,345			10,028			55,705			(82,132	)		57,946
Noninterest expenses - allocated (2)		35,740			12,247			29,500			(77,487	)		—
Contribution before income taxes	$	38,605		$	(2,219	)	$	26,205		$	(4,645	)		57,946
Income tax expense														19,498
Net income													$	38,448
June 30, 2007
Total assets	$	3,920,047		$	1,737,408		$	3,651,893		$	4,830,327		$	14,139,675
Total loans held for investment		3,800,857			1,712,220			3,541,956			974,195			10,029,228
Total deposits		3,564,506			1,159,407			2,997,327			2,364,566			10,085,806

(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.

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

          The following discussion and analysis are presented to assist in understanding the financial condition, changes in financial condition, results of operations, and cash flows of The South Financial Group, Inc. and its subsidiaries (collectively, “TSFG”), except where the context requires otherwise. TSFG may also be referred to herein as “we”, “us”, or “our.” This discussion should be read in conjunction with the consolidated financial statements appearing in this report as well as the Annual Report of TSFG on Form 10-K for the year ended December 31, 2007. Results of operations for the three and six months ended June 30, 2008 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

	Page
Website Availability of Reports Filed with the Securities and Exchange Commission	22
Forward-Looking Statements	22
Non-GAAP Financial Information	23
Overview	23
Critical Accounting Policies and Estimates	25
Expanded Corporate Facilities	28
Balance Sheet Review	28
Earnings Review	48
Enterprise Risk Management	54
Off-Balance Sheet Arrangements	56
Liquidity	56
Recently Adopted/Issued Accounting Pronouncements	58

Website Availability of Reports Filed with the Securities and Exchange Commission

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

Forward-Looking Statements

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

• risks from changes in economic, monetary policy, and industry conditions;

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

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

• risks inherent in making loans including repayment risks and changes in the value of collateral;

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

• continued deterioration in the overall credit environment;

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

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

• loss of deposits due to perceived capital weakness or otherwise;

• availability of wholesale funding;

• adequacy of capital and future capital needs;

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• fluctuations in consumer spending;

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

• continued availability of senior management;

• technological changes;

• ability to increase market share;

• income and expense projections, ability to control expenses, and expense reduction initiatives;

• changes in the compensation, benefit, and incentive plans, including compensation accruals;

• risks associated with income taxes, including the potential for adverse adjustments;

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

• 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 accounting policies and practices;

• changes in the evaluation of the effectiveness of our hedging strategies;

• changes in regulatory actions, including the potential for adverse adjustments;

• changes, costs, and effects of litigation, and environmental remediation; and

• recently-enacted or proposed legislation.

          Such forward-looking statements speak only as of the date on which such statements are made and shall be deemed to be updated by any future filings made by TSFG with the SEC. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events. In addition, certain statements in future filings by TSFG with the SEC, in press releases, and in oral and written statements made by or with the approval of TSFG, which are not statements of historical fact, constitute forward-looking statements.

Non-GAAP Financial Information

          This report also contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles (“GAAP”). TSFG’s management uses these non-GAAP measures to analyze TSFG’s performance. In particular, TSFG presents certain designated net interest income amounts on a tax-equivalent basis (in accordance with common industry practice). Management believes that these presentations of tax-equivalent net interest income aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. In discussing its deposits, TSFG presents information summarizing its funding generated by customers using the following definitions: “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. 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 $14.0 billion in total assets and 180 branch offices in South Carolina, Florida, and North Carolina at June 30, 2008. Founded in 1986, TSFG focuses on attractive Southeastern banking markets with long-term growth potential. TSFG operates Carolina First Bank, which conducts banking operations in North Carolina and South Carolina (as Carolina First Bank), in Florida (as Mercantile Bank), and on the Internet (as Bank Caroline). At June 30, 2008, approximately 45% of TSFG’s customer deposits (total deposits less brokered deposits) were in South Carolina, 40% were in Florida, and 15% were in North Carolina.

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

          TSFG reported a net loss available to common shareholders of $218.1 million, or $(3.01) per diluted share, for the first six months of 2008, compared with net income of $38.4 million, or $0.51 per diluted share, for the first six months of 2007. The net loss was primarily due to a $137.1 million provision for credit losses resulting from continued credit deterioration in the Florida market and a $188.4 million goodwill impairment charge resulting from a decrease in value of the Florida banking segment.

          At June 30, 2008, nonperforming assets as a percentage of loans held for investment and foreclosed property increased to 2.30% from 0.88% at December 31, 2007 and 0.45% at June 30, 2007. The increase in nonperforming assets was primarily attributable to accelerating deterioration in residential construction and development-related loans, principally in Florida markets. For the six months ended June 30, 2008, annualized net loan charge-offs totaled 1.40% of average loans held for investment, compared to 0.53% for the year ended December 31, 2007. TSFG’s provision for credit losses increased to $137.1 million for the first six months of 2008 compared to $26.1 million for the first six months of 2007.

          In order to strengthen its capital and liquidity position, TSFG issued $250.0 million of mandatory convertible non-cumulative preferred stock on May 8, 2008, with net proceeds of $239.0 million. The preferred securities pay dividends at an annual rate of 10%, have a conversion price of $6.50 per common share, and will convert into approximately 38.5 million common shares on or before May 1, 2011.

          Tax-equivalent net interest income was $195.7 million for the first six months of 2008, compared to $194.3 million for the first six months of 2007. The net interest margin increased to 3.16% for the first half of 2008 from 3.10% for the first half of 2007. This margin improvement is partly due to an earning asset mix shift into loans and away from securities and the issuance of preferred stock. Federal Reserve actions to reduce the targeted fed funds rate by 225 basis points during the first half of 2008 led to decreased earning asset yields and a decline in average funding costs.

          Noninterest income totaled $63.1 million for the first six months of 2008, compared to $54.6 million for the first six months of 2007. The increase in noninterest income was largely attributable to a gain on mandatory partial redemption of shares received in the Visa IPO of $1.9 million and a net gain on securities of $2.3 million in the first half of 2008 versus a $3.6 million net loss during the first half of 2007. In addition, during the first six months of 2008, TSFG recorded a net gain on certain derivative activities of $248,000 compared to a net loss of $1.4 million in the first six months of 2007. TSFG’s merchant processing income (net) and customer fee income for the first six months of 2008 increased over the prior year amounts.

          Noninterest expenses totaled $355.8 million for the first six months of 2008, compared to $161.6 for the six months ended June 30, 2007. This increase was primarily due to the $188.4 million goodwill impairment charge in the first quarter of 2008. The increase in noninterest expenses also included higher advertising and business development expenses, higher regulatory assessments, higher loan collection and monitoring expenses, and branch acquisition and conversion costs related to the acquisition of five branches in Orlando, partially offset by declines in professional fees.

          TSFG continues to focus on improving its balance sheet mix by increasing the relative level and mix of customer assets and liabilities. Due to the reduction of investment securities, average loans as a percentage of average earning assets increased to 83.1% for the first six months of 2008 from 78.5% for the first six months of 2007. On the funding side, average customer funding (which includes deposits less brokered deposits plus customer sweep accounts) as a percentage of average total funding decreased to 67.0% for the first six months of 2008, down from 67.3% for the first six months of 2007.

          Using period-end balances, TSFG’s loans held for investment at June 30, 2008 increased 2.6% from December 31, 2007, and total deposit balances increased 1.0%. Customer funding (deposits less brokered deposits plus customer sweep accounts) decreased 1.8% from December 31, 2007 to June 30, 2008.

          TSFG’s tangible equity to tangible asset ratio increased to 7.94% at June 30, 2008, from 6.61% at December 31, 2007, due primarily to the issuance of preferred stock.

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Critical Accounting Policies and Estimates

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

     Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

          The allowance for loan losses (“Allowance”) represents management’s estimate of probable incurred losses in the lending portfolio. 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 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.

          Assessing the adequacy of the Allowance is a process that requires considerable judgment. Management considers the period-end Allowance appropriate and adequate to cover probable incurred losses in the loan portfolio. However, management’s judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove 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 methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the Allowance described above, adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

          A more detailed discussion of TSFG’s Allowance and reserve for unfunded lending commitments is included in the “Balance Sheet Review – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” section.

     Derivatives and Hedging Activities

          TSFG uses derivative financial instruments to reduce exposure to changes in interest rates and market prices for financial instruments. The application of hedge accounting requires judgment in the assessment of hedge effectiveness, identification of similarly hedged item groupings, and measurement of changes in the fair value of derivatives and related hedged items. TSFG believes that its methods for addressing these judgmental areas are reasonable and in accordance with generally accepted accounting principles in the United States. See “Derivative Financial Instruments” and “Fair Value of Certain Financial Instruments” for additional information regarding derivatives.

     Fair Value of Certain Financial Instruments

          Effective January 1, 2008, TSFG adopted SFAS No. 157 (“SFAS 157”), “Fair Value Measurements” for its financial assets and liabilities and SFAS No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities” with no significant impact on its Consolidated Financial Statements. These standards define fair

25

value, establish guidelines for measuring fair value, and allow an irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

          SFAS 157 defines fair value 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. SFAS 157 also establishes a 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. Fair value is based on quoted market prices for the same or similar instruments, adjusted for any differences in terms. If market values are not readily available, then the fair value is estimated. For example, when TSFG has an investment in a privately held company, TSFG’s management evaluates the fair value of these investments based on the entity’s ability to generate cash through its operations, obtain alternative financing, and subjective factors. Modeling techniques, such as discounted cash flow analyses, which use assumptions for interest rates, credit losses, prepayments, and discount rates, are also used to estimate fair value if market values are not readily available.

          TSFG carries its available for sale securities, mortgage loans held for sale, and derivatives at fair value. The unrealized gains or losses, net of income tax effect, on available for sale securities and the effective component of derivatives qualifying as cash flow hedges are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. The fair value adjustments for mortgage loans held for sale and derivative financial instruments not qualifying as cash flow hedges are included in earnings. In addition, for hedged items in a fair value hedge, changes in the hedged item’s fair value attributable to the hedged risk are also included in noninterest income. No fair value adjustment is allowed for the related hedged asset or liability in circumstances where the derivatives do not meet the requirements for hedge accounting under SFAS No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities.”

          TSFG periodically evaluates its investment securities portfolio for other-than-temporary impairment. If a security is considered to be other-than-temporarily impaired, the related unrealized loss is charged to operations, and a new cost basis is established. Factors considered include the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to period-end, and forecasted performance of the security issuer. Impairment is considered other-than-temporary unless TSFG has both the intent and ability to hold the security until the fair value recovers and evidence supporting the recovery outweighs evidence to the contrary. However, for equity securities, which typically do not have a contractual maturity with a specified cash flow on which to rely, the ability to hold an equity security indefinitely, by itself, does not allow for avoidance of other-than-temporary impairment.

          The fair values of TSFG’s investments in privately held limited partnerships, corporations and LLCs are not readily available. These investments are accounted for using either the cost or the equity method of accounting. The accounting treatment depends upon TSFG’s percentage ownership and degree of management influence. TSFG’s management evaluates its investments in limited partnerships and LLCs quarterly for impairment based on the investee’s ability to generate cash through its operations, obtain alternative financing, and subjective factors. There are inherent risks associated with TSFG’s investments in privately held limited partnerships, corporations and LLCs, which may result in income statement volatility in future periods.

          The process for valuing financial instruments, particularly those with little or no liquidity, is subjective and involves a high degree of judgment. Small changes in assumptions can result in significant changes in valuation. Valuations are subject to change as a result of external factors beyond our control that have a substantial degree of uncertainty. The inherent risks associated with determining the fair value of a financial instrument may result in income statement volatility in future periods.

          We 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 example, nonrecurring fair value adjustments to loans held for investment reflect full or partial write-downs that are based on the loan’s observable fair value or the fair value of the underlying collateral in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.”

          See Note 13 to the Consolidated Financial Statements for more information on fair value measurements for the three and six months ended June 30, 2008.

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     Income Taxes

          Management uses certain assumptions and estimates in determining income taxes payable or refundable, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. Management exercises considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are re-evaluated on a continual basis as regulatory and business factors change.

          No assurance can be given that either the tax returns submitted by management or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service (“IRS”). TSFG is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

          TSFG adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. Under FIN 48, TSFG will only include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While TSFG supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis that considers all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position. 

     Share-Based Compensation

          TSFG measures compensation cost for share-based awards at fair value and recognizes compensation over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. TSFG considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates. For performance-based awards, TSFG estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vesting date.

     Accounting for Acquisitions

          TSFG has grown its operations, in part, through bank and non-bank acquisitions. Since 2000, and in accordance with SFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” TSFG has used the purchase method of accounting to account for acquisitions. Under this method, TSFG is required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal, or other valuation techniques. These estimates also include the establishment of various accruals for planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill or other intangible assets, which are subject to periodic impairment tests, on an annual basis, or more often, if events or circumstances indicate that there may be impairment. These tests, which TSFG performed annually as of June 30th since 2002, use estimates such as projected cash flows, discount rates, time periods, and comparable market values in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as well as the determination of the amortization period for such intangible assets.

          TSFG evaluates for goodwill impairment by determining the fair value for each reporting unit and comparing it to the carrying amount. If the carrying amount exceeds its fair value, the potential for impairment exists, and a second step of impairment testing is required. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities as if the reporting unit had been acquired in a business combination at the date of the impairment test. If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value.

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          During first quarter 2008, the acceleration of credit deterioration in Florida prompted TSFG to perform an updated interim impairment evaluation of a significant portion of the recorded goodwill as of March 31, 2008. As a result of this evaluation, during first quarter 2008, TSFG recognized goodwill impairment in the Florida banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. See “Goodwill” for additional discussion. The annual evaluation performed as of June 30, 2008 indicated that no additional impairment charge was required as of that date.

          For several previous acquisitions, TSFG has agreed to issue earn-out payments based on the achievement of certain performance targets. Upon paying the additional consideration, TSFG would record additional goodwill.

          TSFG’s other intangible assets have an estimated finite useful life and are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. TSFG periodically reviews its other intangible assets to determine whether there have been any events or circumstances which indicate the recorded amount is not recoverable from projected undiscounted cash flows. If the projected undiscounted net operating cash flows are less than the carrying amount, a loss is recognized to reduce the carrying amount to fair value, and when appropriate, the amortization period is also reduced.

Expanded Corporate Facilities

          During 2007, TSFG started construction on its Expanded Corporate Facilities. Through June 30, 2008, TSFG had invested approximately $45 million in the project (which has been capitalized in premises and equipment on the consolidated balance sheet as construction in progress) and had entered into additional contractual commitments of approximately $26 million. The initial phase of the facilities is expected to be placed in service in the first half of 2009.

Balance Sheet Review

     Loans

          TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At June 30, 2008, outstanding loans totaled $10.5 billion, which equaled 106.2% of total deposits (140.0% of customer deposits) and 75.1% of total assets. Loans held for investment increased $262.3 million, or 2.6%, to $10.5 billion at June 30, 2008 from $10.2 billion at December 31, 2007. The major components of the loan portfolio were commercial loans, commercial real estate loans, and consumer loans (including both direct and indirect loans). Substantially all loans were to borrowers located in TSFG’s market areas in South Carolina, Florida, and North Carolina. At June 30, 2008, approximately 7% of the portfolio was unsecured.

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

          TSFG generally sells a majority of its residential mortgage loans in the secondary market. TSFG also retains certain of its mortgage loans in its held for investment portfolio as part of its overall balance sheet management strategy. Loans held for sale increased to $21.9 million at June 30, 2008 from $17.9 million at December 31, 2007, primarily due to timing of mortgage sales. Effective January 1, 2008, TSFG elected to account for its mortgage loans held for sale at fair value pursuant to SFAS 159.

          Table 1 summarizes outstanding loans by collateral type for real estate secured loans and by borrower type for all other loans. Collateral type represents the underlying assets securing the loan, rather than the purpose of the loan. Table 2 provides a stratification of the loan portfolio by loan purpose, which is more meaningful in terms of portfolio management. This presentation differs from that in Table 1, which stratifies the portfolio by collateral type and borrower type, consistent with external regulatory reporting.

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Table 1

Loan Portfolio Composition Based on Collateral Type or Borrower Type

(dollars in thousands)

	June 30, 2008				December 31, 2007
	2008		2007
Commercial, financial and agricultural	$	2,389,048	$	2,285,920	$	2,309,294
Real estate - construction (1)		1,827,861		1,738,387		1,763,365
Real estate - residential mortgages (1-4 family)		1,521,974		1,388,485		1,390,729
Commercial secured by real estate (1)		3,909,030		3,819,818		3,946,440
Consumer		827,818		796,618		803,592
Loans held for investment	$	10,475,731	$	10,029,228	$	10,213,420

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

Table 2

Loan Portfolio Composition Based on Loan Purpose

(dollars in thousands)

	June 30, 2008						December 31, 2007
	2008			2007
Commercial Loans
Commercial and industrial (1)	$	2,891,007		$	2,569,628		$	2,742,863
Owner - occupied real estate (2)		1,183,618			961,806			1,070,376
Commercial real estate (3)		4,162,248			4,258,837			4,158,384
		8,236,873			7,790,271			7,971,623
Consumer Loans
Indirect - sales finance		728,433			684,053			699,014
Consumer lot loans		266,242			350,539			311,386
Direct retail (1)		99,951			108,876			107,827
Home equity (1)		781,120			742,430			754,158
		1,875,746			1,885,898			1,872,385
Mortgage Loans (1)		363,112			353,059			369,412
Total loans held for investment	$	10,475,731		$	10,029,228		$	10,213,420
Percentage of Loans Held for Investment
Commercial and industrial		27.6	%		25.6	%		26.9	%
Owner - occupied real estate (2)		11.3			9.6			10.5
Commercial real estate		39.7			42.5			40.7
Consumer		17.9			18.8			18.3
Mortgage		3.5			3.5			3.6
Total		100.0	%		100.0	%		100.0	%

(1)	In second quarter 2008, TSFG reclassified certain loan balances. Amounts presented for prior periods have been reclassified to conform to the current presentation.
(2)	In Table 1, these loans are included in the “Real estate – construction” and “Commercial secured by real estate” categories, which also include loans to non-real estate industry borrowers.
(3)	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 loans are loans to finance short-term and intermediate-term cash needs of businesses. Typical needs include the need to finance seasonal or other temporary cash flow imbalances, growth in working assets created by sales growth, and purchases of equipment and vehicles. Credit is extended in the form of short-term single

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payment loans, lines of credit for periods up to a year, revolving credit facilities for periods up to five years, and amortizing term loans for periods up to ten years.

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

          Commercial real estate (“CRE”) loans are 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. During second quarter 2008, TSFG ceased originating indirect loans in Florida, and plans to allow this portion of the portfolio to run off over its remaining life.

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

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

          Home equity loans are loans to homeowners, secured primarily by junior mortgages on their primary residences, to finance personal, family, or household needs. These loans may be in the form of amortizing loans or lines of credit with terms up to 15 years. 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 June 30, 2008, TSFG’s house lending limit was $35 million, and 11 credit relationships totaling $475.8 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 $455.0 million, or 4.3% of total loans held for investment at June 30, 2008, compared to 4.2% of total loans held for investment at December 31, 2007.

          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 June 30, 2008, the loan portfolio included commitments totaling $1.3 billion in SNCs. Outstanding borrowings under these commitments totaled $709.1 million at June 30, 2008, increasing from $660.7 million at December 31, 2007. The largest commitment was $40.0 million and the largest outstanding balance was $27.8 million at June 30, 2008. In addition to internal limits that control our credit exposure to individual borrowers, we have established limits on the size of the overall SNC portfolio, and have established a sub-limit for total credit exposure to borrowers located outside of our markets. All of our SNC relationships are underwritten and managed in a centralized Corporate Banking Group staffed with experienced bankers. Our strategy targets borrowers whose management teams are well known to us and whose risk profile is above average. Our ongoing strategic plan is to maintain diversity in our portfolio and expand the profitability of our relationships through the sale of non-credit products.

     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. We attempt to manage the risk attributable to the concentration in commercial real estate loans by focusing our lending on markets with which we are familiar and on borrowers with proven track records whom we believe possess the financial means to weather adverse market conditions.

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Also, management believes that diversification by geography, property type, and borrower partially diversifies the risk of loss in its commercial real estate loan portfolio.

          TSFG’s commercial real estate products include the following:

CRE Product	Description
Completed income property	Loans to finance a variety of income producing properties, including apartments, retail centers, hotels, office buildings and industrial facilities
Residential A&D	Loans to develop land into residential lots
Commercial A&D	Loans to finance the development of raw land into sellable commercial lots
Commercial construction	Loans to finance the construction of various types of income property
Residential construction	Loans to construct single family housing; primarily to residential builders
Residential condo	Loans to construct or convert residential condominiums
Undeveloped land	Loans to acquire land for resale or future development

          Underwriting policies dictate the loan-to-value (“LTV”) limitations for commercial real estate loans. Table 3 presents selected characteristics of commercial real estate loans by product type.

Table 3

Selected Characteristics of Commercial Real Estate Loans

(dollars in thousands)

	June 30, 2008
	Policy LTV		Weighted Average Time to Maturity (in months)	Weighted Average Loan Size		Largest Ten Total O/S
Completed income property	85	%	46.1	$	472	$	132,284
Residential A&D	75		9.9		724		126,546
Commercial A&D	75		13.0		817		81,375
Commercial construction	80		29.1		2,098		135,431
Residential construction	80		11.4		344		73,848
Residential condo	80		8.8		1,478		140,660
Undeveloped land	65		11.1		718		82,625
Overall			29.6	$	583	$	772,770

          In addition to LTV limitations, other commercial real estate management processes are as follows:

          Project Hold Limits. TSFG has implemented project hold limits (which represent the maximum amount that TSFG will hold in its portfolio by project) tiered by the underlying risk. These project limits act to encourage the appropriate amount of borrower and geographic granularity within the portfolio. Since the project limits vary by grade, TSFG attempts to reduce the exposure in correlation to the amount of assigned risk inherent in the project.

          Construction Advances. TSFG monitors construction advances on all construction projects greater than $1 million to ensure inspections are properly obtained and advances are consistent with the construction budget. The appropriateness of the construction budget is part of the underwriting package and considered during the approval process. The monitoring is administered by the centralized Construction Loan Administration department on an ongoing basis.

          Quarterly Project Reviews. On a quarterly basis, each commercial real estate loan greater than $5 million is reviewed as part of a large project review process. Risk Management and the Relationship Manager discuss recent sales activity, local market absorption rates and the progress of each transaction in order to ensure proper internal risk rating and borrower strategy.

          Appraisal Policies. It is TSFG’s policy to comply with Interagency Appraisal and Evaluation Guidelines as issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the “Agencies”). These guidelines address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions and provide guidance to both examiners and regulated institutions about prudent appraisal and evaluation

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programs. Under the Agencies’ appraisal regulations, the appraiser is selected and engaged directly by TSFG or its agent. Additionally, because the appraisal and evaluation process is an integral component of the credit underwriting process, these processes should be isolated from influence by our loan production process. TSFG orders and reviews all appraisals for loans over a set threshold through a centralized review function.

          Although the Agencies’ appraisal regulations exempt certain categories of real estate-related financial transactions from the appraisal requirements, most real estate transactions over $250,000 are considered federally regulated transactions and thus require appraisals. The Agencies allow us to use an existing appraisal or evaluation to support a subsequent transaction, if we document that the existing estimate of value remains valid. Criteria for determining whether an existing appraisal or evaluation remains valid will vary depending upon the condition of the property and the marketplace, and the nature of any subsequent transaction. Factors that could cause changes to originally reported values include: the passage of time; the volatility of the local market; the availability of financing; the inventory of competing properties; improvement to, or lack of maintenance of, the subject property or competing surrounding properties; changes in zoning; or environmental contamination.

          While the Agencies’ appraisal regulations generally allow appropriate evaluations of real estate collateral in lieu of an appraisal for loan renewals and refinancing, in certain situations an appraisal is required. If new funds are advanced over reasonable closing costs, we would be expected to obtain a new appraisal for the renewal of an existing transaction when there is a material change in market conditions or the physical aspects of the property that threatens our real estate collateral protection.

          A reappraisal would not be required when we advance funds to protect our interest in a property, such as to repair damaged property, because these funds should be used to restore the damaged property to its original condition. If a loan workout involves modification of the terms and conditions of an existing credit, including acceptance of new or additional real estate collateral, which facilitates the orderly collection of the credit or reduces our risk of loss, a reappraisal or reevaluation may be prudent, even if it is obtained after the modification occurs.

          TSFG’s policy is to order new appraisals in the following circumstances:

• Funds are being advanced to increase the loan above the originally committed loan amount and the appraisal is more than 18 months old;

• Loan is downgraded to substandard or worse and the appraisal is more than three years old or significant adverse changes have occurred in the market where the property is located;

• Loan is downgraded to watch and the appraisal is more than five years old or significant adverse changes have occurred in the market where the property is located;

• Loan is restructured to advance additional funds or extend the original amortization term and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located;

• Property is being cross-pledged to another loan (other than an abundance of caution) and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located.

          Credit Officers and Special Assets Officers make the final determination of whether an updated appraisal is required and the timing of the updated appraisal, as part of their approval and portfolio management responsibilities.

          Stress Testing. TSFG has implemented a Dual Risk Rating system with nine risk scorecards. The Risk Rating system was launched in December 2007, and fully implemented by March 31, 2008. TSFG expects to begin stressing historical risk ratings following proper validation of assignments and migration studies.

          Late in first quarter 2008, the land portfolio in Florida began to exhibit indicators of distress which prompted additional analysis of the existing portfolio and potential losses based on existing loan to value ratios and anticipated default probabilities. This analysis is further discussed in “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” below. The allowance for loan losses was increased by approximately $27 million during the first half of 2008 as a result of this analysis.

          Table 4 presents the commercial real estate portfolio by geography, while Table 5 presents the commercial real estate portfolio by geography and property type. Commercial real estate nonaccruals, past dues, and net charge-offs are

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presented in Tables 7, 8, and 12, respectively. TSFG monitors trends in these categories in order to evaluate the possibility of higher credit risk in its commercial real estate portfolio.

Table 4

Commercial Real Estate Loans by Geographic Diversification ⁽¹⁾

(dollars in thousands)

	June 30, 2008					December 31, 2007
	Balance		% of Total CRE			Balance		% of Total CRE
Western North Carolina (Hendersonville/Asheville)	$	851,873		20.5	%	$	868,226		20.9	%
Tampa Bay Florida		501,274		12.0			565,917		13.6
South Carolina, exluding Coastal:
Upstate South Carolina (Greenville)		419,375		10.1			400,936		9.6
Midlands South Carolina (Columbia)		262,484		6.3			300,414		7.2
Greater South Charlotte South Carolina (Rock Hill)		152,899		3.7			134,166		3.2
Coastal South Carolina:
North Coastal South Carolina (Myrtle Beach)		327,735		7.9			297,075		7.2
South Coastal South Carolina (Charleston)		297,383		7.1			231,881		5.6
North Florida:
Northeast Florida (Jacksonville)		303,577		7.3			327,877		7.9
North Central Florida		314,608		7.5			301,485		7.3
Central Florida:
Central Florida (Orlando)		289,804		7.0			278,416		6.7
Marion County, Florida (Ocala)		175,560		4.2			168,054		4.0
South Florida (Ft. Lauderdale)		265,676		6.4			283,937		6.8
Total commercial real estate loans	$	4,162,248		100.0	%	$	4,158,384		100.0	%

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

Note: At June 30, 2008 and December 31, 2007, average loan size for commercial real estate loans totaled $583,000 and $557,000, respectively.

Table 5

Commercial Real Estate Loans by Geography and Product Type

(dollars in thousands)

	June 30, 2008 Commercial Real Estate Loans by Geography
	SC, Excl Coastal			Coastal SC			Western NC			Central FL			North FL			South FL			Tampa Bay			Total CRE			% of LHFI
Commercial Real Estate Loans by Product Type
Completed income property	$	415,726		$	276,938		$	447,678		$	194,812		$	352,039		$	150,295		$	199,102		$	2,036,590			19.5	%
Residential A&D		108,986			79,209			174,272			77,549			87,618			5,001			88,398			621,033			5.9
Commercial A&D		46,706			25,985			44,853			26,705			12,149			13,298			46,696			216,392			2.1
Commercial construction		146,692			47,660			36,970			42,915			42,180			15,142			27,173			358,732			3.4
Residential construction		54,369			39,336			65,612			33,062			41,786			12,116			16,126			262,407			2.5
Residential condo		23,893			108,543			10,379			11,189			6,170			22,487			40,589			223,250			2.1
Undeveloped land		38,386			47,447			72,109			79,132			76,243			47,337			83,190			443,844			4.2
Total CRE Loans	$	834,758		$	625,118		$	851,873		$	465,364		$	618,185		$	265,676		$	501,274		$	4,162,248			39.7	%
CRE Loans as % of Total Loans HFI		8.0	%		6.0	%		8.1	%		4.4	%		5.9	%		2.5	%		4.8	%		39.7	%

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

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     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 year ended December 31, 2007.

          Table 6 presents our credit quality indicators.

Table 6

Credit Quality Indicators

(dollars in thousands)

	June 30,						December 31, 2007
	2008			2007
Loans held for investment	$	10,475,731		$	10,029,228		$	10,213,420
Allowance for loan losses		191,727			125,545			126,427
Allowance for credit losses (1)		193,825			126,721			128,695
Nonaccrual loans - commercial and industrial (2)(3)		28,234			10,465			22,963
Nonaccrual loans - owner - occupied real estate (2)		5,112			3,605			4,085
Nonaccrual loans - commercial real estate (2)		151,579			18,692			36,634
Nonaccrual loans - consumer (3)		16,246			5,413			10,697
Nonaccrual loans - mortgage (3)		17,555			3,352			5,812
Restructured loans accruing interest		1,425			—			1,440
Total nonperforming loans		220,151			41,527			81,631
Foreclosed property (other real estate owned and personal property repossessions)		21,780			4,028			8,276
Total nonperforming assets	$	241,931		$	45,555		$	89,907
Loans past due 90 days or more (mortgage and consumer with interest accruing)	$	8,779		$	2,503		$	5,349
Total nonperforming assets as a percentage of loans held for investment and foreclosed property		2.30	%		0.45	%		0.88	%
Allowance for loan losses to nonperforming loans		0.87	x		3.02	x		1.55	x

(1)	The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.
(2)	At June 30, 2008, December 31, 2007, and June 30, 2007, commercial nonaccrual loans included $181,000, $218,000, and $1.9 million, respectively, in restructured loans.
(3)	In second quarter 2008, TSFG reclassified certain loan balances. Amounts presented for prior periods have been reclassified to conform to the current presentation.

          TSFG’s nonperforming asset ratio (nonperforming assets as a percentage of loans held for investment and foreclosed property) increased to 2.30% at June 30, 2008 from 0.88% at December 31, 2007 and 0.45% at June 30, 2007.

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The increase in nonperforming assets was primarily attributable to accelerating market deterioration in residential construction and development-related loans, principally in Florida markets.

          During the second quarter of 2008, TSFG sold $40.0 million of nonperforming loans included in loans held for investment. In the three and six months ended June 30, 2008, TSFG charged-off $16.1 million and $17.6 million, respectively, of these loans against the allowance for loan losses.

          Table 7 presents CRE nonaccrual loans by geography and product type. At June 30, 2008, there were no CRE loans past due 90 days still accruing interest.

Table 7

Commercial Real Estate Nonaccrual Loans

(dollars in thousands)

	June 30, 2008 CRE Nonaccrual Loans (“NAL”) by Geography
	SC, Excl Coastal			Coastal SC			Western NC			Central FL			North FL			South FL			Tampa Bay			Total CRE NAL			% of NAL
CRE Nonaccrual Loans by Product Type
Completed income property	$	1,204		$	237		$	5,741		$	9,020		$	700		$	—		$	107		$	17,009			7.8	%
Residential A&D		1,403			5,523			12,049			24,050			4,980			250			14,492			62,747			28.7
Commercial A&D		—			—			590			901			—			—			—			1,491			0.7
Commercial construction		—			—			—			—			—			1,776			—			1,776			0.8
Residential construction		1,521			2,573			7,121			3,078			2,879			11			—			17,183			7.8
Residential condo		—			3,467			—			2,177			—			9,700			14,674			30,018			13.7
Undeveloped land		147			—			1,535			558			4,549			12,002			2,564			21,355			9.8
Total CRE Nonaccrual Loans	$	4,275		$	11,800		$	27,036		$	39,784		$	13,108		$	23,739		$	31,837		$	151,579			69.3	%
CRE Nonaccrual Loans as % of Total Nonaccrual Loans		2.0	%		5.4	%		12.4	%		18.2	%		6.0	%		10.8	%		14.5	%		69.3	%

          Table 8 provides detail regarding commercial real estate loans past due 30 days or more.

Table 8

Commercial Real Estate Loans Past Due 30 Days or More (excluding nonaccruals)

(dollars in thousands)

	June 30, 2008					December 31, 2007
	Balance		% of CRE			Balance		% of CRE
North Carolina	$	4,039		0.10	%	$	10,029		0.24	%
South Carolina		3,372		0.08			1,889		0.05
Florida		22,554		0.54			14,383		0.34
Total CRE loans past due 30 days or more	$	29,965		0.72	%	$	26,301		0.63	%

          In accordance with SFAS No. 114 (“SFAS 114”), “Accounting by Creditors for Impairment of a Loan,” 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 restructuring. Table 9 summarizes information on impaired loans.

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Table 9
Impaired Loans
(dollars in thousands)
	At and For the Six Months Ended June 30,				At and For the Year Ended December 31, 2007
	2008		2007
Impaired loans	$	195,774	$	33,596	$	68,102
Average investment in impaired loans		175,621		34,602		40,360
Related allowance		39,238		9,414		11,340
Foregone interest		7,008		1,386		3,437

          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 10 provides additional detail regarding potential problem loans.

Table 10
Potential Problem Loans
(dollars in thousands)
	June 30, 2008
			Outstanding Principal Balance
	Number of Loans		Amount		Percentage of Loans Held for Investment
Large potential problem loans ($5 million or more)		10	$	112,817		1.08	%
Small potential problem loans (less than $5 million)		761		248,801		2.37
Total potential problem loans (1)		771	$	361,618		3.45	%

⁽¹⁾ Includes commercial and industrial, commercial real estate, and 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 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).

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          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 losses
Level II	Specific reserves for individually impaired loans
Level III	Subjective/judgmental adjustments for economic and other risk factors
Unfunded	Reserves for off-balance sheet (unadvanced) exposure
Unallocated	Represents the imprecision inherent in the previous calculations
Total	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. This part of the methodology is governed by SFAS No. 5, “Accounting for Contingencies.” 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 eight 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 four pools by product type—Direct, Indirect, Revolving, 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 $54.1 million at June 30, 2008, based on the portfolio historical loss rates, compared to $48.7 million at December 31, 2007.

          Level II Reserves. The second component of the Allowance involves the calculation of specific allowances for each individually impaired loan in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” In situations where a loan is determined to be impaired (primarily because it is probable that all principal and interest amount 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 loans over $500,000 that have been placed in nonaccrual status). 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 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 $39.2 million at June 30, 2008, compared to $11.3 million at December 31, 2007.

          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 is calculated in accordance with SFAS 5 and 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

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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 in Florida.

          During first quarter 2008, undeveloped land loans were experiencing distressed default rates, and higher loss severities could also be expected. TSFG performed two separate analyses to determine an accurate adjustment to this category. Both analyses concluded that an adjustment to the allowance of $23.8 million would be appropriate. This adjustment was added to the Allowance in the Florida Bank segment for the first time during first quarter 2008. This analysis was updated during second quarter 2008 with updated loan balances on this subportfolio using an adjusted appraisal discount, which resulted in the new Level III allowance component increasing $3.2 million to $27.0 million.

          TSFG also experienced an increase in losses in the indirect portfolio, as $5.2 million was charged-off during the first half of 2008, compared to $2.4 million in the first half of 2007. As a result of that recognizable increase, an adjustment was made to the component of economic conditions increasing that portion of the Allowance by $3.8 million.

          As a result of the two areas mentioned above, the Level III Reserves increased to $98.4 million at June 30, 2008, from $66.4 million at December 31, 2007.

          Reserve for Unfunded Commitments. The June 30, 2008 reserve for unfunded commitments decreased to $2.1 million from $2.3 million at December 31, 2007. 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 calculated Level 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 June 30, 2008 was $7.7 million, up from $7.3 million at March 31, 2008 and $6.0 million at December 31, 2007. 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 whether the impaired loans are secured, the collateral type, and the estimated loss severity on individual loans. Specifically, impaired loans increased to $195.8 million at June 30, 2008 from $68.1 million at December 31, 2007, primarily attributable to commercial real estate loans in Florida. Most of the loans contributing to the increase were over $500,000 and were evaluated for whether a specific reserve was warranted based on the analysis of the most probable source of repayment including liquidation of the collateral. Based on this analysis, the Level II Reserves increased 246% compared to the 187% increase in impaired 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. For example, due to indicators of stress on the land portfolio in Florida and other credit quality indicators, these reserves were increased by $27 million during the first half of 2008.

          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

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

Table 11
Summary of Loan and Credit Loss Experience
(dollars in thousands)
	At and For the Six Months Ended June 30,						At and For the Year Ended December 31, 2007
	2008			2007
Allowance for loan losses, beginning of year	$	126,427		$	111,663		$	111,663
Net charge-offs:
Loans charged-off		(76,106	)		(16,233	)		(59,408	)
Loans recovered		4,181			4,128			6,847
		(71,925	)		(12,105	)		(52,561	)
Additions to allowance through provision expense		137,225			25,987			67,325
Allowance for loan losses, end of period	$	191,727		$	125,545		$	126,427
Reserve for unfunded lending commitments, beginning of year	$	2,268		$	1,025		$	1,025
Provision for unfunded lending commitments		(170	)		151			1,243
Reserve for unfunded lending commitments, end of period	$	2,098		$	1,176		$	2,268
Allowance for credit losses, beginning of year	$	128,695		$	112,688		$	112,688
Net charge-offs:
Loans charged-off		(76,106	)		(16,233	)		(59,408	)
Loans recovered		4,181			4,128			6,847
		(71,925	)		(12,105	)		(52,561	)
Additions to allowance through provision expense		137,055			26,138			68,568
Allowance for credit losses, end of period	$	193,825		$	126,721		$	128,695
Average loans held for investment	$	10,328,336		$	9,865,936		$	9,985,751
Loans held for investment, end of period		10,475,731			10,029,228			10,213,420
Net charge-offs as a percentage of average loans held for investment (annualized)		1.40	%		0.25	%		0.53	%
Allowance for loan losses as a percentage of loans held for investment		1.83			1.25			1.24
Allowance for credit losses as a percentage of loans held for investment		1.85			1.26			1.26
Allowance for loan losses to nonperforming loans		0.87	x		3.02	x		1.55	x

          The provision for credit losses for the first half of 2008 totaled $137.1 million, which exceeded net loan charge-offs by $65.1 million. The higher provision largely reflected credit deterioration due to continued weakness in housing markets, particularly in Florida, and additional specific reserves for nonperforming loans and the overall land development portfolios in Florida. The overall allowance for credit losses as a percentage of loans held for investment increased to 1.85% at June 30, 2008 from 1.26% at December 31, 2007 and June 30, 2007. Table 12 provides additional detail for commercial real estate net charge-offs.

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Table 12

Commercial Real Estate Net Charge-Offs

(dollars in thousands)

	Six Months Ended June 30, 2008 CRE Net Charge-Offs (“NCO”) by Geography
	SC, Excl Coastal			Coastal SC			Western NC			Central FL			North FL			South FL			Tampa Bay			Total CRE NCO			% of NCO
CRE Net Charge-Offs by Product Type
Completed income property	$	464		$	220		$	1,527		$	200		$	(1	)	$	—		$	535		$	2,945			4.1	%
Residential A&D		427			—			336			1,500			9,766			—			200			12,229			17.0
Commercial A&D		(4	)		—			311			—			—			—			8,424			8,731			12.1
Commercial construction		—			—			(45	)		—			—			1,280			—			1,235			1.7
Residential construction		459			—			548			—			2,348			—			—			3,355			4.7
Residential condo		—			—			185			—			140			1,500			8,986			10,811			15.0
Undeveloped land		150			—			679			503			4,083			2,250			(494	)		7,171			10.0
Total CRE Net Charge-Offs	$	1,496		$	220		$	3,541		$	2,203		$	16,336		$	5,030		$	17,651		$	46,477			64.6	%
CRE Net Charge-Offs as % of Total Net Charge-Offs		2.1	%		0.3	%		4.9	%		3.1	%		22.7	%		7.0	%		24.5	%		64.6	%

     Securities

          TSFG uses the investment securities portfolio for several purposes. It serves as a vehicle to manage interest rate risk, to generate interest and dividend income, to provide liquidity to meet funding requirements, and to provide collateral for pledges on public deposits, FHLB advances, and securities sold under repurchase agreements. TSFG strives to provide adequate flexibility to proactively manage cash flow as market conditions change. Cash flow may be used to pay-off borrowings, to fund loan growth, or to reinvest in securities at then current market rates. Table 13 shows the carrying values of the investment securities portfolio.

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Table 13

Investment Securities Portfolio Composition

(dollars in thousands)

	June 30,						December 31, 2007
	2008			2007
Available for Sale (at fair value)
U.S. Treasury	$	27,703		$	167,195		$	27,592
U.S. Government agencies		335,593			650,581			503,571
Agency mortgage-backed securities		1,276,145			1,158,498			1,088,427
Private label mortgage-backed securities		15,544			—			—
State and municipal		270,521			308,070			302,586
Other investments:
Corporate bonds		18,211			93,187			20,380
Federal Home Loan Bank (“FHLB”) stock		38,614			44,119			35,333
Community bank stocks		2,078			7,921			4,988
Other equity investments		2,823			3,770			3,335
		1,987,232			2,433,341			1,986,212
Held to Maturity (at amortized cost)
State and municipal		26,577			41,792			39,451
Other investments		100			100			240
		26,677			41,892			39,691
Total	$	2,013,909		$	2,475,233		$	2,025,903
Total securities as a percentage of total assets		14.4	%		17.5	%		14.6	%
Percentage of Total Securities Portfolio
U.S. Treasury		1.4	%		6.8	%		1.4	%
U.S. Government agencies		16.6			26.3			24.8
Agency mortgage-backed securities		63.4			46.8			53.7
Private label mortgage-backed securities		0.8			—			—
State and municipal		14.7			14.1			16.9
Other investments		3.1			6.0			3.2
Total		100.0	%		100.0	%		100.0	%

          Securities (i.e., securities available for sale and securities held to maturity) excluding the unrealized loss on securities available for sale averaged $2.1 billion for the first half of 2008, 22.7% below the average for the first half of 2007 of $2.7 billion.

          The average tax-equivalent portfolio yield decreased for the six months ended June 30, 2008 to 4.69% from 4.80% for the six months ended June 30, 2007.

          The expected duration of the debt securities portfolio was approximately 4.0 years at June 30, 2008, an increase from approximately 3.3 years at December 31, 2007. If interest rates rise, the duration of the debt securities portfolio may extend. Conversely, if interest rates fall, the duration of the debt securities portfolio may decline. Since total securities include some callable bonds and mortgage-backed securities, security paydowns are likely to accelerate if interest rates fall or decline if interest rates rise. Changes in interest rates and related prepayment activity impact yields and fair values of TSFG’s securities.

          The available for sale portfolio constituted 98.7% of total securities at June 30, 2008. Management believes that maintaining most of its securities in the available for sale category provides greater flexibility in the management of the overall investment portfolio. The majority of these securities are government or agency securities and, therefore, pose minimal credit risk.

          Approximately 63% of mortgage-backed securities (“MBS”) are collateralized mortgage obligations (“CMOs”) with an average duration of 5.5 years. At June 30, 2008, approximately 15% of the MBS portfolio was variable rate or

41

hybrid variable rate, where the rate adjusts on an annual basis after a specified fixed rate period, generally ranging from one to ten years. The majority of these securities are government agency securities.

          In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its $18.2 million corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. Subsequent to quarter-end, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. In second quarter 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio, and sold approximately $70 million of corporate bonds in third quarter 2007.

          The net unrealized loss on securities available for sale (pre-tax) totaled $54.4 million at June 30, 2008, compared with a $3.0 million loss at March 31, 2008 and a $48.8 million loss at December 31, 2007, as the increase in long term rates since March 31 was combined with widening credit spreads and current market illiquidity. If interest rates increase, credit spreads continue to widen, and/or market illiquidity worsens, TSFG expects its net unrealized loss on securities available for sale to increase. See Item 1, Note 5 to the Consolidated Financial Statements for information about TSFG’s securities in unrealized loss positions.

          Table 14 shows the credit risk profile of the securities portfolio.

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Table 14

Investment Securities Portfolio Credit Risk Profile

(dollars in thousands)

	June 30, 2008					December 31, 2007
	Balance		% of Total			Balance		% of Total
Government and agency
U.S. Treasury	$	27,703		1.4	%	$	27,592		1.4	%
U.S. Government agencies		335,593		16.7			503,571		24.9
Agency mortgage-backed securities (MBS) (1)		1,276,145		63.3			1,088,427		53.7
Federal Home Loan Bank Stock		38,614		1.9			35,333		1.7
Total government and agency		1,678,055		83.3			1,654,923		81.7
State and municipal (2)(3)(4)
Pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund		195,662		9.7			214,675		10.6
Underlying issuer or collateral rated A or better (including South Carolina State Aid)		82,290		4.1			102,187		5.1
Underlying issuer or collateral rated BBB		7,338		0.4			12,930		0.6
Non-rated		11,808		0.6			12,245		0.6
Total state and municipal		297,098		14.8			342,037		16.9
Corporate bonds
AA or A-rated		13,243		0.7			17,068		0.8
BBB-rated		4,968		0.2			3,312		0.2
Total corporate bonds		18,211		0.9			20,380		1.0
Private label mortgage-backed securities AAA-rated (1)		15,544		0.8			—		—
Community bank stocks and other		5,001		0.2			8,563		0.4
Total securities	$	2,013,909		100.0	%	$	2,025,903		100.0	%
Percent of total securities: (3)
Rated A or higher				98.6	%				98.2	%
Investment grade				99.2					99.0

(1)	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.
(2)	At June 30, 2008 and December 31, 2007, state and municipal securities include $26.6 million and $39.5 million, respectively, of securities held to maturity at amortized cost.
(3)	Ratings shown above do not reflect the benefit of guarantees by bond insurers. At June 30, 2008, $36.5 million of municipal bonds are guaranteed by bond insurers. At December 31, 2007, $43.5 million of municipal bonds are guaranteed by bond insurers.
(4)	At June 30, 2008, the breakdown by current bond rating is as follows: $195.7 million pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund, $9.4 million AAA-rated, $85.5 million AA or A-rated, $860,000 BBB-rated, and $5.6 million non-rated.

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

          Community Bank Stocks. At June 30, 2008, TSFG had equity investments in four community banks located in the Southeast with a fair value of $2.1 million. In each case, TSFG owns less than 5% of the community bank’s outstanding common stock. These investments in community banks are included in securities available for sale.

          Investments Included in Other Assets. TSFG also invests in limited partnerships, limited liability companies (“LLCs”) and other privately held companies. These investments are included in other assets. During the first six months of 2008, TSFG sold $1.0 million of such investments for a net gain of $3.2 million. In the three and six months ended June 30, 2008, TSFG recorded $359,000 and $589,000 in other-than-temporary impairment on these investments. In the three and six months ended June 30, 2007, TSFG recorded $342,000 in other-than-temporary impairment on these investments. At June 30, 2008, TSFG’s investment in these entities totaled $17.4 million, of which $5.3 million were accounted for under the cost method and $12.1 million were accounted for under the equity method.

43

     Goodwill

          In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), TSFG evaluates its goodwill annually for each reporting unit as of June 30^th. However, the acceleration of credit deterioration in Florida prompted TSFG to perform an interim impairment evaluation of a significant portion of the recorded goodwill as of March 31, 2008. As a result of this evaluation, during first quarter 2008, TSFG recognized goodwill impairment in the Florida banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth. In addition, during first quarter 2008, TSFG refined its methodology for allocating certain previously unallocated noninterest expenses to its banking segments, which resulted in higher allocated expenses to each of those segments; such costs were then utilized in the discounted cash flow analysis to determine the fair value of the Florida banking segment. The goodwill impairment charge of $188.4 million was recorded in noninterest expense in the consolidated statements of income. The fair value of the Florida reporting unit tested for impairment was determined primarily using discounted cash flow models based on internal forecasts and, to a lesser extent, market-based trading and transaction multiples.

          The goodwill impairment analysis is performed on the Company’s reporting units and closely follows its operating segments. These reporting units, as well as the assumptions and forecasts used in the discounted cash flow model and the market approach, have varying degrees of subjectivity and may not be comparable to the reporting units, assumptions, and forecasts used by other companies in evaluating their goodwill for impairment.

          The annual impairment evaluation as of June 30, 2008 indicated that no additional impairment charge was required, and there have been no events or circumstances since that date indicating impairment.

     Derivative Financial Instruments

          Derivative financial instruments used by TSFG may include interest rate swaps, caps, collars, floors, options, futures and forward contracts. Derivative contracts are primarily used to hedge identified risks and also to provide risk-management products to customers. TSFG has derivatives that qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), derivatives that do not qualify for hedge accounting under SFAS 133 but otherwise achieve economic hedging goals (“economic hedges”), as well as derivatives that are used in trading and customer hedging programs. See Note 9 to the Consolidated Financial Statements for disclosure of the fair value of TSFG’s derivative assets and liabilities (which are included in other assets and other liabilities, respectively, in the Consolidated Financial Statements) and their related notional amounts. TSFG’s trading derivatives, economic hedges, and customer hedging programs are included in Other Derivatives in the table in Note 9.

          In the three and six months ended June 30, 2008, noninterest income included a gain of $236,000 and $248,000, respectively, for derivative activities. These amounts include the following: the change in fair value of derivatives that do not qualify for hedge accounting under SFAS 133, as well as the net cash settlement from these interest rate swaps; hedge ineffectiveness; and other miscellaneous items.

     Deposits

          Deposits remain TSFG’s primary source of funds. Average customer deposits equaled 61.8% of average total funding in the first half of 2008. TSFG faces strong competition from other banking and financial services companies in gathering deposits. TSFG also maintains short and long-term wholesale sources including federal funds, repurchase agreements, brokered CDs, and FHLB advances to fund a portion of loan demand and, if appropriate, any increases in investment securities.

          Table 15 shows the breakdown of total deposits by type of deposit and the respective percentage of total deposits, while Table 16 shows the breakdown of customer funding by type.

44

Table 15
Type of Deposits
(dollars in thousands)
	June 30,						December 31, 2007
	2008			2007		��
Noninterest-bearing demand deposits	$	1,107,115		$	1,244,834		$	1,127,657
Interest-bearing checking		1,127,497			1,177,609			1,117,850
Money market accounts		2,162,599			2,245,466			2,188,261
Savings accounts		150,696			177,289			158,092
Time deposits under $100,000		1,468,372			1,363,462			1,442,030
Time deposits of $100,000 or more		1,479,740			1,583,653			1,496,270
Customer deposits (1)		7,496,019			7,792,313			7,530,160
Brokered deposits		2,390,350			2,293,493			2,258,408
Total deposits	$	9,886,369		$	10,085,806		$	9,788,568
Percentage of Deposits
Noninterest-bearing demand deposits		11.2	%		12.3	%		11.5	%
Interest-bearing checking		11.4			11.7			11.4
Money market accounts		21.9			22.3			22.4
Savings accounts		1.5			1.8			1.6
Time deposits under $100,000		14.8			13.5			14.7
Time deposits of $100,000 or more		15.0			15.7			15.3
Customer deposits (1)		75.8			77.3			76.9
Brokered deposits		24.2			22.7			23.1
Total deposits		100.0	%		100.0	%		100.0	%

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

Table 16
Type of Customer Funding
(dollars in thousands)
	June 30,				December 31, 2007
	2008		2007
Customer deposits (1)	$	7,496,019	$	7,792,313	$	7,530,160
Customer sweep accounts(2)		536,642		556,622		648,311
Customer funding	$	8,032,661	$	8,348,935	$	8,178,471

(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 June 30, 2008, period-end customer funding decreased $145.8 million, or 1.8%, from December 31, 2007, primarily due to a decrease in customer sweep accounts. While reported in short-term borrowings on the consolidated balance sheet, customer sweep accounts represent excess overnight cash 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 ($428.9 million at June 30, 2008) and 2) uninsured Eurodollar deposits ($107.7 million at June 30, 2008). These balances are tied directly to commercial customer checking accounts, and these sweep accounts generate treasury services noninterest income. The decrease in customer deposits was primarily a result of lower commercial deposits, which decreased due in part to lower overall liquidity from commercial customers and customers seeking diversification among banks.

          TSFG typically experiences seasonality in its customer deposits due to tax receipts from several of its large public deposit customers. During second quarter 2008, TSFG attracted several new public deposit customers. As a result, at June 30, 2008, public deposits totaled approximately $661 million, compared to approximately $645 million at March 31, 2008 and $582 million at December 31, 2007.

45

          TSFG uses brokered deposits and other borrowed funds as an alternative funding source while continuing its efforts to maintain and grow its local customer funding base. Brokered deposits increased as a percentage of total deposits since December 31, 2007 as TSFG replaced certain customer funding with brokered deposits.

          Table 19 in “Earnings Review - Net Interest Income” details average balances for the deposit portfolio for the three and six months ended June 30, 2008 and 2007. Comparing the six months ended June 30, 2008 and 2007, average customer funding decreased $174.8 million, or 2.1%. Within customer funding, the mix continues to shift toward higher cost products, with increases in average time deposits and customer sweep accounts more than offset by a decrease in noninterest-bearing deposits, interest checking, savings and money markets. Average brokered deposits increased $100.5 million, or 5.3%.

          Average customer funding equaled 67.0% of average total funding in the first six months of 2008 and 67.3% in the first six months of 2007. As part of its overall funding strategy, TSFG expects to continue its focus on lowering its funding costs by trying to improve the customer funding level, mix, and rate paid. TSFG attempts to enhance its deposit mix by working to attract lower-cost transaction accounts through actions such as new transaction account opening goals, new checking products, and changing incentive plans to place a greater emphasis on lower-cost customer deposit growth. Deposit pricing is very competitive, and we expect this pricing environment to continue, together with customer behavior driving the mix towards higher rate deposit products—money markets and CDs.

     Borrowed Funds

          Table 17 shows the breakdown of borrowed funds by type.

Table 17
Type of Borrowed Funds
(dollars in thousands)
	June 30,						December 31, 2007
	2008			2007
Short-Term Borrowings
Federal funds purchased and repurchase agreements	$	169,074		$	654,299		$	206,216
Customer sweep accounts		536,642			556,622			648,311
Term auction facility		500,000			—			—
FHLB advances		—			75,000			—
Commercial paper		25,155			32,687			30,828
Treasury, tax and loan note		350,730			114,042			752,195
Total short-term borrowings		1,581,601			1,432,650			1,637,550
Long-Term Borrowings
Repurchase agreements		200,000			200,000			200,000
FHLB advances		297,873			328,100			223,087
Subordinated notes		216,704			262,067			216,704
Mandatorily redeemable preferred stock of subsidiary		56,800			64,800			56,800
Note payable		791			808			786
Employee stock ownership plan note payable		—			50			—
Purchase accounting premiums, net of amortization		789			1,423			963
Total long term borrowings		772,957			857,248			698,340
Total borrowings		2,354,558			2,289,898			2,335,890
Less: Customer sweep accounts		(536,642	)		(556,622	)		(648,311	)
Add: Brokered deposits (1)		2,390,350			2,293,493			2,258,408
Total wholesale borrowings	$	4,208,266		$	4,026,769		$	3,945,987
Wholesale borrowings as a % of total assets		30.1	%		28.5	%		28.4	%

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

46

          TSFG uses both short-term and long-term borrowings to fund growth of earning assets in excess of deposit growth. In the first six months of 2008 and 2007, average borrowings totaled $2.6 billion.

          Period-end wholesale borrowings increased to $4.2 billion at June 30, 2008, compared to $3.9 billion at December 31, 2007 as TSFG replaced certain customer funding with brokered deposits. Average wholesale borrowings totaled $4.0 billion in the first six months of 2008 and 2007. TSFG plans to continue its efforts to reduce its reliance on wholesale borrowings, principally by growth in customer funding.

          Daily funding needs are met through federal funds purchased and short-term brokered CDs, term treasury, tax and loan note (“TT&L”), repurchase agreements, Federal Reserve borrowings, and FHLB advances. Balances in these accounts can fluctuate on a day-to-day basis based on availability and overall funding needs.

          In December 2007, the Federal Reserve announced the establishment of a temporary Term Auction Facility (“TAF”) in which the Federal Reserve would auction term funds to depository institutions. Similar programs are being offered through other central banks to ensure that liquidity is disseminated efficiently. The program is similar to term TT&L auctions in that institutions place bids for the borrowing and the rate on the awarded amount is based on the results of the auction. The collateral used to secure the borrowings is the same that is currently held at the Discount Window (see “Liquidity”). At June 30, 2008, TSFG had $500 million of TAF borrowings from the Federal Reserve. In July 2008, the Federal Reserve extended the TAF through November 2008.

          FHLB advances are a source of funding that TSFG uses depending on the current level of deposits and the availability of collateral to secure FHLB borrowings. At June 30, 2008, TSFG had $625.9 million of unused borrowing capacity from the FHLB. See “Liquidity” for further discussion.

          During the first half of 2008, TSFG recognized a net loss on early extinguishment of debt of $464,000, primarily due to prepayment penalties for FHLB advances partially offset by gains on the extinguishment of called brokered CDs.

     Capital Resources and Dividends

          Total shareholders’ equity totaled $1.6 billion, or 11.2% of total assets, at June 30, 2008 and December 31, 2007. Shareholders’ equity remained basically flat as the net loss for the first half of 2008 (which includes the $188.4 million goodwill impairment charge) and cash dividends paid were largely offset by the net proceeds from the issuance of preferred stock.

          On May 8, 2008, TSFG issued $250.0 million of mandatory convertible non-cumulative preferred stock, with net proceeds of $239.0 million. The preferred securities pay dividends at an annual rate of 10%, have a conversion price of $6.50 per common share, and will convert into approximately 38.5 million common shares by May 1, 2011. Although this issuance strengthened TSFG’s overall capital and liquidity position and regulatory capital ratios, it had a dilutive effect on book value/tangible book value per share and will have a dilutive effect on earnings per share.

          Common book value per common share at June 30, 2008 (assuming conversion of the preferred stock) and December 31, 2007 was $14.01 and $21.40, respectively. Common tangible book value per common share at June 30, 2008 (assuming conversion of the preferred stock) and December 31, 2007 was $9.63 and $12.04, 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. Since TSFG’s net loss for the six months ended June 30, 2008 was largely due to the $188.4 million goodwill impairment charge which was reported in first quarter 2008, book value per share decreased much more than tangible book value per share. At June 30, 2008, goodwill totaled $463.3 million, or $6.36 per share, and is not being amortized, while other intangibles totaled $24.6 million and will continue to be amortized.

          TSFG is subject to the risk-based capital guidelines administered by bank regulatory agencies. The guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and certain off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and certain off-balance sheet items. TSFG and Carolina First Bank exceeded the well-capitalized regulatory requirements at June 30, 2008. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on our Consolidated Financial Statements.

47

          Table 18 sets forth various capital ratios for TSFG and Carolina First Bank. Under current regulatory guidelines, debt associated with trust preferred securities qualifies for tier 1 capital treatment. At June 30, 2008, trust preferred securities included in tier 1 capital totaled $200.5 million.

Table 18
Capital Ratios
	June 30, 2008		Well Capitalized Requirement
TSFG
Total risk-based capital	12.54	%	n/a
Tier 1 risk-based capital	11.05		n/a
Leverage ratio	9.81		n/a
Carolina First Bank
Total risk-based capital	11.43	%	10.00	%
Tier 1 risk-based capital	9.71		6.00
Leverage ratio	8.61		5.00

          At June 30, 2008, TSFG’s tangible equity to tangible asset ratio totaled 7.94%, an increase from 6.61% at December 31, 2007, due primarily to the issuance of preferred stock.

          Carolina First Bank is subject to certain regulatory restrictions on the amount of dividends it is permitted to pay. Currently, Carolina First Bank may not pay a dividend to TSFG without regulatory approval. TSFG presently intends to pay a quarterly cash dividend on its common stock; however, future dividends will depend upon TSFG’s financial performance, capital requirements and assessment of capital needs. On May 2, 2008, TSFG announced a reduction in its quarterly common stock cash dividend to $0.01 per share.

          TSFG, through a real estate investment trust subsidiary, had 568 mandatorily redeemable preferred shares outstanding at June 30, 2008 with a stated value of $100,000 per share. At June 30, 2008, these preferred shares, which are reported as long-term debt on the consolidated balance sheet, totaled $56.8 million. Under Federal Reserve Board guidelines, $26.3 million qualified as tier 1 capital, and $18.3 million qualified as tier 2 capital. The terms for the preferred shares include certain asset coverage and cash flow tests, which if not satisfied, may prohibit its real estate trust subsidiary from paying dividends to Carolina First Bank, which in turn may limit its ability to pay dividends to TSFG.

Earnings Review

     Net Interest Income

          Net interest income is TSFG’s primary source of revenue. Net interest income is the difference between the interest earned on assets, including loan fees and dividends on investment securities, and the interest incurred for the liabilities to support such assets. The net interest margin measures how effectively a company manages the difference between the yield on earning assets and the rate incurred on funds used to support those assets. Fully tax-equivalent net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis based on a 35% marginal federal income tax rate. Table 19 presents average balance sheets and a net interest income analysis on a tax-equivalent basis for the three and six months ended June 30, 2008 and 2007.

48

Table 19
Comparative Average Balances - Yields and Costs
(dollars in thousands)
	Three Months Ended June 30,
	2008							2007
	Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate
Assets
Earning assets
Loans (1)	$	10,458,571	$	158,016		6.08	%	$	9,984,137	$	191,961		7.71	%
Investment securities, taxable (2)		1,799,907		20,591		4.58			2,247,092		26,879		4.79
Investment securities, nontaxable (2) (3)		299,350		3,814		5.10			359,043		4,443		4.95
Total investment securities		2,099,257		24,405		4.65			2,606,135		31,322		4.81
Federal funds sold and interest-bearing bank balances		20,256		106		2.10			6,376		97		6.10
Total earning assets		12,578,084	$	182,527		5.83			12,596,648	$	223,380		7.11
Non-earning assets		1,290,065							1,496,431
Total assets	$	13,868,149						$	14,093,079
Liabilities and Shareholders’ Equity
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking	$	1,120,716	$	2,683		0.96		$	1,176,182	$	6,029		2.06
Savings		152,023		304		0.80			181,166		736		1.63
Money market		2,104,322		11,822		2.26			2,294,181		22,528		3.94
Time deposits, excluding brokered deposits		2,997,131		29,172		3.91			2,910,284		36,407		5.02
Brokered deposits		2,081,224		19,199		3.71			2,042,664		26,366		5.18
Total interest-bearing deposits		8,455,416		63,180		3.01			8,604,477		92,066		4.29
Customer sweep accounts		573,957		2,621		1.84			496,030		5,528		4.47
Other borrowings (4)		2,078,730		15,186		2.94			1,989,109		27,710		5.59
Total interest-bearing liabilities		11,108,103	$	80,987		2.93			11,089,616	$	125,304		4.53
Noninterest-bearing liabilities
Noninterest-bearing deposits		1,079,390							1,225,075
Other noninterest-bearing liabilities		185,275							231,996
Total liabilities		12,372,768							12,546,687
Shareholders’ equity		1,495,381							1,546,392
Total liabilities and shareholders’ equity	$	13,868,149						$	14,093,079
Net interest income (tax-equivalent)			$	101,540		3.24	%			$	98,076		3.12	%
Less: tax-equivalent adjustment (3)				1,335							1,555
Net interest income			$	100,205						$	96,521
Supplemental data:
Customer funding (5)	$	8,027,539	$	46,602		2.33	%	$	8,282,918	$	71,228		3.45	%
Wholesale borrowings (6)		4,159,954		34,385		3.32			4,031,773		54,076		5.38
Total funding (7)	$	12,187,493	$	80,987		2.67	%	$	12,314,691	$	125,304		4.08	%

(1)	Nonaccrual loans are included in average balances for yield computations.
(2)	The average balances for investment securities exclude the unrealized loss recorded for available for sale securities.
(3)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
(4)	During the three months ended June 30, 2008, TSFG capitalized $332,000 of interest in conjunction with the construction of its expanded corporate facilities.
(5)	Customer funding includes total deposits (total interest-bearing plus noninterest-bearing deposits) less brokered deposits plus customer 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.

49

Table 19 (continued)

Comparative Average Balances - Yields and Costs

(dollars in thousands)

	Six Months Ended June 30,
	2008							2007
	Average Balance		Income/ Expense		Yield/ Rate			Average Balance		Income/ Expense		Yield/ Rate
Assets
Earning assets
Loans (1)	$	10,347,045	$	329,244		6.40	%	$	9,899,046	$	378,589		7.71	%
Investment securities, taxable (2)		1,774,664		40,983		4.62			2,330,531		55,704		4.78
Investment securities, nontaxable (2) (3)		312,834		7,957		5.09			371,355		9,132		4.92
Total investment securities		2,087,498		48,940		4.69			2,701,886		64,836		4.80
Federal funds sold and interest-bearing bank balances		14,486		178		2.47			7,348		238		6.53
Total earning assets		12,449,029	$	378,362		6.11			12,608,280	$	443,663		7.09
Non-earning assets		1,407,498							1,512,135
Total assets	$	13,856,527						$	14,120,415
Liabilities and Shareholders’ Equity
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking	$	1,138,067	$	7,336		1.30		$	1,181,680	$	11,964		2.04
Savings		154,435		731		0.95			180,060		1,442		1.61
Money market		2,148,913		28,455		2.66			2,335,745		46,065		3.98
Time deposits, excluding brokered deposits		2,975,248		62,823		4.25			2,902,007		71,988		5.00
Brokered deposits		2,008,073		40,941		4.10			1,907,623		49,086		5.19
Total interest-bearing deposits		8,424,736		140,286		3.35			8,507,115		180,545		4.28
Customer sweep accounts		629,355		8,093		2.59			475,095		10,509		4.46
Other borrowings (4)		2,000,845		34,287		3.45			2,128,838		58,354		5.53
Total interest-bearing liabilities		11,054,936	$	182,666		3.32			11,111,048	$	249,408		4.53
Noninterest-bearing liabilities
Noninterest-bearing deposits		1,081,447							1,227,683
Other noninterest-bearing liabilities		189,964							232,618
Total liabilities		12,326,347							12,571,349
Shareholders’ equity		1,530,180							1,549,066
Total liabilities and shareholders’ equity	$	13,856,527						$	14,120,415
Net interest income (tax-equivalent)			$	195,696		3.16	%			$	194,255		3.10	%
Less: tax-equivalent adjustment (3)				2,785							3,196
Net interest income			$	192,911						$	191,059
Supplemental data:
Customer funding (5)	$	8,127,465	$	107,438		2.66	%	$	8,302,270	$	141,968		3.45	%
Wholesale borrowings (6)		4,008,918		75,228		3.77			4,036,461		107,440		5.37
Total funding (7)	$	12,136,383	$	182,666		3.03	%	$	12,338,731	$	249,408		4.08	%

(1)	Nonaccrual loans are included in average balances for yield computations.
(2)	The average balances for investment securities exclude the unrealized loss recorded for available for sale securities.
(3)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
(4)	During the six months ended June 30, 2008, TSFG capitalized $661,000 of interest in conjunction with the construction of its expanded corporate facilities.
(5)	Customer funding includes total deposits (total interest-bearing plus noninterest-bearing deposits) less brokered deposits plus customer 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.

50

          Fully tax-equivalent net interest income increased 0.7% to $195.7 million for the first six months of 2008 from $194.3 million for the first six months of 2007. TSFG’s average earning assets declined 1.3% to $12.4 billion for the first six months of 2008 from $12.6 billion for the first six months of 2007 due primarily to the planned reduction of securities exceeding loan growth. As a result, average loans as a percentage of average earning assets increased to 83.1% for first six months of 2008, up from 78.5% for the first half of 2007, improving the earning asset mix. At June 30, 2008, approximately 61% of TSFG’s accruing loans were variable rate loans, the majority of which are tied to the prime rate. TSFG has entered into receive-fixed interest rate swaps to hedge the forecasted interest income from certain prime-based commercial loans as part of its overall interest rate risk management. TSFG also has an interest rate floor that is designated as a hedge of commercial loans and is intended to mitigate earnings exposure to falling interest rates.

          The net interest margin for the first half of 2008 was 3.16%, compared with 3.10% for the first half of 2007. The yield on average earning assets decreased 98 basis points, primarily due to decreased loan yields, which were down 131 basis points. The decrease in earning asset yields was more than offset by a decrease in the average cost of funding of 105 basis points. The Federal Reserve has decreased the federal funds target rate by 325 basis points since June 30, 2007.

          Fully tax-equivalent net interest income for second quarter 2008 totaled $101.5 million, an increase of $7.4 million from $94.2 million for first quarter 2008 and $3.5 million from $98.1 million for second quarter 2007. The net interest margin for second quarter 2008 was 3.24%, compared to 3.07% for first quarter 2008 and 3.12% for second quarter 2007. This increase was primarily due to lower funding costs and the net proceeds from the preferred stock issuance. TSFG’s blended mix of funding sources responds more slowly to a declining interest rate environment than its earning assets. Second quarter 2008’s lower funding costs reflect the lagged benefit from the repricing of funding sources.

     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 $137.1 million in the first six months of 2008, compared to $26.1 million in the first six months of 2007. The higher provision largely reflected credit deterioration due to continued weakness in housing markets, particularly in Florida, and additional specific reserves for nonperforming loans and the overall land development portfolios in Florida.

          For second quarter 2008, the provision for credit losses totaled $63.8 million, compared to $73.3 million for first quarter 2008 and $17.1 million for second quarter 2007. Second quarter provision exceeded net loan charge-offs by $16.8 million.

          Net loan charge-offs were $71.9 million, or 1.40% of average loans held for investment, for the first six months of 2008, compared with $12.1 million, or 0.25% of average loans held for investment, for the first six months of 2007. The allowance for credit losses equaled 1.85% of loans held for investment as of June 30, 2008, compared to 1.26% for both December 31, 2007 and June 30, 2007. See “Loans,” “Credit Quality,” and “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.”

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     Noninterest Income

          Table 20 shows the components of noninterest income.

Table 20

Components of Noninterest Income

(dollars in thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008		2007			2008		2007
Service charges on deposit accounts	$	10,986	$	11,223		$	21,415	$	21,836
Debit card income, net		2,056		1,839			3,932		3,406
Customer service fee income		1,358		1,402			2,689		2,693
Total customer fee income		14,400		14,464			28,036		27,935
Insurance income		2,388		2,987			5,448		6,284
Retail investment services, net		2,120		2,021			3,666		3,735
Trust and investment management income		1,857		1,734			3,523		3,328
Benefits administration fees		734		749			1,490		1,491
Total wealth management income		7,099		7,491			14,127		14,838
Bank-owned life insurance income		2,910		4,454			6,057		7,305
Mortgage banking income		1,858		1,877			3,343		3,946
Gain (loss) on securities		1,876		(2,237	)		2,272		(3,622	)
Gain on Visa IPO share redemption		—		—			1,904		—
Merchant processing income, net		809		771			1,666		1,506
Gain (loss) on certain derivative activities		236		(1,497	)		248		(1,400	)
Other		3,002		2,360			5,453		4,145
Total noninterest income	$	32,190	$	27,683		$	63,106	$	54,653

          Noninterest income increased 15.5% to $63.1 million in the first six months of 2008 due primarily to a gain on mandatory partial redemption of shares received in the Visa IPO of $1.9 million and a net gain on securities of $2.3 million in the first six months of 2008 compared to a $3.6 million net loss on securities in the first six months of 2007. In addition, TSFG recorded a gain on certain derivative activities of $248,000 in the first half of 2008, compared to a loss of $1.4 million in the first half of 2007.

          Total customer fee income increased slightly in the first six months of 2008 compared to the same period in 2007, primarily due to increased debit card usage, and merchant processing income (net of direct processing costs) increased 10.6% in the first six months of 2008 compared to the same period in 2007 as a result of increased transactions. Bank-owned life insurance decreased in the first half of 2008 relative to 2007 due to the receipt of fewer life insurance proceeds.

          Mortgage banking income decreased 15.3% in the first six months of 2008 when compared to the same period in 2007. Mortgage loans originated by TSFG originators totaled $174.1 million and $301.7 million in the first six months of 2008 and 2007, respectively. The decrease in mortgage banking income was principally the result of lower origination volumes in response to industry conditions.

          For second quarter 2008, noninterest income totaled $32.2 million, compared to $30.9 million first quarter 2008 and $27.7 million second quarter 2007. The increase from first quarter 2008 to second quarter 2008 was largely attributable to increases in service charges on deposit accounts (in keeping with seasonal trends) and mortgage banking income. The increase from second quarter 2007 to second quarter 2008 was primarily due to the swing in gains/losses on securities and certain derivative activities.

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     Noninterest Expenses

          Table 21 shows the components of noninterest expenses.

Table 21

Components of Noninterest Expenses

(dollars in thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Salaries and wages, excluding contract buyouts and severance	$	36,136		$	34,258	$	70,989		$	69,330
Employee benefits		9,113			9,245		18,411			19,004
Occupancy		8,972			8,545		17,595			17,153
Furniture and equipment		6,733			6,486		13,116			12,948
Professional services		3,579			4,914		7,106			9,017
Advertising and business development		2,731			1,973		5,202			3,904
Regulatory assessments		2,374			436		4,451			864
Loan collection and monitoring		2,167			460		3,137			1,179
Amortization of intangibles		1,589			2,136		3,247			4,137
Telecommunications		1,476			1,418		2,899			2,811
Employment contract buyouts and severance		2,299			546		2,299			2,306
Branch acquisition and conversion costs		731			—		731			—
Gain (loss) on early extinguishment of debt		(83	)		231		464			231
Goodwill impairment		—			—		188,431			—
Visa-related litigation		—			—		(863	)		—
Other		9,803			9,503		18,584			18,744
Total noninterest expenses	$	87,620		$	80,151	$	355,799		$	161,628

          During first quarter 2008, the acceleration of credit deterioration in Florida prompted TSFG to perform an interim evaluation of the goodwill associated with its Florida banking segment. The evaluation reflected decreases in projected cash flows for the Florida banking segment, and accordingly the estimated fair value of the segment declined. This decline resulted in the recognition of a goodwill impairment charge of $188.4 million. See “Goodwill.”

          Salaries and wages (excluding contract buyouts and severance) and employee benefits increased $1.1 million, or 1.2%, in the first six months of 2008 compared with the same period in 2007. The number of full-time equivalent employees increased to 2,572 at June 30, 2008 from 2,467 at June 30, 2007.

          Advertising and business development increased 33.2% for the first half of 2008 compared with the first half of 2007, primarily due to costs related to customer funding initiatives. In addition, regulatory assessments increased as the one-time credit which had been offsetting FDIC premiums for all of 2006 and the first three quarters of 2007 was fully utilized in fourth quarter 2007. Loan collection and monitoring expense increased $2.0 million for the first six months of 2008 compared with the first six months of 2007 due to the current credit environment, and may continue to increase.

          Professional services decreased by 21.2% for the first six months of 2008 compared with the first six months of 2007, primarily due to a decrease in legal fees and expenses related to development of TSFG’s strategic initiatives.

          During the first six months of 2008, TSFG recognized a loss on early extinguishment of debt of $464,000, which reflects prepayment penalties on FHLB advances, offset by swap calls on brokered CDs, versus a loss of $231,000 in the first six months of 2007. See “Borrowed Funds.”

          TSFG incurred branch acquisition and conversion costs during the first half of 2008 related to the June 6, 2008 purchase of five retail branch offices in the Orlando area. This transaction could result in additional noninterest expense in future periods.

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          Excluding the goodwill impairment charge in first quarter 2008, second quarter 2008 noninterest expenses increased $7.9 million from first quarter 2008 due primarily to contract buyouts and severance, branch acquisition and conversion costs, and loan collection and monitoring.

     Income Taxes

          The effective income tax rate as a percentage of pretax income was 10.4% for the first half of 2008 and 33.6% for the first half of 2007. The 2008 tax rate was driven by the impact of the nondeductible goodwill impairment, other nontaxable and nondeductible items, and management’s projections. The effective income tax rate for future quarters of 2008 could be significantly impacted by changes in management’s projections and variances to actual results. The statutory U.S. federal income tax rate was 35% for both 2008 and 2007.

Enterprise Risk Management

          Pages 51 through 54 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007 provides a discussion of overall Enterprise Risk Management, Derivatives and Hedging Activities, Economic Risk, Operational Risk, and Compliance and Litigation Risks.

     Credit Risk

          Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligation. Credit risk arises in many of TSFG’s business activities, most prominently in its lending activities, derivative activities, ownership of debt securities, and when TSFG acts as an intermediary on behalf of its customers and other third parties. TSFG has a risk management system designed to help ensure compliance with its policies and control processes. See “Critical Accounting Policies and Estimates – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” and “Credit Quality” for updated credit risk disclosures.

     Liquidity Risks

          TSFG’s business is also subject to liquidity risk, which arises in the normal course of business. TSFG’s liquidity risk is that we will be unable to meet a financial commitment to a customer, creditor, or investor when due. See “Liquidity” for updated liquidity disclosures.

     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 2007 Form 10-K. The interest sensitivity analysis which follows has been updated for June 30, 2008 numbers.

          Interest Sensitivity Analysis. As discussed on pages 51 and 52 of TSFG’s 2007 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 22 and 23 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 22 and 23. 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 income analysis;

• mortgage backed securities prepayments are based on historical industry data;

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

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

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

• management takes no action to counter any change.

          Table 22 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

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or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at June 30, 2008, and 2007 levels, respectively.

Table 22
Net Interest Income at Risk Analysis
Interest Rate Scenario (1)		Annualized Hypothetical Percentage Change in Net Interest Income June 30,
		2008		2007
2.00	%	1.7	%	(0.7	)%
1.00		1.0		(0.3	)
Flat		—		—
(1.00	)	(1.1	)	(0.1	)
(2.00	)	(2.5	)	—

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

          Table 23 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 23 shows the effect that the indicated changes in interest rates would have on the fair value of net assets at June 30, 2008 and 2007, respectively, compared with the base case or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at June 30, 2008 and 2007 levels, respectively.

Table 23
Economic Value of Equity Risk Analysis
Interest Rate Scenario (1)		Annualized Hypothetical Percentage Change in Economic Value of Equity June 30,
		2008		2007
2.00	%	(7.7	)%	(11.4	)%
1.00		(2.8	)	(5.4	)
Flat		—		—
(1.00	)	1.7		2.8
(2.00	)	(1.2	)	0.5

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

          There are material limitations with TSFG’s models presented in Tables 22 and 23, 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.

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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 10 to the Consolidated Financial Statements for disclosure of the amounts of lending commitments.

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

          See “Derivative Financial Instruments” under “Balance Sheet Review” and Note 9 to the Consolidated Financial Statements for additional information regarding derivatives.

Liquidity

          Liquidity management ensures that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, provide funds for dividends and debt service, manage operations on an ongoing basis, and capitalize on new business opportunities.

          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. 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. Daily and short-term liquidity needs are principally met with deposits from customers, payments on loans, maturities and paydowns of investment securities, and wholesale borrowings, including brokered CDs, federal funds purchased (as available), repurchase agreements, treasury tax and loan notes, and, depending on the availability of collateral, borrowings from the Federal Reserve and FHLB. In light of current market conditions, TSFG has reduced its usage of short-term unsecured wholesale borrowings. TSFG is focusing additional efforts aimed at acquiring new deposits from its customer base through its established branch network to enhance liquidity and reduce reliance on wholesale borrowing. Liquidity needs are a factor in developing the deposit pricing structure, which may be altered to retain or grow deposits if deemed necessary.

          Longer term funding needs are typically 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. In addition, the Company may also issue equity capital to address liquidity or capital needs.

          Under normal business conditions, the sources above are adequate to meet both the short-term and longer-term funding needs of the Company; however, TSFG’s contingency funding plan establishes early warning triggers to alert management to potentially 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

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crisis. Limits ensure that liquidity is sufficient to manage through crises of various degrees of severity, triggered by TSFG-specific events, such as significant adverse changes to earnings, credit quality or credit ratings, or general industry or market events, such as market instability or rapid adverse changes in the economy.

          In addition to the primary funding sources discussed above, secondary sources of liquidity include sales of investment securities which are not held for pledging purposes and other classes of assets. Securities classified as available for sale which are not pledged may be sold in response to changes in interest rates or liquidity needs. A significant portion of TSFG’s securities are pledged as collateral for repurchase agreements and public funds deposits.

          Management believes that TSFG’s available borrowing capacity and efforts to grow deposits are sufficient to provide the necessary funding for the remainder of 2008 and 2009. However, management is prepared to take other actions, including potential asset sales, 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 24 summarizes future contractual obligations based on maturity dates as of June 30, 2008. Table 24 does not include payments which may be required under employment and deferred compensation agreements. In addition, Table 24 does not include payments required for interest and income taxes (see Item 1, Consolidated Statements of Cash Flows for details on interest and income taxes paid for the six months ended June 30, 2008).

Table 24
Contractual Obligations
(dollars in thousands)
	Payments Due by Period
	Total		Remainder of 2008		2009 and 2010		2011 and 2012		After 2012
Time deposits	$	5,338,462	$	3,078,329	$	1,711,881	$	273,416	$	274,836
Short-term borrowings		1,581,601		1,581,601		—		—		—
Long-term debt		772,168		36		69,759		259,216		443,157
Operating leases		194,050		10,197		38,122		31,981		113,750
Expanded corporate facilities contracts		26,174		26,056		118		—		—
Total contractual obligations	$	7,912,455	$	4,696,219	$	1,819,880	$	564,613	$	831,743

          TSFG has the ability to borrow from the FHLB and maintain short-term lines of credit from unrelated banks. FHLB advances outstanding as of June 30, 2008 totaled $297.9 million. At June 30, 2008, TSFG had $625.9 million of unused borrowing capacity from the FHLB. TSFG funds its short-term needs principally with deposits, including brokered deposits, federal funds purchased, repurchase agreements, FHLB advances, Federal Reserve borrowings, treasury tax and loan notes, and the principal run-off of investment securities. At June 30, 2008, TSFG had unused short-term lines of credit totaling $814.7 million (which may be canceled at the lender’s option and which are subject to funds availability at the lender), compared to $1.9 billion at December 31, 2007.

          A collateralized borrowing relationship with the Federal Reserve Bank of Richmond is in place for Carolina First Bank. At June 30, 2008, TSFG had qualifying collateral to secure advances up to $3.5 billion, of which $500.0 million was outstanding, placed through the Federal Reserve’s Term Auction Facility (see “Borrowed Funds”).

          TSFG enters into agreements in the normal course of business to extend credit to meet the financial needs of its customers. For amounts and types of such agreements at June 30, 2008, 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.

          Typically, the primary sources of funding for the parent company include dividends received from its banking subsidiary, proceeds from the issuance of subordinated debt, equity, and commercial paper. Currently, dividends are not payable from Carolina First Bank to the parent without regulatory approval. The primary uses of funds for the parent company include repayment of maturing debt and commercial paper, share repurchases, dividends paid to common and preferred shareholders, and capital contributions to subsidiaries. At June 30, 2008, the parent company had one $10.0

57

million short-term unused line of credit. During the first half of 2008, two of its lines of credit totaling $25.0 million were cancelled.

          During second quarter 2008, TSFG issued $250 million of mandatory convertible non-cumulative preferred stock (with net proceeds of $239 million) and reduced its quarterly common stock cash dividend to $0.01 per share in an effort to strengthen its capital and liquidity position. The parent company contributed $125 million of the preferred capital proceeds to Carolina First Bank during second quarter 2008.

          TSFG’s original capital plan, announced in May 2008, included the possibility of issuing up to $100 million in bank-level subordinated debt. Subsequent to quarter-end, after further examination of our capital needs, we decided to suspend the offering.

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 June 30, 2008, TSFG’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures as currently in effect. Based on this evaluation, TSFG’s management concluded that as of June 30, 2008, 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 June 30, 2008 or through the date of this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, TSFG’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

          See Note 10 to the Consolidated Financial Statements for a discussion of legal proceedings.

Item 1A. Risk Factors

          There have been no material changes to the risk factors previously disclosed under Item 1A (pages 9-11) of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007.

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 June 30, 2008.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased			Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs (2) (in thousands)
April 1, 2008 to April 30, 2008		105	(1)	$	11.95		—	$	88,024
May 1, 2008 to May 31, 2008		876	(1)		6.57		—		88,024
June 1, 2008 to June 30, 2008		1,248	(1)		5.01		—		—
Total		2,229		$	5.95		—	$	—

(1)

These shares were canceled in connection with exercise of options, vesting of restricted stock, or distribution from the deferred compensation plan. Pursuant to TSFG’s stock option plans, participants may exercise stock options by surrendering shares of TSFG common stock the participants already own or, in some cases, by surrendering fully vested stock options as payment of the option exercise price. Pursuant to TSFG’s restricted stock plans, participants may tender shares of vested restricted stock as payment for taxes due at the time of vesting. Pursuant to TSFG’s Executive Deferred Compensation Plan, participants may tender shares of stock as payment for taxes due at the time of distribution. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable stock option, restricted stock, or deferred compensation plan and not pursuant to publicly announced share repurchase programs.

(2)

In August 2007, the Board of Directors amended and restated TSFG’s existing stock repurchase authorization to be an aggregate of $100.0 million, $88.0 million of which expired unused on June 30, 2008.

          On June 3, 2008, we issued 4,403 common shares to the former shareholder of Summit Title, LLC, a title insurance agency acquired by TSFG in 2004. These shares were issued in connection with earnout provisions in the acquisition documents. This issuance of shares was not registered under the Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2) thereof.

          On May 8, 2008, we issued 250,000 shares of preferred stock to certain institutional investors and certain Company affiliates (including directors) through a private placement. This issuance of shares was not registered under the Securities Act of 1933 in reliance upon the exemption set forth in Section 4(2) thereof.

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Item 3. Defaults upon Senior Securities

          None.

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

          On May 6, 2008, TSFG held its 2008 Annual Meeting of Shareholders. The results of the 2008 Annual Meeting of Shareholders follow.

          Proposal #1 – Election of Directors

	Voting shares in favor
	#		%			Withheld Authority
Michael R. Hogan		59,144,716		87.6	%		8,407,270
Jon W. Pritchett		59,356,413		87.9	%		8,195,573
Edward J. Sebastian		58,581,359		86.7	%		8,970,627
John C.B. Smith, Jr.		58,851,814		87.1	%		8,700,172
Mack I. Whittle, Jr.		55,885,790		82.7	%		11,666,196

          William P. Brant, J.W. Davis, M. Dexter Hagy, William S. Hummers III, Challis M. Lowe, Darla D. Moore, H. Earle Russell, Jr., William R. Timmons III, and David C. Wakefield III continued in their present terms as directors.

          C. Claymon Grimes, Jr., Samuel H. Vickers and Charles B. Schooler retired from the Board, effective as of the annual meeting.

          Proposal #2 – Approve Amendments to Articles of Incorporation to replace supermajority voting provisions with majority voting provisions. These proposed amendments were approved with 62,739,031 shares, or 92.9%, voting in favor, 4,363,927 shares voting against, and 449,219 shares abstaining.

          Proposal #3 – Approve Amendments to Articles of Incorporation to Phase Out TSFG’s Classified Board Structure. This proposed amendment was approved with 62,813,621 shares, or 93.0%, voting in favor, 4,267,577 shares voting against, and 471,105 shares abstaining.

          Proposal #4 – To Approve TSFG’s Stock Option Plan, including to increase the shares available for issuance thereunder by 500,000. This Plan was approved with 48,692,670 shares, or 81.7%, voting in favor, 10,927,736 shares voting against, and 891,103 shares abstaining.

          Proposal #5 – Approve TSFG’s Long Term Incentive Plan. This Plan was approved with 49,158,962 shares, or 82.5%, voting in favor, 10,423,510 shares voting against, and 929,137 shares abstaining.

          Proposal #6 – Approve TSFG’s Management Performance Incentive Plan This Plan was approved with 52,092,137 shares, or 87.5%, voting in favor, 7,473,546 shares voting against, and 945,826 shares abstaining.

          Proposal #7 – A shareholder proposal requiring an annual, non-binding shareholder vote to ratify executive compensation. This Proposal was approved with 30,183,294 shares, or 51.9%, voting in favor, 28,008,426 shares voting against, and 2,319,789 shares abstaining.

          Proposal #8 – Ratification of Auditors. The shareholders approved the appointment of PricewaterhouseCoopers LLP as independent auditors of TSFG for fiscal year 2008 with 65,349,276 shares, or 97.3%, voting in favor, 1,782,459 shares voting against, and 420,474 shares abstaining.

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          On July 18, 2008, TSFG held a Special Meeting of Shareholders. The results of the Special Meeting of Shareholders follow.

          Proposal #1 – Approve conversion terms and general voting rights of our Mandatory Convertible Non-cumulative Preferred Stock. This Proposal was approved with 40,742,129 shares, or 95.2%, voting in favor, 2,039,554 shares voting against, and 398,388 shares abstaining.

          Proposal #2 – Approve adjournment of the special meeting to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to adopt Proposal #1 or a quorum is not present at the time of the Special Meeting. This Proposal was approved with 37,832,623 shares, or 87.6%, voting in favor, 4,859,378 shares voting against, and 488,070 shares abstaining.

Item 5. Other Information

          On August 8, 2008, Michael R. Hogan resigned from the TSFG Board of Directors. On August 1, 2008, Mr. Hogan’s insurance company (of which he was a founding principal) was acquired by BB&T Corporation and in connection therewith, he became an officer of BB&T. Under the terms of the acquisition agreement, Mr. Hogan was precluded from serving on the board of any other financial institution. It was in compliance with this requirement that Mr. Hogan submitted his resignation to the TSFG Board of Directors.

Item 6. Exhibits

17.1	Letter of resignation dated August 8, 2008 from Michael R. Hogan
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 June 30, 2008 Quarterly Report on Form 10-Q with the Securities and Exchange Commission (“SEC”) and is accessible at no cost on TSFG’s web site, www.thesouthgroup.com, through the Investor Relations link. TSFG’s SEC filings are also available through the SEC’s web site at www.sec.gov.

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SIGNATURES

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

	The South Financial Group, Inc.
Date: August 11, 2008	/s/ James R. Gordon
	James R. Gordon
	Senior Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

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