- Quarterly Report (10-Q)

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, 2010

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 Incorporation or Organization)	(IRS Employer Identification No.)

102 South Main Street, Greenville, South Carolina	29601
(Address of Principal Executive Offices)	(Zip Code)

(864) 255-7900

Registrant's telephone number, including area code

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

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

Yes o 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 o	Accelerated filer x
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 3, 2010 was 216,403,004.

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,
	2010			2009			2009
Assets
Cash and due from banks	$	133,231		$	151,272		$	190,346
Interest-bearing bank balances		1,027,401			152,187			192,962
Securities
Available for sale, at fair value		2,145,352			1,744,633			2,095,401
Held to maturity (fair value $0, $147,203 and $129,496, respectively)		-			146,469			127,516
Total securities		2,145,352			1,891,102			2,222,917
Loans held for sale		31,457			40,290			15,758
Loans held for investment		7,658,395			9,306,009			8,386,127
Less: Allowance for loan losses		(394,155	)		(285,290	)		(365,642	)
Net loans held for investment		7,264,240			9,020,719			8,020,485
Bank-owned life insurance		302,036			298,946			302,830
Premises and equipment, net		253,547			273,365			261,523
Accrued interest receivable		34,003			40,517			37,304
Goodwill		-			221,650			214,118
Other intangible assets, net		13,690			19,282			15,707
Other assets		390,412			478,901			421,032
Total assets	$	11,595,369		$	12,588,231		$	11,894,982

Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing retail and commercial deposits	$	1,100,373		$	1,099,743		$	1,124,404
Interest-bearing retail and commercial deposits		6,579,981			6,233,137			6,225,707
Total retail and commercial deposits		7,680,354			7,332,880			7,350,111
Brokered deposits		1,748,799			2,055,772			1,946,101
Total deposits		9,429,153			9,388,652			9,296,212
Short-term borrowings		263,267			343,154			322,702
Long-term debt		1,116,206			1,126,435			1,116,869
Accrued interest payable		50,640			72,699			36,658
Other liabilities		119,282			148,038			129,367
Total liabilities		10,978,548			11,078,978			10,901,808

Commitments and contingencies (Note 10)

Shareholders' equity
Preferred stock-no par value; authorized 10,000,000 shares; issued and outstanding 347,000, 537,026, and 351,650 shares, respectively		332,943			519,406			335,783
Common stock-par value $1 per share; authorized 325,000,000 shares; issued and outstanding 216,403,004, 160,248,170, and 215,455,541 shares, respectively		216,403			160,248			215,456
Surplus		1,350,001			1,191,170			1,344,984
Retained deficit		(1,326,546	)		(403,296	)		(934,598	)
Accumulated other comprehensive income, net of deferred taxes		43,606			41,115			30,938
Other, net		414			610			611
Total shareholders' equity		616,821			1,509,253			993,174
Total liabilities and shareholders' equity	$	11,595,369		$	12,588,231		$	11,894,982

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data) (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Interest Income
Interest and fees on loans	$	95,195		$	121,823		$	194,055		$	245,942
Interest and dividends on securities:
Taxable		17,468			18,140			34,954			38,688
Exempt from federal income taxes		111			2,072			343			4,306
Total interest and dividends on securities		17,579			20,212			35,297			42,994
Interest on interest-bearing bank balances and short-term investments		489			-			773			1
Total interest income		113,263			142,035			230,125			288,937
Interest Expense
Interest on deposits		38,046			49,541			75,730			104,384
Interest on short-term borrowings		222			644			451			1,790
Interest on long-term debt		5,527			5,920			10,951			11,815
Total interest expense		43,795			56,105			87,132			117,989
Net Interest Income		69,468			85,930			142,993			170,948
Provision for Credit Losses		113,884			131,337			209,007			273,964
Net interest income after provision for credit losses		(44,416	)		(45,407	)		(66,014	)		(103,016	)
Noninterest Income		36,965			32,272			58,097			56,013
Noninterest Expenses		305,453			136,188			389,106			226,429
Loss before income taxes		(312,904	)		(149,323	)		(397,023	)		(273,432	)
Income tax benefit		(3,359	)		(59,647	)		(6,884	)		(109,353	)
Net Loss		(309,545	)		(89,676	)		(390,139	)		(164,079	)
Preferred stock dividends		(4,446	)		(6,726	)		(8,783	)		(15,814	)
Deemed dividend resulting from accretion of discount		(912	)		(857	)		(1,810	)		(1,701	)
Deemed dividend resulting from induced conversion		-			(13,986	)		-			(20,461	)
Amounts allocated to participating security holders		-			(240	)		-			(241	)
Net Loss Available to Common Shareholders	$	(314,903	)	$	(111,485	)	$	(400,732	)	$	(202,296	)


Average Common Shares Outstanding, Basic		215,987			90,987			215,756			86,629
Average Common Shares Outstanding, Diluted		215,987			90,987			215,756			86,629
Loss Per Common Share, Basic	$	(1.46	)	$	(1.23	)	$	(1.86	)	$	(2.34	)
Loss Per Common Share, Diluted		(1.46	)		(1.23	)		(1.86	)		(2.34	)
Dividends Per Common Share		-			0.01			-			0.02

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

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 Deficit And Other			Accumulated Other Comprehensive Income, Net			Total
Balance, December 31, 2008		74,643,649		$	74,644		$	566,379		$	1,135,920		$	(198,970	)	$	42,558		$	1,620,531
Net loss		-			-			-			-			(164,079	)		-			(164,079	)
Other comprehensive loss, net of income tax of $188		-			-			-			-			-			(1,443	)		(1,443	)
Comprehensive loss		-			-			-			-			-			-			(165,522	)
Common dividends declared ($0.02 per share)		-			-			-			-			(2,452	)		-			(2,452	)
Preferred dividends declared		-			-			-			-			(15,814	)		-			(15,814	)
Accretion of discount on preferred stock		-			-			1,701			-			(1,701	)		-			-
Common stock activity:
Issuance of common stock		75,000,000			75,000			-			(5,100	)		-			-			69,900
Conversion of preferred stock		9,988,306			9,988			(48,674	)		58,848			(20,461	)		-			(299	)
Restricted stock plan		325,784			326			-			389			-			-			715
Director compensation		144,763			145			-			102			-			-			247
Dividend reinvestment plan		79,114			79			-			61			-			-			140
Employee stock purchase plan		67,204			67			-			68			-			-			135
Stock option expense		-			-			-			1,372			-			-			1,372
Other, net		(650	)		(1	)		-			(490	)		791			-			300
Balance, June 30, 2009		160,248,170		$	160,248		$	519,406		$	1,191,170		$	(402,686	)	$	41,115		$	1,509,253

Balance, December 31, 2009		215,455,541		$	215,456		$	335,783		$	1,344,984		$	(933,987	)	$	30,938		$	993,174
Net loss		-			-			-			-			(390,139	)		-			(390,139	)
Other comprehensive income, net of income tax of $6,821		-			-			-			-			-			12,668			12,668
Comprehensive loss		-			-			-			-			-			-			(377,471	)
Accretion of discount on preferred stock		-			-			1,810			-			(1,810	)		-			-
Common stock activity:
Dividend reinvestment plan		59,547			59			-			(28	)		-			-			31
Employee stock purchase plan		123,911			124			-			(40	)		-			-			84
Restricted stock plan		48,622			49			-			417			-			-			466
Conversion of preferred stock		715,383			715			(4,650	)		3,911			-			-			(24	)
Common and preferred stock released by trust for deferred compensation		-			-			-			-			501			-			501
Deferred compensation payable in stock		-			-			-			-			(697	)		-			(697	)
Stock option expense		-			-			-			757			-			-			757
Balance, June 30, 2010		216,403,004		$	216,403		$	332,943		$	1,350,001		$	(1,326,132	)	$	43,606		$	616,821

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

	Six Months Ended June 30,
	2010			2009
Cash Flows from Operating Activities
Net loss	$	(390,139	)	$	(164,079	)
Adjustments to reconcile net loss to net cash provided by operating activities
Provision for credit losses		209,007			273,964
Depreciation, amortization, and accretion, net		25,318			18,749
Impairment of long-lived assets		-			17,376
Loss on other real estate owned		14,886			12,997
Loss on non-mortgage loans held for sale		-			11,299
Share-based compensation expense		1,241			2,737
Goodwill impairment		214,118			2,511
Gain on early extinguishment of debt		-			(3,043	)
Gain on certain derivative activities		(632	)		(2,220	)
Gain on securities		(10,098	)		(1,626	)
Gain on sale of mortgage loans		(1,962	)		(1,263	)
(Gain) loss on disposition of premises and equipment		(10	)		149
Origination of loans held for sale		(122,198	)		(198,882	)
Sale of loans held for sale and principal repayments		111,178			220,306
Decrease (increase) in other assets		50,206			(80,136	)
(Decrease) increase in other liabilities		(1,359	)		1,262
Net cash provided by operating activities		99,556			110,101

Cash Flows from Investing Activities
Sale of securities available for sale		198,676			131,466
Maturity, redemption, call, or principal repayments of securities available for sale		271,211			390,889
Maturity, redemption, call, or principal repayments of securities held to maturity		36,541			7,467
Purchase of securities available for sale		(456,842	)		(194,069	)
Purchase of securities held to maturity		-			(131,435	)
Sale of securities held to maturity		57,168			-
Repayments of loans held for investment, net of originations		443,295			232,690
Sale of loans originally held for investment		36,009			305,312
Sale of other real estate owned		23,941			13,985
Sale of premises and equipment		294			7
Purchase of premises and equipment		(3,863	)		(25,968	)
Net cash provided by investing activities		606,430			730,344

Cash Flows from Financing Activities
Increase (decrease) in deposits, net		130,967			(16,496	)
Decrease in short-term borrowings		(59,435	)		(1,283,247	)
Issuance of long-term debt		-			550,000
Payment of long-term debt		(89	)		(129,030	)
Issuance of common stock		-			69,900
Cash dividends paid on common stock		-			(1,595	)
Cash dividends paid on preferred stock		-			(18,429	)
Conversion of preferred stock		-			(299	)
Other common stock activity		(105	)		(175	)
Net cash provided by (used for) financing activities		71,338			(829,371	)
Net change in cash and cash equivalents		777,324			11,074
Cash and cash equivalents at beginning of period		383,308			292,385
Cash and cash equivalents at end of period	$	1,160,632		$	303,459

Supplemental Cash Flow Data
Interest paid, net of amounts capitalized	$	71,791		$	114,683
Income tax (refunds) payments, net		(20,751	)		(47,041	)
Significant non-cash investing and financing transactions:
Unrealized gain on available for sale securities		27,093			19,240
Securities transferred to available for sale from held to maturity		34,930			-
Loans transferred to other real estate owned		64,140			76,259
Loans transferred from held for investment to held for sale		40,861			346,471
Conversion/exchange of preferred stock		4,650			143,174

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Note 1 – General

The foregoing unaudited Consolidated Financial Statements and Notes are presented in accordance with the instructions for the Securities and Exchange Commission Quarterly Report on Form 10-Q. “TSFG” refers to The South Financial Group, Inc. and subsidiaries, except where the context requires otherwise. The information contained in the Consolidated Financial Statements included in TSFG's Annual Report on Form 10-K for the year ended December 31, 2009 should be referred to in connection with the reading of these unaudited interim Consolidated Financial Statements. The Consolidated Balance Sheet at December 31, 2009 is derived from TSFG’s Consolidated Audited Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments necessary to present a fair statement of the results for the interim periods have been made. All such adjustments are of a normal, recurring nature. TSFG has evaluated subsequent events for potential recognition and/or disclosure through the date the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.

Nature of Operations

TSFG is a bank holding company headquartered in Greenville, South Carolina that offers a broad range of financial products and services, including banking, treasury management, investments, wealth management, and private banking services. TSFG’s banking subsidiary Carolina First Bank conducts banking operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile). TSFG also owns several non-bank subsidiaries. At June 30, 2010, TSFG operated through 83 branch offices in South Carolina, 66 in Florida, and 27 in North Carolina. In South Carolina, the branches are primarily located in the state’s largest metropolitan areas. The Florida operations are principally concentrated in the Jacksonville, Orlando, Tampa Bay, Southeast Florida, and Gainesville areas. The North Carolina branches are primarily located in the Hendersonville and Asheville areas of western North Carolina and in the Wilmington area of eastern North Carolina.

Going Concern Considerations

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

As described in Note 12, Regulatory Matters, Carolina First Bank is currently operating under a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the South Carolina State Board of Financial Institutions (the “Consent Order”). In addition, The South Financial Group, Inc. has entered into a Written Agreement (the “Fed Agreement”) with the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

On May 16, 2010, the Company entered into a definitive agreement (“The Merger Agreement”) with TD providing for the merger of The South Financial Group, Inc. and a wholly-owned subsidiary of TD. Completion of the merger requires, among other things, the approval of TSFG’s shareholders and customary regulatory approvals. See Note 13, Definitive Agreement, for additional information regarding the proposed transaction. Although TSFG expects the merger to occur in September 2010, there can be no assurance that the merger will be consummated or, if consummated, when the merger will occur.

If the merger is not consummated and if TSFG is otherwise unable to raise capital, due to existing regulatory restrictions on cash payments between Carolina First Bank and TSFG, TSFG may be unable to continue as a going concern, and any continued independent operation would likely depend upon the ability to raise additional capital. There can be no assurance that TSFG will be successful in any efforts to raise such capital. Also, the pursuit of any additional strategic alternative transactions would involve significant expenses and management time and attention.

Both the parent company and Carolina First Bank actively manage liquidity and cash flow needs. The parent company does not have any debt maturing during 2010 or 2011. TSFG has suspended its common and preferred

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

dividends to shareholders. At June 30, 2010, the parent company had $25.8 million of cash and cash equivalents. During the first six months of 2010, the parent company contributed $30.0 million to its subsidiary bank as a capital contribution.

Cash and cash equivalents at the banking subsidiary at June 30, 2010 were approximately $1.2 billion. Carolina First Bank has $90,000 of long-term debt and $419.5 million in brokered CDs maturing in the remaining six months of 2010. Liquidity at the bank level is dependent upon the deposit franchise which funds 81.3% of the Company’s assets (or 66.2% excluding brokered CDs). During April 2010, the FDIC approved an interim final rule extending the Transaction Account Guarantee Program (“TAGP”), which provides full FDIC coverage for noninterest-bearing transaction deposit accounts and certain interest-bearing checking accounts, from June 30, 2010 to December 31, 2010 (and subject to extension for an additional one year as determined by the FDIC). On July 21, 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Act permanently increases the statutory standard maximum deposit insurance amount to $250,000. In addition, the Act provides, for all insured depository institutions, full deposit insurance coverage for noninterest-bearing transaction accounts for 2 years starting December 31, 2010. Deposit balances which are not covered by FDIC insurance total approximately $764 million currently, and would increase to approximately $1.1 billion without the benefit of the FDIC’s TAGP, but incorporating benefits of the Dodd-Frank Act. A significant portion of uninsured deposits are public fund deposits which are collateralized by investment securities. Loss of collateralized deposits in a liquidity crisis would be essentially liquidity-neutral to the extent released collateral could be sold or used to secure replacement wholesale funding. Thus, the primary deposit-related liquidity risk relates to balances which are neither insured nor collateralized, which total approximately $387 million currently, and would increase to approximately $449 million without the benefit of the TAGP, but incorporating benefits of the Dodd-Frank Act. Public deposits which are currently insured but which would be uninsured and would therefore require collateralization without the benefit of the TAGP totaled approximately $252 million at June 30, 2010. Free securities, which totaled $923 million at June 30, 2010, would be available to meet incremental collateral needs and, along with surplus cash, represent reserves to address liquidity needs in a crisis scenario. If a liquidity issue presents itself, deposit promotions may yield in-flows of cash, but such a strategy could be limited based on limitations on maximum interest rates imposed on TSFG by the Consent Order.

Based on current and expected liquidity needs and sources, as well as the probable completion of the TD merger, and excluding a liquidity crisis, management expects TSFG to be able to meet its obligations at least through June 30, 2011. However, if the Company is unable to consummate the merger with TD or otherwise comply with the terms of the Consent Order , its banking regulators could take further action, which could include actions (including the implementation of a receivership) that would have a material adverse effect on the Company’s business, results of operations and financial position.

Accounting Estimates and Assumptions

The preparation of the Consolidated Financial Statements and accompanying Notes requires management of TSFG to make a number of estimates and assumptions relating to reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from these estimates and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and reserve for unfunded lending commitments, the effectiveness of derivative and other hedging activities, the fair value of certain financial instruments (securities, derivatives, privately held investments, and, for purposes of goodwill impairment evaluation, loans), income tax assets or liabilities (including deferred tax assets and any related valuation allowance), share-based compensation, and accounting for acquisitions, including the fair value determinations, the analysis of goodwill impairment and the analysis of valuation allowances in the initial accounting of loans acquired. To a lesser extent, significant estimates are also associated with the determination of contingent liabilities, discretionary compensation, and other employee benefit agreements.

Principles of Consolidation

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2010 presentation with no impact on shareholders’ equity or net loss as previously reported. In particular, beginning first quarter 2010, TSFG reclassified interest-bearing balances held at the Federal Reserve from cash and due from banks to interest-bearing bank balances. Amounts for prior periods (including $192.8 million at December 31, 2009 and $152.2 million at June 30, 2009) have been reclassified to conform to the current presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, interest-bearing bank balances, and federal funds sold. Generally, both cash and cash equivalents have maturities of three months or less, and accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. At June 30, 2010, interest-bearing cash balances held at the Federal Reserve totaled $1.0 billion and are included in interest-bearing bank balances.

Loans Held for Sale

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

Loans or pools of loans are transferred from the held for investment portfolio to the held for sale portfolio when the intent to hold the loans has changed due to portfolio management or risk mitigation strategies and when there is a plan to sell the loans within a reasonable period of time. At the time of transfer, if the fair value is less than the cost, the difference related to the credit quality of the loan is recorded as an adjustment to the allowance for loan losses. Decreases in fair value subsequent to the transfer are recognized in noninterest income or expense.

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

Recently Adopted Accounting Pronouncements

Accounting for Transfers of Financial Assets

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

Accounting for Variable Interest Entities

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

Improving Disclosures about Fair Value Measurements

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

Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset

Accounting Standards Update No. 2010-18 (“ASU 2010-18”), “Receivables: Effect of a Loan Modification When the Loan is Part of a Pool that is Accounted for as a Single Asset,” allows a company to make a one-time election to prospectively terminate accounting for loans as a pool. Companies shall apply this election on a pool-by-pool basis. In addition, this election does not preclude an entity from accounting for future loan acquisitions as a pooled unit of accounting. This ASU is effective for any modification of a loan (or loans) accounted for within a pool occurring in interim or annual periods ending on or after July 15, 2010. Earlier application of the ASU is permitted.

Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses

Accounting Standards Update No. 2010-20 (“ASU 2010-20”), “ Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” requires companies to provide more information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. ASU 2010-20 will improve transparency in financial reporting by public and nonpublic companies that hold financing receivables, which include loans, lease receivables, and other long-term receivables. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010.

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						Six Months Ended
	June 30,						June 30,
	2010		2009				2010		2009
Noninterest Income
Service charges on deposit accounts	$	9,385		$	9,535		$	18,608	$	18,803
Debit card income, net		2,564			2,168			4,780		4,093
Customer service fee income		1,189			1,264			2,315		2,473
Total customer fee income		13,138			12,967			25,703		25,369
Insurance income		1,584			1,765			3,460		4,222
Retail investment services, net		1,603			1,646			3,190		3,656
Trust and investment management income		1,161			1,495			2,263		2,960
Benefits administration fees		-			571			-		1,213
Total wealth management income		4,348			5,477			8,913		12,051
Bank-owned life insurance income		4,480			2,560			6,924		5,062
Mortgage banking income		1,493			2,050			2,782		3,255
Gain on certain derivative activities		573			1,085			632		2,220
Merchant processing income, net		-			817			-		1,427
Gain on securities, net		10,487			4,580			10,098		1,626
Other		2,446			2,736			3,045		5,003
Total noninterest income	$	36,965		$	32,272		$	58,097	$	56,013

Noninterest Expenses
Salaries and wages	$	29,085		$	34,739		$	58,921	$	69,930
Employee benefits		6,793			8,925			11,305		17,848
Severance related benefits		-			829			878		829
Total salaries and wages and employee benefits		35,878			44,493			71,104		88,607
Goodwill impairment		214,118			2,511			214,118		2,511
Occupancy		9,771			9,506			19,471		18,942
Regulatory assessments		8,708			6,479			15,858		11,134
Write-downs/loss on other real estate owned		9,394			12,873			14,886		12,997
Furniture and equipment		6,335			6,801			12,941		13,746
Loan collection and foreclosed asset expense		5,940			7,247			10,632		12,138
Professional services (a)		5,295			4,351			10,624		8,858
Project NOW expense		-			281			-		1,579
Telecommunications		1,563			1,551			3,099		3,077
Advertising and business development		986			2,109			2,155		3,390
Loss on nonmortgage loans held for sale		-			9,461			-		11,299
Amortization of intangibles		1,008			1,286			2,017		2,577
FDIC special assessment		-			5,700			-		5,700
Loss on repurchase of auction rate securities		-			-			-		676
Gain on early extinguishment of debt		-			(2,991	)		-		(3,043	)
Impairment of long-lived assets		-			17,376			-		17,376
Other		6,457			7,154			12,201		14,865
Total noninterest expenses	$	305,453		$	136,188		$	389,106	$	226,429

(a) Expenses related to the proposed merger with TD and related capital raising activities totaled $1.4 million and $3.1 million for the three and six months ended June 30, 2010, respectively.

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Note 3 – Accumulated Other Comprehensive Income

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Net Unrealized Gains on Securities Available for Sale
Balance at beginning of period	$	27,153		$	27,233		$	18,487		$	6,890
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period		24,283			(8,116	)		37,615			24,185
Income tax (expense) benefit		(8,499	)		3,113			(13,165	)		(8,848	)
Less: Reclassification adjustment for gains included in net loss		(10,522	)		(4,950	)		(10,522	)		(4,945	)
Income tax expense		3,683			1,733			3,683			1,731
		8,945			(8,220	)		17,611			12,123
Balance at end of period		36,098			19,013			36,098			19,013

Net Unrealized Gains on Cash Flow Hedges
Balance at beginning of period		10,273			29,785			12,451			35,668
Other comprehensive (loss) income:
Unrealized (loss) gain on change in fair values		29			2,376			1,687			6,264
Income tax benefit (expense)		(10	)		(831	)		(591	)		(2,192	)
Less: Reclassification adjustment for gains included in net loss		(4,283	)		(14,196	)		(9,291	)		(27,135	)
Income tax (benefit) expense		1,499			4,968			3,252			9,497
		(2,765	)		(7,683	)		(4,943	)		(13,566	)
Balance at end of period		7,508			22,102			7,508			22,102
	$	43,606		$	41,115		$	43,606		$	41,115

Total other comprehensive income (loss)	$	6,180		$	(15,903	)	$	12,668		$	(1,443	)
Net loss		(309,545	)		(89,676	)		(390,139	)		(164,079	)
Comprehensive loss	$	(303,365	)	$	(105,579	)	$	(377,471	)	$	(165,522	)

Note 4 – Securities

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

	June 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities Available for Sale
U.S. Treasury	$	2,059	$	32	$	-	$	2,091
U.S. Government agencies		480,287		4,896		-		485,183
Agency residential mortgage-backed securities		1,587,812		50,324		-		1,638,136
Private label residential mortgage-backed securities		6,146		62		-		6,208
State and municipals		11,499		319		-		11,818
Other investments		2,014		43		141		1,916
	$	2,089,817	$	55,676	$	141	$	2,145,352

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	December 31, 2009
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities Available for Sale
U.S. Treasury	$	2,069	$	-	$	24	$	2,045
U.S. Government agencies		78,696		1,011		-		79,707
Agency residential mortgage-backed securities		1,952,386		34,984		7,065		1,980,305
Private label residential mortgage-backed securities		8,757		12		265		8,504
State and municipals		23,086		76		4		23,158
Other investments		1,964		24		306		1,682
	$	2,066,958	$	36,107	$	7,664	$	2,095,401

Securities Held to Maturity
State and municipals	$	16,217	$	411	$	9	$	16,619
Agency residential mortgage-backed securities		111,199		1,578		-		112,777
Other investments		100		-		-		100
	$	127,516	$	1,989	$	9	$	129,496

There were no securities held to maturity at June 30, 2010. The amortized cost and estimated fair value of securities available for sale (in thousands) at June 30, 2010, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The estimated fair value of securities was determined using quoted market prices.

	June 30, 2010
	Amortized		Estimated
	Cost		Fair Value
Securities Available for Sale
Due in one year or less	$	119,958	$	121,556
Due after one year through five years		1,361,985		1,392,095
Due after five years through ten years		287,010		294,079
Due after ten years		318,902		335,757
No contractual maturity		1,962		1,865
	$	2,089,817	$	2,145,352

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Proceeds from sales of securities held to maturity	$	57,168		$	-		$	57,168		$	-
Proceeds from sales of securities available for sale		198,676			125,737			198,676			131,466

Sales of securities held to maturity:
Gross realized gains	$	2,162		$	-		$	2,162		$	-
Sales of securities available for sale:
Gross realized gains		9,412			5,385			9,412			5,385
Gross realized losses		-			-			-			(5	)
Maturities and other securities transactions:
Gross realized gains		-			-			71			-
Other-than-temporary impairment		(1,087	)		(805	)		(1,547	)		(3,754	)
Net gain on securities	$	10,487		$	4,580		$	10,098		$	1,626

During second quarter 2010, TSFG sold securities classified as held to maturity with a net carrying amount of $55.0 million and recognized a $2.2 million gain on the sale. In addition, TSFG re-assessed its intent to hold its remaining securities classified as held to maturity. As a result of this re-assessment, TSFG reclassified the remaining held to maturity portfolio with a net carrying amount of $34.4 million to available for sale, recording an unrealized gain of $1.0 million in order to adjust to the fair value of $35.4 million at June 30, 2010.

During the three and six months ended June 30, 2010, TSFG sold securities classified as available for sale with a net carrying amount of $189.3 million and recognized a $9.4 million gain on the sale. During the three and six months ended June 30, 2009, TSFG sold securities classified as available for sale with net carrying amounts of $120.3 million and $126.1 million, respectively, and recognized net gains of $5.4 million on the sales.

Subsequent to quarter-end, TSFG sold approximately $2.1 billion of securities and recognized a gain on sale of $54.4 million. Proceeds were reinvested into short-term agency securities, with the remainder held as excess cash. The unrealized gain or loss on securities is excluded from regulatory capital calculations; therefore, the gain recognition on the securities sales improved regulatory capital ratios.

Securities with estimated fair values of $1.2 billion and $1.1 billion at June 30, 2010 and December 31, 2009, respectively, were pledged to secure public deposits and for other purposes. The amortized cost totaled approximately $1.2 billion and $1.1 billion for these same periods.

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, 2010
	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
Other investments	$	1,325	$	120	$	41	$	21	$	1,366	$	141

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	December 31, 2009
	Less than 12 Months				12 Months or Longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Securities Available for Sale
U.S. Treasury	$	2,045	$	24	$	-	$	-	$	2,045	$	24
Agency residential mortgage-backed securities		758,427		7,053		2,572		12		760,999		7,065
Private label residential mortgage-backed securities		-		-		2,392		265		2,392		265
State and municipals		-		-		648		4		648		4
Other investments		399		116		830		190		1,229		306
	$	760,871	$	7,193	$	6,442	$	471	$	767,313	$	7,664

Securities Held to Maturity
State and municipals	$	1,237	$	9	$	-	$	-	$	1,237	$	9

During second quarter 2010, TSFG recorded $1.1 million in other-than-temporary impairment on certain of its debt securities 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 $2.1 billion of securities and recognized a gain on sale of $54.4 million.

At June 30, 2010, TSFG had four individual equity investments that were in an unrealized loss position. These securities were not considered impaired on an other-than-temporary basis based on either the short duration of the unrealized loss, or, to the extent that an investment has been in an unrealized loss position for more than a year, improving trends in fair value.

TSFG also invests in limited partnerships, limited liability companies and other privately held companies. These investments are included in other assets. In the three and six months ended June 30, 2010, TSFG recorded $34,800 and $494,000, respectively, in other-than-temporary impairment on these investments. At June 30, 2010, TSFG's investment in these entities totaled $14.7 million, of which $7.8 million were accounted for under the cost method and $6.9 million were accounted for under the equity method.

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Note 5 – Loans

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

	June 30, 2010		December 31, 2009
Commercial Loans
Commercial and industrial	$	1,796,992	$	2,080,329
Commercial owner - occupied real estate		1,269,990		1,271,525
Commercial real estate		3,158,947		3,501,809
		6,225,929		6,853,663
Consumer Loans
Indirect - sales finance		179,312		230,426
Consumer lot loans		121,412		144,315
Direct retail		79,172		83,460
Home equity		772,748		787,645
		1,152,644		1,245,846

Mortgage Loans		279,822		286,618
Total loans held for investment		7,658,395		8,386,127
Loans held for sale		31,457		15,758
Total loans	$	7,689,852	$	8,401,885

Included in the above:
Nonaccrual loans held for investment	$	460,617	$	399,046
Loans past due 90 days still accruing interest		14,150		10,465

During the three and six months ended June 30, 2010, TSFG transferred (and sold) $13.2 million and $40.9 million of loans from the held for investment portfolio to the held for sale portfolio. In connection with the sales for the three and six months ended June 30, 2010, TSFG charged-off $1.5 million and $4.9 million, respectively, against the allowance for loan losses prior to transferring them to loans held for sale.

Loan restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. Consequently, a modification that would otherwise not be considered is granted to the borrower. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance with the modified terms. At June 30, 2010 TSFG had $75.5 million in loans that were accruing interest under the terms of troubled debt restructurings. This amount consists of $ 56.1 million in commercial loans, $17.3 million in residential mortgage loans, and $ 2.1 million in other consumer loans.

Loans are considered to be impaired when, in management’s judgment and based on current information, the full collection of principal and interest becomes doubtful. A loan is also considered impaired if its terms are modified in a troubled debt restructure. At June 30, 2010, TSFG did not have any material commitments to lend additional money to borrowers whose loans had been restructured in a troubled debt restructure. The following table summarizes information on impaired loans (in thousands):

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	At and For the Six Months Ended June 30, 2010		At and For the Year Ended December 31, 2009
Impaired loans with specific allowance	$	287,640	$	197,576
Impaired loans with no specific allowance		218,727		194,763
Total impaired loans	$	506,367	$	392,339

Related allowance	$	50,806	$	37,656
Interest income recognized		1,589		1,484
Foregone interest		10,939		15,527

Note 6 – Allowance for Credit Losses

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

	At and For the Six Months Ended June 30,						At and For the Year Ended December 31,
	2010			2009			2009
Allowance for loan losses
Balance at beginning of period	$	365,642		$	247,086		$	247,086
Allowance adjustment for loans sold		-			(4,471	)		(4,471	)
Provision for loan losses		209,968			272,362			664,208
Loans charged-off		(195,599	)		(234,565	)		(556,585	)
Recoveries of loans previously charged-off		14,144			4,878			15,404
Balance at end of period	$	394,155		$	285,290		$	365,642

Reserve for unfunded lending commitments
Balance at beginning of year	$	7,484		$	2,788		$	2,788
Provision for unfunded lending commitments		(961	)		1,602			4,696
Balance at end of period	$	6,523		$	4,390		$	7,484

Allowance for credit losses
Balance at beginning of year	$	373,126		$	249,874		$	249,874
Allowance adjustment for loans sold		-			(4,471	)		(4,471	)
Provision for credit losses		209,007			273,964			668,904
Loans charged-off		(195,599	)		(234,565	)		(556,585	)
Recoveries of loans previously charged-off		14,144			4,878			15,404
Balance at end of period	$	400,678		$	289,680		$	373,126

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Note 7 – 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, 2010:

	Carolina First			Mercantile			Other			Total
Balance as of December 31, 2009
Goodwill	$	201,628		$	426,049		$	12,490		$	640,167
Accumulated impairment losses		-			(426,049	)		-			(426,049	)
		201,628			-			12,490			214,118

Goodwill impairment charge		(201,628	)		-			(12,490	)		(214,118	)

Balance as of June 30, 2010
Goodwill		201,628			426,049			12,490			640,167
Accumulated impairment losses		(201,628	)		(426,049	)		(12,490	)		(640,167	)
	$	-		$	-		$	-		$	-

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

For the June 30, 2010 goodwill impairment test, management used a total company fair value of $191.2 million based on the cash election of $0.28 per share available to common shareholders proposed in the definitive merger agreement with TD plus the $130.6 million consideration that TD will pay to the U.S. Treasury for its $347 million of TSFG preferred stock and the associated warrant (see Note 13). The $191.2 million valuation was allocated to each of the reporting units based on the relative economic capital allocated to each reporting unit. The valuations indicated that the fair values of the Carolina First segment and insurance operations were less than their carrying values. Step 2 of the evaluation indicated that there was no remaining value attributable to the goodwill, and the entire carrying value of $214.1 million was written off during the second quarter.

During second quarter 2009, TSFG recorded a $2.1 million goodwill impairment charge on one of its nonbank subsidiaries (included in the Other segment) based on discounted cash flows and estimated market valuations. Also in second quarter 2009, TSFG recorded a $411,000 goodwill impairment charge in its Retirement Plan Administration reporting unit due to its decision to sell its subsidiary, American Pensions, Inc. (included in the Other segment). Both of these reporting units were sold during third quarter 2009.

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Note 8 – Other Real Estate Owned

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	142,631		$	73,672		$	122,086		$	44,668
Property transferred in		28,928			44,167			64,141			76,259
Proceeds from sales		(14,765	)		(11,021	)		(23,941	)		(13,985	)
Loss on sales		(1,462	)		(2,643	)		(2,406	)		(2,767	)
Write-downs		(7,932	)		(10,230	)		(12,480	)		(10,230	)
Balance at end of period	$	147,400		$	93,945		$	147,400		$	93,945

Note 9 – Derivative Financial Instruments and Hedging Activities

TSFG is exposed to certain risks arising from both its ongoing business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. TSFG manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, TSFG enters into derivative financial instruments to manage exposure that arises from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage the differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments, principally related to certain variable-rate loans and fixed-rate borrowings.

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	June 30, 2010						December 31, 2009
	Fair Value				Notional		Fair Value				Notional
	Asset		Liability		Amount		Asset		Liability		Amount
Derivatives designated as hedging instruments under GAAP:
Cash flow hedges
Interest rate swaps associated with lending activities	$	481	$	-	$	100,000	$	14,339	$	-	$	780,000

Fair value hedges
Interest rate swaps associated with brokered CDs		1,280		22		38,586		1,895		48		54,185
Total derivatives designated as hedging instruments under GAAP	$	1,761	$	22	$	138,586	$	16,234	$	48	$	834,185

Derivatives not designated as hedging instruments under GAAP:
Interest rate swaps	$	2,808	$	3,652	$	268,173	$	279	$	480	$	119,755
Forward foreign currency contracts		99		99		9,614		12		12		13,331
Customer swap contracts		32,391		25,425		732,994		25,658		22,067		850,680
Options, mortgage contracts and other		291		285		106,752		416		433		111,328
Total derivatives not designated as hedging instruments under GAAP	$	35,589	$	29,461	$	1,117,533	$	26,365	$	22,992	$	1,095,094

Total derivatives	$	37,350	$	29,483	$	1,256,119	$	42,599	$	23,040	$	1,929,279

Cash Flow Hedges of Interest Rate Risk

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010 and 2009, such derivatives were used to hedge the variable cash inflows associated with existing pools of prime and LIBOR-based loan assets. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the three and six months ended June 30, 2010, no hedge ineffectiveness was recognized. For the three and six months ended June 30, 2009, the Company recognized a gain of $78,000 and a loss of $96,000, respectively, for hedge ineffectiveness attributable to a mismatch between the swap notional and the aggregate principal amount of the designated loan pools. In addition, certain swaps failed to qualify for hedge accounting due to this mismatch; accordingly, the change in fair value of these swaps during the three and six months ended June 30, 2009 of $1.0 million and $1.2 million, respectively, was recognized directly in earnings as a loss and was included in the sections entitled “Derivatives Not Designated as Hedging Instruments” throughout this footnote.

Certain of these swaps with a notional amount of $265.0 million were terminated or de-designated in the six months ended June 30, 2010. The current balance left in OCI relating to these hedges is a pre-tax gain of approximately $8.9 million that will be amortized to the statement of operations as the hedged cash flows impact earnings. During the three and six months ended June 30, 2010, the Company accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $599,000 and $726,000, respectively, to earnings as a result of the hedged forecasted transactions becoming probable not to occur due to declines in certain pools of prime and LIBOR based loans. During the three and six months ended June 30, 2009, the Company accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $1.8 million and $2.6 million, respectively, to earnings as

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

a result of the hedged forecasted transactions becoming probable not to occur. During the next twelve months, the Company estimates that $8.1 million will be reclassified as an increase to interest income. With respect to cash flow hedges, forecasted transactions are being hedged through 2012.

Fair Value Hedges of Interest Rate Risk

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

For derivatives that are designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. For the three and six months ended June 30, 2010, the Company recognized losses of $7,000 and $12,000, respectively, related to hedge ineffectiveness and amounts excluded from effectiveness testing. For the three and six months ended June 30, 2009, the Company recognized a loss of $715,000 and $121,000, respectively, related to hedge ineffectiveness and amounts excluded from effectiveness testing. The net impact of the Company’s fair value hedges to interest expense for the three and six months ended June 30, 2010, which includes net settlements on the derivatives and any amortization of the basis adjustment on the hedged items, was a reduction to interest expense of $469,000 and $978,000, respectively. The net impact of the Company’s fair value hedges to interest expense for the three and six months ended June 30, 2009, which includes net settlements on the derivatives and any amortization of the basis adjustment on the hedged items, was a reduction to interest expense of $1.3 million and $2.5 million, respectively.

Non-designated Hedges

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

Additionally, TSFG offers programs that permit its customers to hedge various risks, including fluctuations in interest rates and foreign exchange rates. Customer contracts are frequently interest rate swaps in conjunction with floating rate loans to achieve fixed rate financing and foreign exchange forward contracts to manage currency risk associated with non-US dollar denominated transactions. Through these programs, derivative contracts are executed between the customers and TSFG. In most cases, offsetting contracts are executed between TSFG and selected third parties to hedge market risk created through the customer contracts. The interest rates on the third party contracts are identical to the interest rates on the customer contracts, and thus, the change in fair value of the customer contracts will generally be offset by the change in fair value of the related third-party contracts, with the exception of any credit valuation adjustments that may be recorded. However, during 2009, certain third party counterparties terminated contracts as a result of TSFG’s rating downgrades, and TSFG did not replace a portion of the terminated contracts. As a result, certain customer contracts are no longer offset by third-party hedges. At June 30, 2010, the total fair value of TSFG’s interest rate swaps with customers was an asset of $32.4 million, net of a $1.6 million established reserve for credit losses. During the three and six months ended June 30, 2010, TSFG recorded credit losses of $79,000 and $2.2 million, respectively, on its customer swaps.

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

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Effect of Derivative Instruments on the Consolidated Statements of Operations

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Derivatives in Cash Flow Hedging Relationships
Interest rate swaps associated with lending activities:
Amount of gain recognized in OCI	$	30	$	2,034	$	1,688	$	5,700
Amount of gain reclassified from accumulated OCI to interest income (effective portion)		3,684		9,007		8,565		18,926
Amount of gain reclassified from accumulated OCI to gain on certain derivative activities (effective portion)		599		2,836		726		3,780
Amount of gain recognized in gain on certain derivative activities (ineffective portion and amount excluded from effectiveness testing)		-		78		-		(96	)
Interest rate floor associated with lending activities:
Amount of gain recognized in OCI		-		342		-		564
Amount of gain reclassified from accumulated OCI to interest income (effective portion)		-		2,275		-		4,525

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Derivatives in Fair Value Hedging Relationships
Interest rate swaps associated with brokered CDs:
Amount of gain (loss) recognized in gain on certain derivative activities on derivative	$	178		$	(1,187	)	$	242		$	23
Amount of (loss) gain recognized in gain on certain derivative activities on hedged item		(186	)		472			(255	)		(144	)

		Amount of Gain (Loss)
		Recognized in Income on
		Derivative
Derivatives Not	Location of Gain (Loss)	Three Months Ended						Six Months Ended
Designated as	Recognized in Income on	June 30,						June 30,
Hedging Instruments	Derivative	2010			2009			2010			2009
Interest rate swaps	Loss on certain derivative activities	$	(10	)	$	(1,063	)	$	(71	)	$	(1,294	)
Interest rate swaps	Other noninterest income		(1,498	)		245			(2,131	)		819
Customer swap contracts	Gain on certain derivative activities		1,934			-			1,251			-
Mortgage contracts	Mortgage banking income		31			(79	)		35			(30	)
Other contracts	Loss on certain derivative activities		(10	)		(51	)		(12	)		(49	)
		$	447		$	(948	)	$	(928	)	$	(554	)

Credit-risk-related Contingent Features

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

Furthermore, certain of TSFG’s derivative instruments contain provisions that require the Company to maintain its status as a well / adequately capitalized institution and/or the Company’s debt to maintain a certain credit rating from one or more of the major credit rating agencies. These provisions enable the counterparties to the derivative instruments to request immediate payment or require TSFG to post additional collateral. At June 30, 2010, TSFG is considered “adequately capitalized” and no longer has rated debt.

As of June 30, 2010, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $27.2 million. As of June 30, 2010, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $39.7 million. Since the Company was in violation of certain debt rating provisions at June 30, 2010, it could have been required to settle its obligations under the agreements at the termination value ($27.2 million) and could have been required to post additional collateral with the respective counterparty (up to $1.9 million).

Note 10 – Commitments and Contingent Liabilities

Legal Proceedings

TSFG is currently subject to various legal proceedings, including the litigation discussed below, and claims arising in the ordinary course of business. In the opinion of management based on consultation with external legal counsel, any reasonably foreseeable outcome of such current litigation would not be expected to materially affect TSFG's consolidated financial position or results of operations, except to the extent indicated in the discussion below.

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

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

As previously disclosed, on May 16, 2010, TSFG, TD and a wholly owned subsidiary of TD entered into the Merger Agreement (providing for the Merger of TSFG with a TD subsidiary) and a share purchase agreement (the “Share Purchase Agreement”), pursuant to which TD agreed to purchase 100 newly issued shares of TSFG’s Series M Preferred Stock (the “Issuance”), which will vote together with TSFG common stock as a single class and represent 39.9% of the total voting power of holders of TSFG capital stock entitled to vote, for consideration of 1,000 TD common shares.

Subsequent to the entry into the Merger Agreement, two purported class action lawsuits were filed in the South Carolina Court of Common Pleas (the “Court”) relating to the transactions contemplated by the Merger Agreement and the Share Purchase Agreement, each on behalf of a putative class of TSFG stockholders and each naming TSFG, the TSFG directors, and TD as defendants. Those actions were consolidated on June 28, 2010, under the caption In re The South Financial Group, Inc., CA No. 2010-CP-23-2001 (the “Action”).

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

The plaintiffs in the Action generally challenge the proposed Merger and Issuance. On July 22, 2010, the defendants entered into a memorandum of understanding (the “MOU”) with the plaintiffs regarding the settlement of the Action. In connection with the settlement contemplated by the MOU, TD agreed not to engage in any additional purchases of TSFG common stock from July 22, 2010 through the record date for the special meeting of TSFG shareholders to vote on the Merger. In addition, TSFG and TD agreed to make certain additional disclosures relating to the Merger in the registration statement on Form F-4 to be filed with the Securities Exchange Commission by TD that includes a preliminary proxy statement for the purposing of soliciting the vote of TSFG shareholders.

The MOU contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including Court approval following notice to TSFG’s shareholders. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed merger, the Merger Agreement and the transactions contemplated thereby, and any disclosure made or shareholder vote held in connection therewith, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. Upon Court approval, plaintiffs’ attorneys are expected to apply for an award of attorneys’ fees and expenses. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the MOU may be terminated.

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, 2010, the estimated recourse reserve liability, included in other liabilities, totaled $6.0 million. TSFG will continue to evaluate the reserve level and may make adjustments through earnings as more information becomes known. There can be no guarantee that any liability or cost arising out of this matter will not exceed any established reserves.

Dividend Arrearage on Preferred Securities

During first quarter 2010, TSFG suspended dividend payments on its preferred stock and all remaining outstanding equity and capital instruments. This suspension of dividends does not constitute a default under the applicable documents governing such instruments. However, as a result, the Company is in arrears in the payment of dividends with respect to the Series 2008-T Preferred Stock, trust preferred securities, and REIT preferred securities, all of which are cumulative preferred securities.

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

As of June 30, 2010, the arrearage with respect to the Series 2008-T Preferred Stock, trust preferred securities, and REIT preferred securities held by third parties was $8.8 million, $1.6 million, and $1.6 million, respectively, or $11.9 million in the aggregate.

Loan Commitments

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

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

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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, 2010		December 31, 2009
Loan commitments:
Commercial, industrial, and other	$	875,894	$	1,085,129
Commercial owner-occupied and commercial real estate		72,885		119,928
Home equity loans		408,382		423,151
Total loan commitments		1,357,161		1,628,208
Standby letters of credit		189,773		199,237
Documentary letters of credit		3,956		2,066
Unused business credit card lines		30,731		31,746
Total	$	1,581,621	$	1,861,257

Note 11 – Preferred Stock

The following is a summary of TSFG’s preferred stock at and for the six months ended June 30, 2010 and 2009:

	Shares
	Balance, December 31, 2009		Exchanged		Converted to Common Shares			Balance, June 30, 2010		Carrying Value ($000s)
Series 2008D-V		1,048		-		(1,048	)		-		-
Series 2008D-NV		3,602		-		(3,602	)		-		-
Mandatorily convertible preferred stock		4,650		-		(4,650	)		-		-
Series 2008-T		347,000		-		-			347,000		347,000
Less discount originally attributable to the Warrant issued to the Treasury Department, net of accretion		-		-		-			-		(14,057	)
Series 2008-T, net		347,000		-		-			347,000		332,943
Total preferred stock		351,650		-		(4,650	)		347,000	$	332,943

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	Shares
	Balance, December 31, 2008		Exchanged			Converted to Common Shares			Balance, June 30, 2009		Carrying Value ($000s)
Series 2008ND-V		51,341		(21,852	)		(10,689	)		18,800	$	18,800
Series 2008ND-NV		177,639		(72,648	)		(37,985	)		67,006		67,006
Series 2008D-V		2,248		-			-			2,248		2,248
Series 2008D-NV		7,472		-			-			7,472		7,472
Series 2009-A		-		94,500			-			94,500		94,500
Mandatorily convertible preferred stock		238,700		-			(48,674	)		190,026		190,026
Series 2008-T		347,000		-			-			347,000		347,000

Less discount originally attributable to the Warrant issued to the Treasury Department, net of accretion		-		-			-			-		(17,620	)
Series 2008-T, net		347,000		-			-			347,000		329,380
Total preferred stock		585,700		-			(48,674	)		537,026	$	519,406

See Note 13, Definitive Agreement, for information regarding Series M Preferred Stock that will, subject to the terms and conditions set forth in the Merger Agreement, be issued to TD in connection with the merger.

Note 12 – Regulatory Matters

Effective April 30, 2010, Carolina First Bank’s Board of Directors entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the South Carolina State Board of Financial Institutions (the “Consent Order”). This Consent Order provides for various things, including (among other things) the following: (1) within 120 days of entering into the Consent Order, Carolina First Bank must increase its Tier 1 leverage ratio to 8% and its total risk-based capital ratio to 12%, (2) Carolina First Bank must prepare strategic, capital, liquidity and earnings plans and related projections within certain timetables set forth in the Consent Order and on an ongoing basis, (3) Carolina First Bank must provide plans and meet timeframes set forth in the Consent Order for reducing criticized assets, (4) Carolina First Bank is precluded from extending credit to classified borrowers absent express board approval and must ensure compliance with updated concentration limits implemented with respect to its loan portfolio, (5) Carolina First Bank is subject to certain limitations with respect to brokered deposits and the rates it can pay on certain customer deposits, (6) Carolina First Bank cannot make dividends or bonus payments without the consent of the FDIC and (7) Carolina First Bank must limit its growth to 10% per year unless the FDIC consents otherwise. The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Consent Order. Regardless of the Bank’s capital ratios, it cannot be classified as “well capitalized” while it is operating under the Consent Order.

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

							Minimum Requirements
													To Be Well Capitalized
													Under Prompt
							For Capital Adequacy						Corrective Action
	Actual						Purposes						Provisions (1)
	June 30,			December 31,			June 30,			December 31,			June 30,			December 31,
	2010			2009			2010			2009			2010			2009
TSFG
Tier 1 capital	$	730,847		$	948,762		$	343,055		$	382,008			n/a			n/a
Total risk-based capital		878,621			1,073,472			686,110			764,015			n/a			n/a
Tier 1 capital ratio		8.52	%		9.93	%		4.00	%		4.00	%		n/a			n/a
Total risk-based capital ratio		10.24			11.24			8.00			8.00			n/a			n/a
Leverage ratio		6.11			7.91			4.00			4.00			n/a			n/a

Carolina First Bank
Tier 1 capital	$	704,919		$	854,808		$	342,225		$	381,423		$	513,363		$	572,134
Total risk-based capital		842,891			1,005,638			684,450			762,846			855,605			953,557
Tier 1 capital ratio		8.24	%		8.96	%		4.00	%		4.00	%		6.00	%		6.00
Total risk-based capital ratio		9.85			10.55			8.00			8.00			10.00			10.00
Leverage ratio		5.90			7.13			4.00			4.00			5.00			5.00

(1)

Minimum capital amounts and ratios are the amounts to be well capitalized under the various regulatory capital requirements administered by the federal banking agencies. Under the terms of the Consent Order, Carolina First Bank must increase its Tier 1 leverage ratio to 8% and its total risk-based capital ratio to 12%. Regardless of the Bank’s capital ratios, it cannot be classified as “well capitalized” while it is operating under the Consent Order.

Note 13 – Definitive Agreement

On May 16, 2010, the Company entered into the Merger Agreement with TD providing for the merger of TSFG and a wholly-owned subsidiary of TD. Under the terms of the Merger Agreement, which has been approved unanimously by the boards of both companies, TSFG’s common shareholders will receive, at each shareholder’s election, $0.28 in cash or 0.004 shares of TD common stock per TSFG common share. In addition, immediately prior to completion of the merger, the U.S. Treasury will sell to TD its $347 million of TSFG preferred stock and the associated warrant acquired under the Treasury’s Capital Purchase Program and discharge all accrued but unpaid dividends on that stock for total cash consideration of approximately $130.6 million. Completion of the merger requires, among other things, the approval of TSFG shareholders and customary regulatory approvals. The Merger Agreement further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay to TD a termination fee of approximately $7.6 million.

Through the date hereof, all bank regulatory approvals have been received except the Office of the Superintendent of Financial Institutions. Although receipt of such regulatory approval cannot be assured, TSFG believes that such will be received prior to the end of August 2010. The approval of the Federal Reserve is conditioned upon certain items, including the necessity for TSFG to enter into a transaction with respect to the disposition of certain deposit liabilities in Putnam County, Florida.

In connection with the Merger Agreement, TD and TSFG entered into a share purchase agreement (the “Share Purchase Agreement”) under which TD will, subject to the terms and conditions set forth therein, acquire 100 newly issued shares of Series M Preferred Stock of the Company, representing 39.9% of the aggregate voting power exercisable by the Company’s common shareholders and TD as holder of the Series M Preferred Stock, in consideration for the issuance of 1,000 shares of TD’s common stock to the Company . TSFG intends to issue the preferred stock described above in reliance on the shareholder approval exception set forth in NASDAQ Rule 5635(f), and the Audit Committee of TSFG’s Board of Directors has approved reliance on this exception. Following announcement of the merger,

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

however, the staff of NASDAQ informed TSFG that it has interpreted Rule 5635(f) to not apply in the specific context of the merger. Because there is no process for appealing this conclusion other than as part of the delisting appeal process, because the TD preferred share issuance remains an important requirement under the terms of the proposed transaction, and because the TSFG board determined that the issuance is in the best interests of TSFG, its shareholders and other constituents, TSFG has determined to proceed with the issuance of the Series M Preferred Stock to TD following the receipt of required regulatory approvals (and expiration of related waiting periods). Following the issuance, NASDAQ may initiate delisting proceedings.

The foregoing summary is not complete and is qualified in all respects by reference to the actual language of the Merger Agreement and the Share Purchase Agreement.

Although TSFG expects the merger to be consummated in September 2010, there can be no assurance that the transaction will be consummated or, if consummated, when the transaction will occur.

Note 14 – Income Taxes

At June 30, 2010, TSFG had federal income tax net operating loss (NOL) carryforwards of $495 million that will expire in 2029 and 2030. The ability of TSFG to utilize NOL carryforwards to reduce future federal taxable income and the federal income tax liability of the Company may be subject to various limitations under Section 382 of the Internal Revenue Code of 1986, as amended. The utilization of such carryforwards may be limited upon the occurrence of certain events, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock by TSFG which results in an aggregate change of more than 50% in the beneficial ownership of TSFG during any three-year period. If the transaction with TD Bank (see Note 13) is consummated, the utilization of the NOL, other tax attributes, and certain unrealized built-in losses could be limited to approximately $156 million.

Note 15 – Average Share Information

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net loss available to common shareholders (numerator)	$	(314,903	)	$	(111,485	)	$	(400,732	)	$	(202,296	)
Basic
Average common shares outstanding (denominator)		215,987,294			90,986,862			215,756,248			86,629,235
Loss per share	$	(1.46	)	$	(1.23	)	$	(1.86	)	$	(2.34	)
Diluted
Average common shares outstanding		215,987,294			90,986,862			215,756,248			86,629,235
Average dilutive potential common shares		-			-			-			-
Average diluted shares outstanding (denominator)		215,987,294			90,986,862			215,756,248			86,629,235
Loss per share	$	(1.46	)	$	(1.23	)	$	(1.86	)	$	(2.34	)

For the three and six months ended June 30, 2010, options to purchase an additional 3.0 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share because either their inclusion would have had an antidilutive effect or the exercise price of the option was greater than the average market price of the common shares. Also excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2010 because of their antidilutive effect were 10.1 million shares of common stock related to warrants, and 104,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs.

For the three and six months ended June 30, 2009, options to purchase an additional 4.3 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share because their

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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, 2009, because of their antidilutive effect, were 38.7 million shares of common stock related to mandatorily convertible preferred stock, 10.1 million shares of common stock related to warrants, and 276,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs.

Note 16 – Fair Value Disclosures

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

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

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

parameters. For purposes of potential valuation adjustments to its derivative positions, TSFG evaluates the credit risk of its counterparties as well as that of TSFG. Accordingly, TSFG has considered factors such as the likelihood of default by TSFG and its counterparties, its net exposures, and remaining contractual life, among other things, in determining fair value adjustments related to credit risk.

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

	June 30, 2010
	Total		Level 1		Level 2		Level 3
Securities available for sale:
U.S. Treasury	$	2,091	$	2,091	$	-	$	-
U.S. Government agencies		485,183		309,206		175,977		-
Agency residential mortgage-backed securities		1,638,136		-		1,638,136		-
Private label residential mortgage-backed securities		6,208		-		6,208		-
State and municipals		11,818		-		11,568		250
Other investments		1,916		1,394		471		51
Total securities available for sale		2,145,352		312,691		1,832,360		301
Derivative assets:
Interest rate swaps		4,569		-		3,289		1,280
Forward foreign currency contracts		99		-		99		-
Customer swap contracts		32,390		-		31,147		1,243
Options, mortgage contracts and other		291		-		-		291
Total derivative assets		37,349		-		34,535		2,814
Total	$	2,182,701	$	312,691	$	1,866,895	$	3,115

Derivative liabilities:
Interest rate swaps	$	3,674	$	-	$	3,674	$	-
Forward foreign currency contracts		99		-		99		-
Customer swap contracts		25,424		-		25,424		-
Options, mortgage contracts and other		286		-		81		205
Total derivative liabilities	$	29,483	$	-	$	29,278	$	205

	June 30, 2009
	Total		Level 1		Level 2		Level 3
U.S Treasury	$	4,051	$	4,051	$	-	$	-
U.S. Government agencies		44,220		26,133		18,087		-
Agency mortgage-backed securities		1,449,961		-		1,449,961		-
Private label mortgage-backed securities		11,600		-		11,600		-
State and municipals		232,916		-		232,616		300
Other investments		1,885		1,245		428		212
Total securities available for sale		1,744,633		31,429		1,712,692		512
Derivative assets		66,957		-		65,426		1,531
Total	$	1,811,590	$	31,429	$	1,778,118	$	2,043

Derivative liabilities	$	31,186	$	-	$	29,878	$	1,308

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

Derivative liabilities	$	23,040	$	-	$	22,675	$	365

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

	Three months ended June 30, 2010
	Securities available for sale				Net derivative assets (liabilities)
	State and municipals		Other investments		Interest rate swaps		Customer swap contracts			Other

Balance, beginning of period	$	250	$	1	$	1,095	$	1,953		$	55
Total net gains included in net income		-		-		185		133			31
Purchases, sales, issuances and settlements, net		-		-		-		-			-
Transfers into (from) Level 3		-		50		-		(843	)		-
Balance, end of period	$	250	$	51	$	1,280	$	1,243		$	86

Net gains included in net loss relating to assets/liabilities held at period-end	$	-	$	-	$	185	$	133		$	31

	Six months ended June 30, 2010
	Securities available for sale					Net derivative assets (liabilities)
	State and municipals			Other investments		Interest rate swaps		Customer swap contracts			Other

Balance, beginning of period	$	300		$	1	$	1,118	$	2,159		$	51
Total net gains (losses) included in net income		-			-		162		(962	)		35
Purchases, sales, issuances and settlements, net		(50	)		-		-		-			-
Transfers into Level 3		-			50		-		46			-
Balance, end of period	$	250		$	51	$	1,280	$	1,243		$	86

Net gains (losses) included in net loss relating to assets/liabilities held at period-end	$	-		$	-	$	162	$	(962	)	$	35

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2009						June 30, 2009
	Securities available for sale			Net derivative assets (liabilities)			Securities available for sale			Net derivative assets (liabilities)

Balance, beginning of period	$	516		$	1,173		$	566		$	(410	)
Total net gains (losses) included in net income		-			(950	)		-			633
Purchases, sales, issuances and settlements, net		(4	)		-			(54	)		-
Balance, end of period	$	512		$	223		$	512		$	223

Net gains (losses) included in net income relating to assets/liabilities held at period-end	$	-		$	(950	)	$	-		$	633

For the three and six months ended June 30, 2010, the gains/losses in the tables above were included in noninterest income. During the three and six months ended June 30, 2010, certain derivative assets were transferred to Level 3 from Level 2 based on increases in credit valuation adjustments due to deterioration in the credit quality of certain bank customers with whom TSFG has entered into customer swaps. Many of the derivative assets that were transferred into Level 3 during the first quarter of 2010 were written off during the three months ended June 30, 2010. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the quarterly valuation process. There were no significant transfers between Level 1 and Level 2 for the three and six months ended June 30, 2010. For the three and six months ended June 30, 2009, the gains/losses in the table above were included in noninterest income.

Assets Measured at Fair Value on a Nonrecurring Basis

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

									Total gains (losses)
	Carrying value at period end								Three months			Six months
	Total		Level 1		Level 2		Level 3		ended			ended
June 30, 2010
Loans held for investment	$	264,290	$	-	$	-	$	264,290	$	(34,346	)	$	(115,804	)
Goodwill		-		-		-		-		(214,118	)		(214,118	)
Other real estate owned		64,817		-		-		64,817		(12,184	)		(25,914	)
Private equity investments		1,700		-		-		1,700		(35	)		(494	)
									$	(260,683	)	$	(356,330	)

June 30, 2009
Loans held for investment	$	304,827	$	-	$	-	$	304,827	$	(83,078	)	$	(126,150	)
Loans held for sale		25,081		-		-		25,081		(2,031	)		(2,041	)
Goodwill		5,682		-		-		5,682		(2,511	)		(2,511	)
Long lived assets		69,486		-		-		69,486		(17,376	)		(17,376	)
Other real estate owned		60,865		-		-		60,865		(26,906	)		(39,215	)
Private equity investments		3,580		-		-		3,580		(330	)		(3,279	)
Auction rate preferred securities		5,774		-		-		5,774		-			(676	)
									$	(132,232	)	$	(191,248	)

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

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

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

Goodwill. Nonrecurring fair value adjustments to goodwill reflect impairment write-downs. The write-down was based on an estimate of the total value of TSFG that was allocated to each reporting unit based on each unit's economic capital. The valuations indicated that the fair values of the segments were less than their carrying values. The second step in the evaluation indicated that there was no remaining value attributed to goodwill. Because of the significance of unobservable inputs in

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

the valuation of goodwill impairment, goodwill subjected to nonrecurring fair value adjustments is classified as Level 3. See Note 7 for further discussion of the process for evaluating goodwill for impairment.

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

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

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

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

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

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

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

	June 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	133,231	$	133,231	$	190,346	$	190,346
Interest-bearing bank balances		1,027,401		1,027,401		192,962		192,962
Securities available for sale		2,145,352		2,145,352		2,095,401		2,095,401
Securities held to maturity		-		-		127,516		129,496
Net loans		7,295,697		6,623,991		8,036,243		7,213,252
Derivative assets		37,349		37,349		42,599		42,599

Financial Liabilities
Retail and commercial deposits	$	7,680,354	$	7,702,217	$	7,350,111	$	7,387,521
Brokered deposits		1,748,799		1,764,240		1,946,101		1,956,562
Total deposits		9,429,153		9,466,457		9,296,212		9,344,083
Short-term borrowings		263,267		263,184		322,702		322,545
Subordinated notes related to trust preferred securities		206,704		55,925		206,704		95,977
Other long-term debt		909,502		923,646		910,165		911,924
Total long-term debt		1,116,206		979,571		1,116,869		1,007,901
Derivative liabilities		29,483		29,483		23,040		23,040

Note 17

– Business Segments

TSFG’s banking subsidiary Carolina First Bank conducts banking operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile). Carolina First and Mercantile are TSFG’s primary reportable segments for management financial reporting. This business segment structure along geographic lines is consistent with the way management internally reviews financial information and allocates resources. Each geographic bank segment consists of commercial and consumer lending and full service branches in its geographic region with its own management team. The branches provide a full range of traditional banking products as well as treasury services, wealth management and mortgage banking services. The “Other” column includes the investment securities portfolio, indirect lending, treasury, parent company activities, bank-owned life insurance, net intercompany eliminations, various nonbank subsidiaries (including insurance), equity investments, and certain other activities not currently allocated to the aforementioned segments.

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

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	Carolina First			Mercantile			Other			Total
Three Months Ended June 30, 2010
Net interest income before inter-segment income (expense)	$	42,051		$	19,056		$	8,361		$	69,468
Inter-segment interest income (expense)		2,252			8,633			(10,885	)		-
Net interest income		44,303			27,689			(2,524	)		69,468
Provision for credit losses		98,554			25,031			(9,701	)		113,884
Noninterest income		12,674			5,782			18,509			36,965
Goodwill impairment (3)		201,628			-			12,490			214,118
Other noninterest expenses - direct (1)		34,153			21,471			35,711			91,335
Contribution before allocation		(277,358	)		(13,031	)		(22,515	)		(312,904	)
Noninterest expenses - allocated (2)		14,791			9,175			(23,966	)		-
Contribution before income taxes	$	(292,149	)	$	(22,206	)	$	1,451			(312,904	)
Income tax benefit											(3,359	)
Net loss										$	(309,545	)

Six Months Ended June 30, 2010
Net interest income before inter-segment income (expense)	$	86,081		$	38,732		$	18,180		$	142,993
Inter-segment interest income (expense)		4,466			16,155			(20,621	)		-
Net interest income		90,547			54,887			(2,441	)		142,993
Provision for credit losses		127,577			65,468			15,962			209,007
Noninterest income		24,734			9,597			23,766			58,097
Goodwill impairment		201,628			-			12,490			214,118
Other noninterest expenses - direct (1)		64,139			42,346			68,503			174,988
Contribution before allocation		(278,063	)		(43,330	)		(75,630	)		(397,023	)
Noninterest expenses - allocated (2)		29,105			17,734			(46,839	)		-
Contribution before income taxes	$	(307,168	)	$	(61,064	)	$	(28,791	)		(397,023	)
Income tax benefit											(6,884	)
Net loss										$	(390,139	)

June 30, 2010
Total assets	$	4,700,575		$	2,734,568		$	4,160,226		$	11,595,369
Total loans held for investment		4,633,690			2,686,803			337,902			7,658,395
Total deposits		4,187,190			3,466,751			1,775,212			9,429,153

(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.

(3)	Goodwill impairment – goodwill allocated to Carolina First banking segment and insurance operations was written off as of June 30, 2010. See Note 7 for further details.

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

	Carolina
	First			Mercantile			Other			Total
Three Months Ended June 30, 2009
Net interest income before inter-segment income (expense)	$	43,232		$	22,273		$	20,425		$	85,930
Inter-segment interest income (expense)		4,613			8,785			(13,398	)		-
Net interest income		47,845			31,058			7,027			85,930
Provision for credit losses		74,548			48,433			8,356			131,337
Noninterest income		13,253			5,906			13,113			32,272
Goodwill impairment		-			-			2,511			2,511
Other noninterest expenses - direct (1)		37,270			36,996			59,411			133,677
Contribution before allocation		(50,720	)		(48,465	)		(50,138	)		(149,323	)
Noninterest expenses - allocated (2)		23,595			11,043			(34,638	)		-
Contribution before income taxes	$	(74,315	)	$	(59,508	)	$	(15,500	)		(149,323	)
Income tax benefit											(59,647	)
Net loss										$	(89,676	)

Six Months Ended June 30, 2009
Net interest income before inter-segment income (expense)	$	84,760		$	42,740		$	43,448		$	170,948
Inter-segment interest income (expense)		11,743			20,644			(32,387	)		-
Net interest income		96,503			63,384			11,061			170,948
Provision for credit losses		122,084			139,108			12,772			273,964
Noninterest income		26,684			11,261			18,068			56,013
Goodwill impairment		-			-			2,511			2,511
Other noninterest expenses - direct (1)		63,394			56,984			103,540			223,918
Contribution before allocation		(62,291	)		(121,447	)		(89,694	)		(273,432	)
Noninterest expenses - allocated (2)		46,017			23,945			(69,962	)		-
Contribution before income taxes	$	(108,308	)	$	(145,392	)	$	(19,732	)		(273,432	)
Income tax benefit											(109,353	)
Net loss										$	(164,079	)

June 30, 2009
Total assets	$	5,790,782		$	3,349,787		$	3,447,662		$	12,588,231
Total loans held for investment		5,512,736			3,312,120			481,153			9,306,009
Total deposits		4,245,440			3,047,981			2,095,231			9,388,652

(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.

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

The following discussion and analysis are presented to assist in understanding the financial condition, changes in financial condition, results of operations, and cash flows of The South Financial Group, Inc. and its subsidiaries (collectively, "TSFG"), except where the context requires otherwise. TSFG may also be referred to herein as "we", "us", or "our.” This discussion should be read in conjunction with the consolidated financial statements appearing in this report as well as TSFG’s Annual Report on Form 10-K for the year ended December 31, 2009. Results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of results that may be attained for any other period.

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

	Page

Website Availability of Reports Filed with the Securities and Exchange Commission	36
Forward-Looking Statements	36
Non-GAAP Financial Information	37
Overview	38
Recent Legislation Impacting the Financial Services Industry	40
Critical Accounting Policies and Estimates	40
Deposit Insurance	41
Balance Sheet Review	42
Capital and Liquidity	58
Results of Operations	61
Enterprise Risk Management	67
Off-Balance Sheet Arrangements	69
Recently Adopted/Issued Accounting Pronouncements	70

Website Availability of Reports Filed with the Securities and Exchange Commission

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

Forward-Looking Statements

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

whether the merger with TD Bank is consummated;

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

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

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

continued volatility and deterioration of the capital and credit markets;

ability to maintain adequate sources of funding and liquidity;

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

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

adverse customer reaction associated with any public regulatory actions;

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

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

ability to maintain key personnel and attract new employees;

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

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

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

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

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

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

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

changes in accounting policies and practices;

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

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

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

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

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

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

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

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

fluctuations in consumer spending;

increased competition in our markets;

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

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

risks associated with income taxes, including the potential for adverse adjustments and the inability to reverse valuation allowances on deferred tax assets;

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

valuation of intangibles and any potential future impairment;

significant delay or inability to execute strategic initiatives designed to grow revenues;

changes in management’s assessment of and strategies for lines of business, asset, and deposit categories;

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

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

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

Non-GAAP Financial Information

This report also contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles (“GAAP”). TSFG’s management uses these non-GAAP measures to analyze TSFG’s performance. In particular, TSFG presents certain designated net interest income amounts on a tax-equivalent

basis (in accordance with common industry practice). Management believes that these presentations of tax-equivalent net interest income aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. In discussing its deposits, TSFG presents information summarizing its funding generated by customers using the following definitions: “core deposits,” which are defined by TSFG as noninterest-bearing, interest-bearing checking, money market accounts, and savings accounts; “customer deposits,” which are defined by TSFG as total deposits less brokered deposits; and “customer funding,” which is defined by TSFG as total deposits less brokered deposits plus customer sweep accounts. TSFG also discusses its funding generated from non-customer sources using the following definition: “wholesale borrowings,” which are defined by TSFG as short-term and long-term borrowings less customer sweep accounts plus brokered deposits. Management believes that these presentations of “core deposits,” “customer deposits,” “customer funding,” and “wholesale borrowings” aid in the identification of funding generated by its lines of business versus its treasury department. In addition, TSFG provides data eliminating intangibles in order to present data on a “tangible” basis. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. Management compensates for these limitations by providing detailed reconciliations between GAAP and operating measures. These disclosures should not be viewed as a substitute for GAAP measures, and furthermore, TSFG’s non-GAAP measures may not necessarily be comparable to non-GAAP performance measures of other companies.

Overview

The South Financial Group is a bank holding company, headquartered in Greenville, South Carolina, with $11.6 billion in total assets and 176 branch offices in South Carolina, Florida, and North Carolina at June 30, 2010. Founded in 1986, TSFG focuses on Southeastern banking markets, which have historically experienced long-term growth. TSFG operates Carolina First Bank, which conducts banking operations in North Carolina and South Carolina (as Carolina First) and in Florida (as Mercantile). At June 30, 2010, approximately 44% of TSFG’s customer deposits were in South Carolina, 45% were in Florida, and 11% were in North Carolina.

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

As described in Item 1, Note 12, Regulatory Matters, Carolina First Bank is currently operating under a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the South Carolina State Board of Financial Institutions (the “Consent Order”). In addition, The South Financial Group, Inc. has entered into a Written Agreement (the “Fed Agreement”) with the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

On May 16, 2010, the Company entered into a definitive agreement with TD providing for the merger of The South Financial Group with a wholly-owned subsidiary of TD. Completion of the merger requires, among other things, the approval of The South Financial Group’s shareholders and customary regulatory approvals. See Item 1, Note 13, Definitive Agreement, for additional information regarding the proposed transaction. There can be no assurance that the merger will be consummated or, if consummated, when the merger will occur.

As discussed in Item 1, Note 1 to the Consolidated Financial Statements, the Company has assessed its ability to continue as a going concern and has concluded that, based on current and expected liquidity needs and sources, as well as the probable completion of the TD merger, management expects TSFG to be able to meet its obligations at least through June 30, 2011. If the Company is unable to consummate the merger with TD or otherwise comply with the terms of the Consent Order, further regulatory actions (including the implementation of a receivership) could be taken, and its ability to operate as a going concern could be negatively impacted. Also see “Capital and Liquidity.”

TSFG reported a net loss available to common shareholders of $400.7 million, or $(1.86) per diluted share, for the first six months of 2010, compared to a net loss available to common shareholders of $202.3 million, or $(2.34) per diluted share for the first six months of 2009. The following is a summary of the consolidated statements of operations (in thousands, except per share data):

	Six Months Ended June 30,						Increase
	2010			2009			(Decrease)
Net interest income	$	142,993		$	170,948		$	(27,955	)
Provision for credit losses		209,007			273,964			(64,957	)
Noninterest income		58,097			56,013			2,084
Noninterest expenses		389,106			226,429			162,677
Income tax benefit		6,884			109,353			(102,469	)
Net loss		(390,139	)		(164,079	)		(226,060	)
Preferred stock dividends and other		(10,593	)		(38,217	)		27,624
Net loss available to common shareholders	$	(400,732	)	$	(202,296	)	$	(198,436	)

Loss per common share, diluted	$	(1.86	)	$	(2.34	)	$	0.48

At June 30, 2010, nonperforming assets as a percentage of loans and foreclosed property increased to 7.76% from 6.13% at December 31, 2009 and 5.94% at June 30, 2009. Nonperforming assets increased to $608.5 million at June 30, 2010 from $522.4 million at December 31, 2009 and $560.7 million at June 30, 2009, as stabilization in TSFG’s Florida markets was offset by deterioration in the coastal South Carolina and western North Carolina commercial real estate portfolios, which management expects to continue to be stressed. For the six months ended June 30, 2010, annualized net loan charge-offs totaled 4.55% of average loans held for investment, compared to 4.63% for the six months ended June 30, 2009. TSFG’s provision for credit losses decreased to $209.0 million for the first six months of 2010 from $274.0 million for the first six months of 2009.

Based on capital ratios at June 30, 2010, and under terms of the Consent Order, Carolina First Bank is considered “adequately capitalized” under applicable regulatory definitions. TSFG’s tangible equity to tangible assets ratio decreased to 5.21% at June 30, 2010, from 6.54% at December 31, 2009, primarily due to the net loss in the first half of 2010. Tangible common equity to tangible assets was 2.33% at June 30, 2010, compared to 3.67% at December 31, 2009 and 6.07% at June 30, 2009.

Tax-equivalent net interest income was $143.2 million for the first six months of 2010, compared to $173.3 million for the first six months of 2009. The net interest margin decreased to 2.65% for the first six months of 2010 from 2.87% for the first six months of 2009. The decrease was primarily due to TSFG’s ongoing liquidity positioning, continued contraction in outstanding loan balances and higher levels of nonperforming assets compared to the first half of 2009.

Noninterest income totaled $58.1 million for the first six months of 2010, compared to $56.0 million for the first six months of 2009. The increase was largely due to a $10.1 million gain on securities, partially offset by lower wealth management income, gain on certain derivative activities and the absence of merchant processing income due to the sale of the merchant line of business in third quarter 2009.

Noninterest expenses totaled $389.1 million for the first six months of 2010, compared to $226.4 million for the first six months of 2009. The increase relative to June 30, 2009 was primarily due to the goodwill impairment charge of $214.1 million related to TSFG’s Carolina First Banking segment and insurance operations in the second quarter of 2010 . The increased expense due to goodwill impairment was partially offset by lower personnel costs in 2010, as well as the absence of impairment of long lived assets, loss on nonmortgage loans held for sale and the FDIC special assessment that were all recognized in the first six months of 2009.

Recent Legislation Impacting the Financial Services Industry

On July 21 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things, will:

Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies.

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (DIF) and increase the floor of the size of the DIF, which generally will require an increase in the level of assessments for institutions, such as TSFG, with assets in excess of $10 billion.

Impose comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting certain derivatives businesses in the institution itself.

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.

Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. The Act will also provide unlimited federal deposit insurance for non-interest bearing demand transaction accounts at all insured depository institutions for two years starting December 31, 2010.

Effective 1 year after enactment, repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

Amend the Electronic Fund Transfer Act (EFTA) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers, such as TSFG, having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

Critical Accounting Policies and Estimates

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

For additional information regarding critical accounting policies and estimates, refer to the Annual Report of TSFG on Form 10-K for the year ended December 31, 2009, specifically Item 8, Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements and the section captioned “Critical

Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Deposit Insurance

During 2009, the FDIC required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As of June 30, 2010, $69.0 million in prepaid deposit insurance is included in other assets in the consolidated balance sheet. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.

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

The Dodd-Frank Act, signed into law July 21, 2010, permanently increases the statutory standard maximum deposit insurance amount to $250,000. In addition, the Act provides, for all insured depository institutions, full deposit insurance coverage for noninterest-bearing transaction accounts for 2 years starting December 31, 2010.

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

The Dodd-Frank Act requires the FDIC to revise the deposit insurance assessment system to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period. Currently, only deposits payable in the United States are included in determining the premium paid by an institution. The Dodd-Frank Act also eliminates the ceiling on the size of the DIF and increases the floor of the size of the DIF, which will require a general increase in the level of assessments for institutions, such as Carolina First Bank, with assets in excess of $10 billion. It is currently uncertain whether the changes proposed in the FDIC’s April 2010 notice of proposed rulemaking, described above, will be maintained by the FDIC after adopting them to the requirements of the Dodd-Frank Act.

Balance Sheet Review

Loans

TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At June 30, 2010, outstanding loans totaled $7.7 billion, which equaled 81.6% of total deposits (100.1% of customer deposits) and 66.3% of total assets. The major components of the loan portfolio were commercial loans, commercial real estate loans, and consumer loans (including both direct and indirect loans). Substantially all loans were to borrowers located in TSFG’s market areas in South Carolina, Florida, and North Carolina. At June 30, 2010, approximately 4% of the portfolio was unsecured.

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

In an effort to accelerate the sale or resolution of problem loans and to otherwise divest itself of loans with limited relationship opportunity, during the three and six months ended June 30, 2010, TSFG transferred $13.2 million and $40.9 million, respectively, from the held for investment portfolio to the held for sale portfolio (and subsequently sold or otherwise settled the loan).

TSFG generally sells a substantial majority of its residential mortgage loans in the secondary market. TSFG also retains certain of its mortgage loans in its held for investment portfolio as part of its overall balance sheet management strategy. Mortgage loans held for sale increased to $18.9 million at June 30, 2010 from $15.8 million at December 31, 2009, primarily due to timing of mortgage sales.

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

Table 1
Loan Portfolio Composition Based on Loan Purpose
(dollars in thousands)
	June 30,						December 31,
	2010			2009			2009
Commercial Loans
Commercial and industrial	$	1,796,992		$	2,428,511		$	2,080,329
Commercial owner - occupied real estate		1,269,990			1,315,442			1,271,525
Commercial real estate (1)		3,158,947			3,873,199			3,501,809
		6,225,929			7,617,152			6,853,663
Consumer Loans
Indirect - sales finance		179,312			285,658			230,426
Consumer lot loans		121,412			178,212			144,315
Direct retail		79,172			87,326			83,460
Home equity		772,748			811,057			787,645
		1,152,644			1,362,253			1,245,846

Mortgage Loans		279,822			326,604			286,618

Total loans held for investment	$	7,658,395		$	9,306,009		$	8,386,127

Percentage of Loans Held for Investment
Commercial and industrial		23.5	%		26.1	%		24.8	%
Commercial owner - occupied real estate		16.6			14.2			15.2
Commercial real estate		41.2			41.6			41.8
Consumer		15.0			14.6			14.8
Mortgage		3.7			3.5			3.4
Total		100.0	%		100.0	%		100.0	%

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

Commercial and industrial loans are loans to finance short-term and intermediate-term cash needs of businesses. Typical needs include the need to finance seasonal or other temporary cash flow imbalances, growth in working assets created by sales growth, and purchases of equipment and vehicles. Credit is extended in the form of short-term single payment loans, lines of credit for periods up to a year, revolving credit facilities for periods up to five years, and amortizing term loans for periods up to ten years.

Commercial owner - occupied real estate loans are loans to finance the purchase or expansion of operating facilities used by businesses not engaged in the real estate business. Typical loans are loans to finance offices, manufacturing plants, warehouse facilities, and retail shops. Depending on the property type and the borrower’s cash flows, amortization terms vary from 10 to 20 years. Although secured by mortgages on the properties financed, these loans are underwritten based on the cash flows generated by the 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. TSFG has effectively stopped originating indirect auto loans, with the exception of certain dealers that fit within our relationship strategy.

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, 2010, TSFG’s house lending limit was $35 million, and 8 credit relationships totaling $331.4 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 $505.0 million, or 6.6% of total loans held for investment at June 30, 2010, compared to 6.9% of total loans held for investment at December 31, 2009. Approximately $22.8 million of these loans were considered nonperforming loans as of June 30, 2010.

TSFG, through its Corporate Banking group, participates in “shared national credits” (multi-bank credit facilities of $20 million or more, or “SNCs”), primarily to borrowers who are headquartered or conduct business in or near our markets. At June 30, 2010, the loan portfolio included outstanding SNC borrowings of $364.8 million, decreasing from $495.6 million at December 31, 2009. The largest commitment was $28.6 million and the largest outstanding balance was $17.2 million at June 30, 2010. Our strategy targets borrowers whose management teams are well known to us and whose risk profile is above average. We expect to continue to reduce the percentage of our portfolio invested in SNCs due to the lack of relationship opportunity on much of the portfolio.

Late in 2009, TSFG established a U.S. Small Business Administration ("SBA") lending unit to generate new customers by focusing on small business lending opportunities. In early 2010, TSFG was approved as a preferred lender under the SBA Preferred Lender Program ("PLP"). This PLP designation grants TSFG the authority to process,

underwrite, close, and service SBA guaranteed loans without prior SBA review. From time to time, TSFG may sell the SBA-guaranteed portion of the loans into the SBA loan secondary market, generating gains from the sales, and retain the un-guaranteed portion (generally 10% to 25% of the principal). At June 30, 2010, loans held for sale included $12.6 million of SBA loans, compared to $2.5 million at March 31, 2009.

Commercial Real Estate Concentration

The portfolio’s largest concentration is in commercial real estate loans. Real estate development and construction are major components of the economic activity that occurs in TSFG’s markets. TSFG’s commercial real estate products include the following:

Commercial Real Estate Product		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 at origination for commercial real estate loans. Table 2 presents selected characteristics of commercial real estate loans by product type.

Table 2
Selected Characteristics of Commercial Real Estate Loans
(dollars in thousands)
	June 30, 2010
	Policy LTV			Weighted Average Time to Maturity (in months)		Weighted Average Loan Size		Largest Ten Total O/S
Completed income property		80	%		32.7	$	527	$	182,020
Residential A&D		75			9.4		465		80,242
Commercial A&D		75			7.4		834		54,198
Commercial construction		80			44.4		3,100		114,898
Residential construction		80			8.0		346		76,564
Residential condo		80			11.1		571		48,786
Undeveloped land		65			8.9		624		68,958

Overall					27.4	$	566

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

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

Table 3
Commercial Real Estate Loans by Geographic Diversification (1)
(dollars in thousands)
	June 30, 2010					December 31, 2009
	Balance		% of Total CRE			Balance		% of Total CRE
South Carolina, exluding Coastal:
Upstate South Carolina (Greenville)	$	539,821		17.1	%	$	569,018		16.2	%
Midlands South Carolina (Columbia)		201,071		6.4			232,088		6.6
Greater South Charlotte South Carolina (Rock Hill)		118,651		3.7			142,114		4.1
Coastal South Carolina:
North Coastal South Carolina (Myrtle Beach)		299,922		9.5			331,819		9.5
South Coastal South Carolina (Charleston)		260,817		8.3			292,207		8.3
Western North Carolina (Hendersonville/Asheville)		551,740		17.5			639,264		18.3
Central Florida (Orlando/Ocala)		346,450		11.0			356,239		10.2
North Florida:
Northeast Florida (Jacksonville)		199,946		6.3			219,202		6.3
North Central Florida		254,415		8.0			271,085		7.7
South Florida (Ft. Lauderdale)		187,785		5.9			198,874		5.7
Tampa Bay Florida		198,329		6.3			249,899		7.1
Total commercial real estate loans	$	3,158,947		100.0	%	$	3,501,809		100.0	%

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

Table 4
Commercial Real Estate Loans by Geography and Product Type
(dollars in thousands)
	June 30, 2010 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	$	540,635		$	376,504		$	349,834		$	200,569		$	350,258		$	125,802		$	120,932		$	2,064,534			27.0	%
Residential A&D		52,344			42,937			99,071			15,755			30,922			11,466			26,181			278,676			3.6
Commercial A&D		25,294			18,460			23,677			20,409			8,607			15,878			13,683			126,008			1.6
Commercial construction		167,468			8,984			18,580			33,290			16,464			9,177			9,509			263,472			3.4
Residential construction		33,153			6,440			4,858			24,162			14,176			19,974			1,352			104,115			1.4
Residential condo		3,348			48,878			6,374			909			1,861			636			4,183			66,189			0.9
Undeveloped land		37,301			58,536			49,346			51,356			32,073			4,852			22,489			255,953			3.3
Total CRE Loans	$	859,543		$	560,739		$	551,740		$	346,450		$	454,361		$	187,785		$	198,329		$	3,158,947			41.2	%

CRE Loans as % of Total Loans HFI		11.2	%		7.3	%		7.2	%		4.5	%		5.9	%		2.5	%		2.6	%		41.2	%

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

Credit Quality

A willingness to take credit risk is inherent in the decision to grant credit. Prudent risk-taking requires a credit risk management system based on sound policies and control processes that ensure compliance with those policies. TSFG’s credit risk management system is defined by policies approved by the Board of Directors that govern the risk underwriting, portfolio monitoring, and problem loan administration processes. Adherence to underwriting standards is managed through a multi-layered credit approval process and after-the-fact review by credit risk management of loans approved by lenders. Through daily review by credit risk managers, monthly reviews of exception reports, and ongoing analysis of asset quality trends, compliance with underwriting and loan monitoring policies is closely supervised. The administration of problem loans is driven by policies that require written plans for resolution and periodic meetings with

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

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

Table 5 presents our credit quality indicators.

Table 5
Credit Quality Indicators
(dollars in thousands)
	June 30						December 31,
	2010			2009			2009
Loans held for sale	$	31,457		$	40,290		$	15,758
Loans held for investment		7,658,395			9,306,009			8,386,127
Allowance for loan losses		394,155			285,290			365,642
Allowance for credit losses (1)		400,678			289,680			373,126

Nonaccrual loans - commercial and industrial		78,977			76,506			77,527
Nonaccrual loans - commercial owner - occupied real estate		51,029			24,170			43,701
Nonaccrual loans - commercial real estate		294,344			309,339			240,377
Nonaccrual loans - consumer		15,834			26,504			16,314
Nonaccrual loans - mortgage		20,433			28,046			21,127
Total nonperforming loans held for investment		460,617			464,565			399,046
Nonperforming loans held for sale - CRE		-			376			-
Foreclosed property (other real estate owned and personal property repossessions)		147,834			95,752			123,314
Total nonperforming assets	$	608,451		$	560,693		$	522,360

Restructured loans accruing interest	$	75,451		$	17,291		$	26,128

Loans past due 90 days or more (interest accruing)	$	14,150		$	11,107		$	10,465

Total nonperforming assets as a percentage of loans and foreclosed property		7.76	%		5.94	%		6.13	%
Total nonperforming assets as a percentage of total assets		5.25			4.45			4.39
Allowance for loan losses to nonperforming loans held for investment		0.86	x		0.61	x		0.92	x

(1)	The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.

TSFG’s nonperforming asset ratio (nonperforming assets as a percentage of loans and foreclosed property) increased to 7.76% at June 30, 2010 from 6.13% at December 31, 2009, as stabilization in TSFG’s Florida markets was offset by deterioration in the coastal South Carolina and western North Carolina commercial real estate portfolios, which management expects to continue to be stressed. Nonperforming asset balances also increased to $608.5 million at June 30, 2010 from $522.4 million at December 31, 2009.

Troubled debt restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. Accordingly, TSFG works with these borrowers to prevent or diminish further difficulties, and ultimately to improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted resulting in classification as a troubled debt restructuring. Troubled debt restructurings can involve loans remaining on non-accrual status, moving to non-accrual status, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in

assessing whether the borrower can meet the new terms and the determination of whether the loan is on accrual or non-accrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.

The majority of TSFG’s loan modifications relate to commercial lending and involve extending the term of the loan. In these cases, TSFG does not typically lower the interest rate or forgive principal or interest as part of the loan modification. At June 30, 2010, TSFG had $75.5 million in loans that were accruing interest under the terms of troubled debt restructurings, which consisted of $56.1 million in commercial loans, $17.3 million in residential mortgage loans, and $2.1 million in other consumer loans. Nonaccrual restructured loans totaling $26.9 million at June 30, 2010 are included in nonaccrual loans in Table 5 above. The amount of loan restructurings has increased during 2009 and 2010, as TSFG continues to work with borrowers who are experiencing financial difficulties. As a result of continued economic stress, TSFG anticipates that it will have further increases in loan restructurings.

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

Table 6
Commercial Real Estate Nonaccrual Loans
(dollars in thousands)
	June 30, 2010 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	$	24,629		$	16,065		$	29,943		$	4,730		$	9,013		$	3,764		$	11,918		$	100,062			21.7	%
Residential A&D		10,486			10,648			26,385			8,568			3,162			1,092			1,200			61,541			13.4
Commercial A&D		1,781			8,538			3,636			959			-			-			6,289			21,203			4.6
Commercial construction		14,098			-			927			-			1,225			-			5,193			21,443			4.7
Residential construction		223			41			1,469			5,908			1,600			-			-			9,241			2.0
Residential condo		38			35,076			496			-			6			-			4,002			39,618			8.6
Undeveloped land		2,576			3,031			9,138			15,061			10,123			782			524			41,235			8.9
Total CRE Nonaccrual Loans	$	53,831		$	73,399		$	71,994		$	35,226		$	25,129		$	5,638		$	29,126		$	294,343			63.8	%

CRE Nonaccrual Loans as % of Total Nonaccrual Loans HFI		11.7	%		15.9	%		15.6	%		7.6	%		5.5	%		1.2	%		6.3	%		63.8	%

Table 7
Commercial Real Estate Loans Past Due 30 Days or More (excluding nonaccruals)
(dollars in thousands)
	June 30, 2010					December 31, 2009
	Balance		% of CRE			Balance		% of CRE
North Carolina	$	21,209		0.67	%	$	17,747		0.51	%
South Carolina		26,950		0.86			23,714		0.68
Florida		33,865		1.07			71,877		2.05
Total CRE loans past due 30 days or more	$	82,024		2.60	%	$	113,338		3.24	%

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

Table 8
Potential Problem Loans
(dollars in thousands)
	June 30, 2010							December 31, 2009
	# of				% of			# of				% of
	Loans		Balance		LHFI			Loans		Balance		LHFI
Large potential problem loans ($5 million or more)		38	$	327,793		4.28	%		40	$	377,230		4.50	%
Small potential problem loans (less than $5 million)		1,158		558,004		7.29			1,112		558,700		6.66
Total potential problem loans (1)		1,196	$	885,797		11.57	%		1,152	$	935,930		11.16	%

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

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

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

Management’s ongoing evaluation of the adequacy of the Allowance considers both impaired and unimpaired loans and takes into consideration TSFG’s past loan loss experience, known and inherent risks in the portfolio, existing adverse situations that may affect the borrowers’ ability to repay, estimated value of any underlying collateral, an analysis of guarantees and an analysis of current economic factors and existing conditions.

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

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

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

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

TSFG generates historical loss ratios from actual loss history for nine subsets of the loan portfolio over a 12 quarter period (3 years). Commercial loans are sorted by risk rating into four pools—Pass, Special Mention, Substandard,

and Doubtful. Consumer loans are sorted into five pools by product type—Direct, Indirect, Home Equity, Consumer Lots, and Mortgage.

The adjusted loss ratio for each pool is multiplied by the dollar amount of loans in the pool in order to create a range. We then add and subtract five percent (5.0%) to and from this amount to create the upper and lower boundaries of the range. The upper and lower boundary amounts for each pool are summed to establish the total range. Although TSFG generally uses the actual historical loss rate, on occasion management may decide to select a higher or lower boundary based on known market trends or internal behaviors that would impact the performance of a specific portfolio grouping. The Level I reserves totaled $207.1 million at June 30, 2010, based on the portfolio historical loss rates, compared to $193.0 million at December 31, 2009.

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

TSFG tests a broad group of loans for impairment each quarter (this includes all large commercial relationships, generally over $1 million, that have been placed in nonaccrual status or modified as a troubled debt restructure). Once a loan is identified as impaired, reserves are based on a thorough analysis of the most probable source of repayment which is normally the liquidation of collateral, but may also include discounted future cash flows or the 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 $50.8 million and $37.7 at June 30, 2010 and December 31, 2009, respectively.

Level III Reserves. The third component of the Allowance represents subjective and judgmental adjustments determined by management to account for the effect of risks or losses that are not fully captured elsewhere. This part of the methodology reflects adjustments to historical loss experience to incorporate current economic conditions and other factors which impact the inherent losses in the portfolio. This component includes amounts for new loan products or portfolio categories which are deemed to have risks not included in the other reserve elements as well as macroeconomic and other factors. The qualitative risk factors of this third allowance level are more subjective and require a high degree of management judgment. Currently, Level III Reserves include additional reserves for current economic conditions, the commercial real estate concentration in the portfolio, and an additional adjustment to represent declining land values. The Level III Reserves totaled $136.3 million at June 30, 2010 compared to $135.0 million at December 31, 2009.

Reserve for Unfunded Commitments. At June 30, 2010 and December 31, 2009, the reserve for unfunded commitments was $6.5 million and $7.5 million, respectively. This reserve is determined by formula; historical loss ratios are multiplied by potential usage levels (i.e., the difference between actual usage levels and the second highest historical usage level).

Unallocated Reserves. The 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, 2010 was $25.5 million, compared to $21.3 million at December 31, 2009. The unallocated Allowance is the result of management’s best estimate of risks inherent in the portfolio, economic uncertainties and other subjective factors, including industry trends, as well as the imprecision inherent in estimates used for the allocated portions of the Allowance. Management reviews the overall level of the Allowance as well as the unallocated component and considers the level of both amounts in determining the appropriate level of reserves for the overall inherent risk in TSFG’s total loan portfolio.

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

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

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

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

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

Table 9
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,
	2010			2009			2009
Allowance for loan losses, beginning of year	$	365,642		$	247,086		$	247,086
Allowance adjustment for loans sold		-			(4,471	)		(4,471	)
Net charge-offs:
Loans charged-off		(195,599	)		(234,565	)		(556,585	)
Loans recovered		14,144			4,878			15,404
		(181,455	)		(229,687	)		(541,181	)
Additions to allowance through provision expense		209,968			272,362			664,208
Allowance for loan losses, end of period	$	394,155		$	285,290		$	365,642

Reserve for unfunded lending commitments, beginning of period	$	7,484		$	2,788		$	2,788
Provision for unfunded lending commitments		(961	)		1,602			4,696
Reserve for unfunded lending commitments, end of period	$	6,523		$	4,390		$	7,484

Allowance for credit losses, beginning of period	$	373,126		$	249,874		$	249,874
Allowance adjustment for loans sold		-			(4,471	)		(4,471	)
Net charge-offs:
Loans charged-off		(195,599	)		(234,565	)		(556,585	)
Loans recovered		14,144			4,878			15,404
		(181,455	)		(229,687	)		(541,181	)
Additions to allowance through provision expense		209,007			273,964			668,904
Allowance for credit losses, end of period	$	400,678		$	289,680		$	373,126

Average loans held for investment	$	8,050,855		$	10,000,260		$	9,456,636
Loans held for investment, end of period		7,658,395			9,306,009			8,386,127
Net charge-offs as a percentage of average loans held for investment (annualized)		4.55	%		4.63	%		5.72	%
Allowance for loan losses as a percentage of loans held for investment		5.15			3.07			4.36
Allowance for credit losses as a percentage of loans held for investment		5.23			3.11			4.45

The provision for credit losses for the first half of 2010 totaled $209.0 million, compared to $274.0 million for the first half of 2009, and exceeded net loan charge-offs by $27.6 million. The overall allowance for credit losses as a percentage of loans held for investment increased to 5.23% at June 30, 2010 from 4.45% at December 31, 2009. Net charge-offs in the first half of 2010 decreased to $181.5 million compared to $229.7 million in the first half of 2009. Tables 10 and 11 provide additional detail for net charge-offs.

Table 10
Net Charge-Offs by Product Type
(dollars in thousands)
	Six Months Ended
	June 30, 2010
	Amount		% of NCO
Commercial and industrial	$	57,778		31.8	%
Commercial owner-occupied real estate		12,314		6.8
Commercial real estate		89,938		49.6
Indirect - sales finance		3,151		1.7
Consumer lot loans		6,241		3.4
Direct retail		1,594		0.9
Home equity		6,911		3.8
Mortgage		3,528		2.0
Total net charge-offs	$	181,455		100.0	%

Table 11
Commercial Real Estate Net Charge-Offs by Product Type
(dollars in thousands)
	Six Months Ended June 30, 2010 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	$	4,997		$	8,607		$	10,198		$	2,447		$	3,141		$	1,514		$	5,345		$	36,249			20.0	%
Residential A&D		4,173			9,072			14,175			2,082			2,366			288			995			33,151			18.3
Commercial A&D		127			244			1,009			-			80			436			790			2,686			1.5
Commercial construction		519			135			1,688			-			424			-			-			2,766			1.5
Residential construction		34			874			1,243			163			8,623			(1,233	)		(2,346	)		7,358			4.1
Residential condo		365			80			362			-			-			-			5,853			6,660			3.7
Undeveloped land		(162	)		218			235			-			1,108			(91	)		(240	)		1,068			0.6
Total CRE Net Charge-Offs	$	10,053		$	19,230		$	28,910		$	4,692		$	15,742		$	914		$	10,397		$	89,938			49.6	%

CRE Net Charge-Offs as % of Total Net Charge-Offs		5.6	%		10.6	%		15.9	%		2.6	%		8.7	%		0.5	%		5.7	%		49.6	%

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, treasury tax and loan (“TT&L”) advances, FHLB advances, derivatives, and securities sold under repurchase agreements. Table 12 shows the carrying values of the investment securities portfolio.

Table 12
Investment Securities Portfolio Composition
(dollars in thousands)
	June 30,						December 31,
	2010			2009			2009
Available for Sale (at fair value)
U.S. Treasury	$	2,091		$	4,051		$	2,045
U.S. Government agencies		485,183			44,220			79,707
Agency residential mortgage-backed securities		1,638,136			1,449,961			1,980,305
Private label residential mortgage-backed securities		6,208			11,600			8,504
State and municipal		11,818			232,916			23,158
Other investments:
Community bank stocks		418			496			399
Other equity investments		1,498			1,389			1,283
		2,145,352			1,744,633			2,095,401
Held to Maturity (at amortized cost)
State and municipal		-			16,835			16,217
Agency residential mortgage-backed securities		-			129,534			111,199
Other investments		-			100			100
		-			146,469			127,516
Total	$	2,145,352		$	1,891,102		$	2,222,917

Total securities as a percentage of total assets		18.5	%		15.0	%		18.7	%

Percentage of Total Securities Portfolio
U.S. Treasury		0.1	%		0.2	%		0.1	%
U.S. Government agencies		22.6			2.3			3.6
Agency residential mortgage-backed securities		76.4			83.6			94.1
Private label residential mortgage-backed securities		0.3			0.6			0.4
State and municipal		0.5			13.2			1.7
Other investments		0.1			0.1			0.1
Total		100.0	%		100.0	%		100.0	%

Securities (i.e., securities available for sale and securities held to maturity) excluding the unrealized gain on securities available for sale averaged $2.2 billion for the first half of 2010 and $2.0 billion for the first half of 2009. The average tax-equivalent portfolio yield decreased for the six months ended June 30, 2010 to 3.22% from 4.48% for the six months ended June 30, 2009. The securities yield decreased primarily due to an overall decline in interest rates resulting in reinvestment of scheduled and unscheduled principal payments and calls at lower yields, investment of excess liquidity into lower yielding securities and the fourth quarter 2009 sales of higher-yielding mortgage-backed securities and municipal securities. Subsequent to June 30, 2010, TSFG sold $2.1 billion of securities. Proceeds of $1.4 billion were reinvested into short-term agency securities, with the remainder held as excess cash. The $54.4 million net gain on these sales improved regulatory capital ratios, as unrealized gains and losses are excluded from regulatory capital.

The duration of the debt securities portfolio and the impact of changes in interest rates on prepayment activity are not meaningful as of June 30, 2010 due to the sale of substantially all debt securities subsequent to quarter end and the partial reinvestment in short-term agency securities. Changes in interest rates are not expected to have a significant impact on the fair value or unrealized gain/loss on the securities due to the short-term maturities of the reinvested portfolio.

The majority of the securities at June 30, 2010 are government or agency securities and, therefore, pose minimal credit risk. The securities purchased subsequent to quarter-end were of similar or higher quality and have minimal credit risk.

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

Table 13
Investment Securities Portfolio Credit Risk Profile
(dollars in thousands)
	June 30, 2010					December 31, 2009
	Balance		% of Total			Balance		% of Total
Government and agency
U.S. Treasury	$	2,091		0.1	%	$	2,045		0.1	%
U.S. Government agencies (1)		485,183		22.6			79,707		3.6
Agency mortgage-backed securities (MBS) (1)(2)(3)		1,638,136		76.4			2,091,504		94.0
Total government and agency		2,125,410		99.1			2,173,256		97.7
State and municipal (3)(4)(5)
Pre-funded with collateral or AAA-rated backed by
Texas Permanent School Fund or AAA-rated		719		-			19,392		0.9
Underlying issuer or collateral rated A or better (including
South Carolina State Aid)		9,058		0.4			15,127		0.7
Underlying issuer or collateral rated BBB		-		-			2,337		0.1
Non-rated		2,041		0.1			2,519		0.1
Total state and municipal		11,818		0.5			39,375		1.8
Private label mortgage-backed securities AAA-rated (2)		6,208		0.3			8,504		0.4
Community bank stocks and other		1,916		0.1			1,782		0.1
Total securities	$	2,145,352		100.0	%	$	2,222,917		100.0	%

Percent of total securities:
Rated A or higher				99.8	%				99.7	%
Investment grade				99.8					99.8

(1)	At June 30, 2010, these amounts include, in the aggregate, $404 million and $1.3 billion related to senior debt and MBS, respectively, issued by FNMA and FHLMC.

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

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

(4)	Ratings shown above do not reflect the benefit of guarantees by bond insurers. At June 30, 2010, $3.2 million of municipal bonds are guaranteed by bond insurers. At December 31, 2009, $4.9 million of municipal bonds are guaranteed by bond insurers.

(5)	At June 30, 2010, the breakdown by current bond rating is as follows: $0.7 million AAA-rated, $9.1 million AA or A-rated, and $2.0 million non-rated.

Note:

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

Investments included in Other Assets. TSFG also invests in limited partnerships, limited liability companies (LLC's) and other privately held companies. These investments are included in other assets. In three and six months ended June 30, 2010, TSFG recorded $34,800 and $494,000 in other-than-temporary impairment on these investments. At June 30, 2010, TSFG's investment in these entities totaled $14.7 million, of which $7.8 million were accounted for under the cost method and $6.9 million were accounted for under the equity method. Since certain of these investments are real estate-related or banking industry-related, additional impairment in future periods is possible.

In April 2009, TSFG sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million. In connection with this sale, TSFG also terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. Also in second quarter 2009, TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity securities included in the other investments category.

Carolina First Bank, as a member of the Federal Home Loan Bank ("FHLB") of Atlanta, is required to own capital stock in the FHLB of Atlanta based generally upon its balances of residential mortgage loans, select commercial loans secured by real estate, and FHLB advances. FHLB stock is included in other assets at its original cost basis. At June 30, 2010 and December 31, 2009, FHLB stock totaled $58.8 million.

Goodwill

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

Other Real Estate Owned

During the three months ended June 30, 2010, TSFG sold $16.2 million in OREO and incurred losses of $1.5 million. Due to continuing weak market conditions, TSFG records OREO at the lower of cost basis or 70% of the most recent appraised value. At June 30, 2010, the carrying value of OREO totaled $147.4 million, compared to $122.1 million at December 31, 2009, and was included in other assets. Table 14 presents a rollforward of OREO, while Table 15 presents an aging as of June 30, 2010 and Table 16 presents OREO by property type.

Table 14
OREO Rollforward
(dollars in thousands)
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Balance at beginning of period	$	142,631		$	73,672		$	122,086		$	44,668
Property transferred in		28,928			44,167			64,141			76,259
Proceeds from sales		(14,765	)		(11,021	)		(23,941	)		(13,985	)
Loss on sales		(1,462	)		(2,643	)		(2,406	)		(2,767	)
Write-downs		(7,932	)		(10,230	)		(12,480	)		(10,230	)
Balance at end of period	$	147,400		$	93,945		$	147,400		$	93,945

Table 15
Number of Months in OREO at June 30, 2010
(dollars in thousands)

Less than three months	$	23,048
Three months or more, but less than six months		31,198
Six months or more, but less than nine months		28,872
Nine months or more, but less than twelve months		19,004
Twelve months or more		45,278
Total OREO	$	147,400

Table 16
OREO by property type at June 30, 2010
(dollars in thousands)

Land	$	90,866
Commercial		28,541
Residential		18,123
Other		9,870
Total OREO	$	147,400

Derivative Financial Instruments

Derivative financial instruments used by TSFG may include interest rate swaps, caps, collars, floors, options, futures and forward contracts. Derivative contracts are primarily used to hedge identified risks and also to provide risk-management products to customers. TSFG has derivatives that qualify for hedge accounting, derivatives that do not qualify for hedge accounting but otherwise achieve economic hedging goals (“economic hedges”), as well as derivatives that are used in trading and customer hedging programs. For purposes of potential valuation adjustments to its derivative assets, TSFG evaluates the credit risk of its counterparties, including bank customers with whom TSFG has entered into customer swaps. During the first half of 2010, TSFG recorded credit losses of $2.2 million on its customer swaps. Deterioration in customers’ credit and in TSFG’s ability to collect on the derivative assets associated with customer swaps could negatively impact TSFG’s consolidated financial statements. If TSFG is in a receivable position with respect to our interest rate swaps with customers, the fair value of the derivative asset represents additional credit exposure to the customer (without additional collateral). At June 30, 2010, the total fair value of TSFG’s customer swap derivative assets was $32.4 million. See Note 9 to the Consolidated Financial Statements for additional information regarding derivatives.

In the first half of 2010, certain cash flow hedges with a notional amount of $265.0 million were terminated or de-designated. The current balance remaining in OCI related to these hedges is a pre-tax gain of approximately $8.9 million that will be amortized to the statement of operations as the hedged cash flows impact earnings.

Deposits

Deposits remain TSFG's primary source of funds. Average customer deposits equaled 70.0% of average total funding in the first half of 2010. TSFG faces strong competition from other banking and financial services companies in gathering deposits. TSFG also maintains short and long-term wholesale sources including federal funds, repurchase agreements, Federal Reserve borrowings, brokered CDs, and FHLB advances to fund a portion of loan demand and, if appropriate, any increases in investment securities.

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

Table 17
Type of Deposits
(dollars in thousands)
	June 30,						December 31,
	2010			2009			2009
Noninterest-bearing demand deposits	$	1,100,373		$	1,099,743		$	1,124,404
Interest-bearing checking		946,163			1,061,400			1,060,470
Money market accounts		1,843,472			1,978,114			2,072,664
Savings accounts		368,177			222,044			322,924
Core deposits		4,258,185			4,361,301			4,580,462
Time deposits under $100,000		1,890,874			1,710,870			1,632,582
Time deposits of $100,000 or more		1,531,295			1,260,709			1,137,067
Customer deposits (1)		7,680,354			7,332,880			7,350,111
Brokered deposits		1,748,799			2,055,772			1,946,101
Total deposits	$	9,429,153		$	9,388,652		$	9,296,212

Percentage of Deposits
Noninterest-bearing demand deposits		11.7	%		11.7	%		12.1	%
Interest-bearing checking		10.0			11.3			11.4
Money market accounts		19.6			21.1			22.3
Savings accounts		3.9			2.4			3.5
Core deposits		45.2			46.5			49.3
Time deposits under $100,000		20.1			18.2			17.6
Time deposits of $100,000 or more		16.2			13.4			12.2
Customer deposits (1)		81.5			78.1			79.1
Brokered deposits		18.5			21.9			20.9
Total deposits		100.0	%		100.0	%		100.0	%

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

Table 18
Type of Customer Funding
(dollars in thousands)
	June 30,				December 31,
	2010		2009		2009
Customer deposits (1)	$	7,680,354	$	7,332,880	$	7,350,111
Customer sweep accounts (2)		256,478		330,765		316,690
Customer funding	$	7,936,832	$	7,663,645	$	7,666,801

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

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

At June 30, 2010, period-end customer funding increased $270.0 million from December 31, 2009 and $273.2 million from June 30, 2009, due to two time deposit promotions and the incorporation of a new floating rate time deposit product. Public deposits totaled approximately $662.1 million at June 30, 2010 compared to $749.1 million at December 31, 2009, and $664.1 million at June 30, 2009, and are generally subject to seasonal fluctuations.

While reported in short-term borrowings on the consolidated balance sheet, customer sweep accounts represent excess overnight cash to/from commercial customer operating accounts and are a source of funding for TSFG. Currently, sweep balances are generated through two products: 1) collateralized customer repurchase agreements ($245.4 million at June 30, 2010) and 2) Eurodollar deposits ($11.1 million at June 30, 2010). These balances are tied directly to commercial customer checking accounts and generate treasury services noninterest income.

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

subject to certain limitations with respect to brokered deposits and the rates it can pay on certain customer deposits as stipulated in its Consent Order. TSFG’s Board limitation requires that brokered deposits not exceed 20% of total assets.

Average customer funding equaled 72.5% of average total funding for the first six months of 2010 and 67.7% for the first six months of 2009. Period-end customer funding increased to 73.4% of total funding at June 30, 2010, compared to 71.4% at December 31, 2009. Although the Company more aggressively priced time deposits in first quarter 2010 to build excess liquidity to address whether the TAGP would be extended and to extend maturities of funding, TSFG expects to continue its focus on lowering its funding costs by trying to improve the customer funding level, mix, and rate paid. TSFG attempts to enhance its deposit mix by working to attract lower-cost transaction accounts through actions such as new transaction account opening goals, new checking products, and creating incentive plans to place a greater emphasis on lower-cost customer deposit growth. Deposit pricing is very competitive, and we expect this pricing environment to continue as banks compete for sources of liquidity and funding to replace funding which may not be available in the current environment. TSFG is subject to certain limitations under the Consent Order which limit the rates paid on brokered deposits and a variety of customer deposit products.

In April 2010, the FDIC approved an interim final rule extending the TAGP from June 30, 2010 to December 31, 2010. TSFG elected to continue its participation in the program, through which all noninterest-bearing transaction accounts and certain interest-bearing checking accounts are fully guaranteed by the FDIC for the entire amount in the account (see “Deposit Insurance”). The Dodd-Frank Act, signed into law July 21, 2010, permanently increases the statutory standard maximum deposit insurance amount to $250,000. In addition, the Act provides, for all insured depository institutions, full deposit insurance coverage for noninterest-bearing transaction accounts for 2 years starting December 31, 2010. TSFG estimates that deposits that are neither insured nor collateralized would increase from approximately $387 million at June 30, 2010 to approximately $449 million without the benefit of the TAGP, but incorporating benefits of the Dodd-Frank Act.

Table 19
Maturity Distribution of and Rates on Time Deposits
(dollars in thousands)

	Customer Time Deposits					Brokered Deposits					Total
	Balance		Average Rate			Balance		Average Rate			Balance

July 1, 2010 through September 30, 2010	$	970,860		2.96	%	$	184,560		1.78	%	$	1,155,420
October 1, 2010 through December 31, 2010		350,096		2.23			234,969		3.63			585,065
After December 31, 2010		2,101,213		2.26			1,329,270		2.62			3,430,483
Total outstanding	$	3,422,169		2.45	%	$	1,748,799		2.67	%	$	5,170,968

Borrowed Funds

Table 20 shows the breakdown of borrowed funds by type.

Table 20
Type of Borrowed Funds
(dollars in thousands)
	June 30,						December 31,
	2010			2009			2009
Short-Term Borrowings
Federal funds purchased and repurchase agreements	$	25		$	25		$	25
Customer sweep accounts		256,478			330,765			316,690
Treasury, tax and loan note		6,764			12,364			5,987
Total short-term borrowings		263,267			343,154			322,702

Long-Term Borrowings
Repurchase agreements		125,000			125,000			125,000
FHLB advances, net of discount		752,012			762,188			752,646
Subordinated notes		206,704			206,704			206,704
Mandatorily redeemable preferred stock of REIT subsidiary		31,800			31,800			31,800
Note payable		690			743			719
Total long-term borrowings		1,116,206			1,126,435			1,116,869
Total borrowings		1,379,473			1,469,589			1,439,571
Less: Customer sweep accounts		(256,478	)		(330,765	)		(316,690	)
Add: Brokered deposits (1)		1,748,799			2,055,772			1,946,101
Total wholesale borrowings	$	2,871,794		$	3,194,596		$	3,068,982

Wholesale borrowings as a % of total assets		24.8	%		25.4	%		25.8	%

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

TSFG uses both short-term and long-term borrowings to fund net growth of assets in excess of deposit growth. In the first six months of 2010, average borrowings totaled $1.4 billion, compared with $2.2 billion in the first six months of 2009. Period-end wholesale borrowings decreased $197.2 million since December 31, 2009, primarily due to a decrease in brokered CDs. During 2009, TSFG began shifting into borrowings with remaining maturities of more than one year in order to strengthen liquidity.

Capital and Liquidity

Capital

Based on capital ratios at June 30, 2010, and under the terms of the Consent Order, Carolina First Bank is considered “adequately capitalized” under applicable regulatory definitions.

If the merger is not consummated and if TSFG is otherwise unable to raise capital, due to existing regulatory restrictions on cash payments between Carolina First Bank and TSFG, TSFG may be unable to discharge its liabilities in the normal course of business. There can be no assurance that TSFG will be successful in any efforts to raise capital during 2010. The pursuit of strategic transaction alternatives may also involve significant expenses and management time and attention.

Shareholders' equity totaled $616.8 million, or 5.3% of total assets, at June 30, 2010 compared with $993.2 million, or 8.3% of total assets, at December 31, 2009. Shareholders’ equity decreased primarily due to the net losses in the first six months of 2010. Tangible common equity to tangible assets decreased to 2.33% at June 30, 2010, compared to 3.67% at December 31, 2009. During the first six months of 2010, TSFG contributed $30 million to its subsidiary bank as a capital contribution.

TSFG’s unrealized gain on securities available for sale and cash flow hedges, net of tax, which is included in accumulated other comprehensive income, increased to $43.6 million at June 30, 2010, compared with $30.9 million at

December 31, 2009 due primarily to a decrease in long-term interest rates. Subsequent to quarter-end, TSFG sold substantially all of the debt securities portfolio and realized gains of approximately $54.4 million.

Common book value per common share at June 30, 2010 and December 31, 2009 was $1.31 and $3.05, respectively. The decrease in common book value per common share was primarily due to the net loss during the period. Common tangible book value per common share at June 30, 2010 and December 31, 2009 was $1.25 and $1.98, respectively. Tangible book value was below book value as a result of intangibles associated with acquisitions of entities and assets accounted for as purchases. However, the difference declined at the end of the second quarter due to the write off of the remaining goodwill. At June 30, 2010, intangible assets totaled $13.7 million and will continue to be amortized.

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

Table 21
Capital Ratios

	June 30, 2010			To Be Well Capitalized Under Prompt Corrective Action Provisions (1)			To Be Adequately Capitalized Under Prompt Corrective Action Provisions (1)
TSFG
Total risk-based capital		8.52	%		n/a			n/a
Tier 1 risk-based capital		10.24			n/a			n/a
Leverage ratio		6.11			n/a			n/a

Carolina First Bank (2)
Total risk-based capital		8.24	%		10.00	%		8.00	%
Tier 1 risk-based capital		9.85			6.00			4.00
Leverage ratio		5.90			5.00			4.00

(1)

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

(2)	At June 30, 2010, Carolina First Bank was considered adequately capitalized by regulatory standards and as a result of the Consent Order.

At June 30, 2010, trust preferred securities and shares of mandatorily redeemable preferred stock of a REIT subsidiary (“REIT preferred securities”) included in tier 1 capital totaled $200.5 million and $26.3 million, respectively. Under current regulatory guidelines and subject to certain limitations, debt associated with trust and REIT preferred securities qualifies for tier 1 capital treatment for TSFG, although the allowable amounts can change as equity declines below certain levels. While a complete review of all the rules is beyond the scope of this document, it is important to be aware of certain limits that have begun to impact the Company’s ratios. The limitation regarding the inclusion of trust and REIT preferred securities in capital calculations impacts only the ratios calculated at the consolidated level and, accordingly, is not applicable to the Carolina First Bank ratios. (The trust preferred securities are not included in Carolina First Bank’s tier 1 capital since the related subordinated notes were issued by the parent company.) Regulatory rules allow trust and REIT preferred securities to be included in tier 1 capital up to 25.0% of the sum of selected tier 1 capital elements, including the trust and REIT preferred securities. At June 30, 2010, trust and REIT preferred securities accounted for 31.0% of TSFG’s tier 1 capital. Consequently, $35.8 million of trust and REIT preferred securities were excluded from tier 1 capital (there is no limitation on the amount included in total risk based capital). Effective March 31, 2011, the 25.0% limitation will become more restrictive and could cause the Company’s tier 1 capital ratios to be negatively impacted.

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

Liquidity

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

Liquidity is managed at two levels. The first is the liquidity of the parent company, which is the holding company that owns Carolina First Bank, the banking subsidiary. The second is the liquidity of the banking subsidiary. The management of liquidity at both levels is essential because the parent company and banking subsidiary each have different funding needs and sources, and each are subject to certain regulatory guidelines and requirements. In addition, Carolina First Bank is subject to limitations on the amount of funds that may be transferred to the parent company. At June 30, 2010, Carolina First Bank could not pay any dividend to the parent company.

Through the Asset Liability Committee (“ALCO”), Corporate Treasury is responsible for planning and executing the funding activities and strategy. TSFG’s liquidity policy strives to ensure a diverse funding base, with limits established by wholesale funding source as well as aggregate wholesale funding levels. Daily and short-term liquidity needs are principally met with deposits from customers, payments on loans, maturities and paydowns of investment securities, and excess cash balances. TSFG is focusing additional efforts at acquiring new deposits from its customer base through its established branch network to enhance liquidity and reduce reliance on wholesale borrowing.

As noted in Table 22 which follows, TSFG has $1.7 billion of time deposits maturing over the remainder of 2010, with maturities of customer and brokered CDs accounting for $1.3 billion and $0.4 million, respectively. TSFG expects to replace maturing customer CDs through ongoing efforts to grow customer deposits and various deposit campaigns. TSFG’s ability to replace maturing customer CDs and grow customer funding could be limited due to the deposit rate restrictions imposed by the Consent Order. Additionally, the Company cannot replace maturing brokered CDs without the prior approval of the FDIC. TSFG expects to absorb brokered CD maturities and any declines in customer funding through liquidity reserves, comprised of surplus cash or unpledged securities, which totaled $1.9 billion as of June 30 th .

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

Under normal business conditions, the sources above are adequate to meet both the short-term and long-term funding needs of the Company; however, TSFG’s contingency funding plan establishes early warning triggers to alert management to potential negative liquidity trends. The plan provides a framework to manage through various scenarios – including identification of alternative actions and an executive management team to navigate through a crisis. Limits ensure that liquidity is sufficient to manage through crises of various degrees of severity, triggered by TSFG-specific events, such as regulatory actions, significant adverse changes to earnings, credit quality or credit ratings, or general industry or market events, such as market instability or adverse changes in the economy. Deposit balances which are not covered by FDIC insurance total approximately $764 million currently, and would increase to approximately $1.1 billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at December 31, 2010. A significant portion of uninsured deposits are public fund deposits which are collateralized by investment securities. Loss of collateralized deposits in a liquidity crisis would be essentially liquidity-neutral to the extent released collateral could be sold or used to secure replacement wholesale funding. Thus, the primary deposit-related liquidity risk relates to balances which are neither insured nor collateralized, which total approximately $387 million currently, and would increase to approximately $449 million without the benefit of the TAGP, but incorporating the benefits of the Dodd-Frank Act. Public deposits which are

currently insured but which would be uninsured and would therefore require collateralization without the benefit of the TAGP totaled approximately $252 million at June 30, 2010. Liquidity reserves of $1.9 billion, comprised of $923 million of free securities and $1.0 billion of excess cash held at the Federal Reserve, would meet incremental collateral and liquidity needs in a crisis scenario. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on limitations on maximum interest rates imposed by the Consent Order.

If the TD merger is not consummated, there is no assurance that TSFG will be able to obtain new borrowings or issue additional equity on terms that are satisfactory. As a result, TSFG is currently maintaining a cash position in excess of normal levels. TSFG is also evaluating additional capital and cash management strategies including the potential sale of selected assets. While liquidity is an ongoing challenge for all financial institutions, management believes that TSFG’s liquidity reserves and efforts to grow core deposits are sufficient to provide the necessary funding for the remainder of 2010.

In managing its liquidity needs, TSFG focuses on its existing assets and liabilities, as well as its ability to enter into additional borrowings, and on the manner in which they combine to provide adequate liquidity to meet our needs. Table 22 summarizes future contractual obligations based on maturity dates as of June 30, 2010. Table 22 does not include payments which may be required under employment and deferred compensation agreements. In addition, Table 22 does not include payments required for interest and income taxes (see Item 1, Consolidated Statements of Cash Flows for details on interest and income taxes paid for the six months ended June 30, 2010).

Table 22
Contractual Obligations
(dollars in thousands)
	Payments Due by Period
	Total		Remainder of 2010		2011 and 2012		2013 and 2014		After 2014
Customer time deposits	$	3,422,169	$	1,320,956	$	2,022,702	$	41,056	$	37,455
Brokered deposits		1,748,799		419,529		1,228,437		67,065		33,768
Total time deposits		5,170,968		1,740,485		3,251,139		108,121		71,223
Short-term borrowings		263,267		263,267		-		-		-
Long-term debt - parent company		206,704		-		-		-		206,704
Long-term debt - Carolina First Bank		910,807		90		681,416		200,267		29,034
Total long-term debt		1,117,511		90		681,416		200,267		235,738
Operating leases		166,809		8,539		34,180		29,666		94,424
Total contractual obligations	$	6,718,555	$	2,012,381	$	3,966,735	$	338,054	$	401,385

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, 2010, see “Off-Balance Sheet Arrangements.” Increased demand for funds under these agreements would reduce TSFG’s available liquidity and could require additional sources of liquidity.

Results of Operations

Net Interest Income

Net interest income is TSFG’s primary source of revenue. Net interest income is the difference between the interest earned on assets, including loan fees and dividends on investment securities, and the interest incurred for the liabilities to support such assets. The net interest margin measures how effectively a company manages the difference between the yield on earning assets and the rate incurred on funds used to support those assets. Fully tax-equivalent net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis based on a 35% marginal federal income tax rate. Table 23 presents average balance sheets and a net interest income analysis on a tax-equivalent basis for the three and six months ended June 30, 2010 and 2009.

Table 23
Comparative Average Balances - Yields and Costs
(dollars in thousands)
	Three Months Ended June 30,
	2010							2009
	Average		Income/		Yield/			Average		Income/		Yield/
Assets	Balance		Expense		Rate			Balance		Expense		Rate
Earning assets
Commercial loans	$	6,413,941	$	73,178		4.58	%	$	7,900,570	$	83,970		4.26	%
Consumer loans		1,276,308		14,723		4.63			1,443,823		17,282		4.80
Indirect loans		190,716		3,610		7.59			530,875		9,544		7.21
Risk management derivatives tied to loans		-		3,685					-		11,027
Total loans (1)		7,880,965		95,196		4.84			9,875,268		121,823		4.95
Investment securities, taxable (2)		2,272,036		17,468		3.08			1,680,893		18,140		4.32
Investment securities, nontaxable (2) (3)		12,559		170		5.41			246,001		3,188		5.18
Total investment securities		2,284,595		17,638		3.09			1,926,894		21,328		4.43
Federal funds sold and interest-bearing bank balances (4)		782,113		489		0.25			73,170		-		-
Total earning assets		10,947,673	$	113,323		4.15			11,875,332	$	143,151		4.83
Non-earning assets		1,051,857							1,210,224
Total assets	$	11,999,530						$	13,085,556

Liabilities and Shareholders' Equity
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking	$	988,381	$	605		0.25		$	1,036,339	$	724		0.28
Savings		370,986		670		0.72			208,856		472		0.91
Money market		1,871,664		4,027		0.86			1,924,037		6,726		1.40
Time deposits, excluding brokered deposits		3,364,889		20,925		2.49			3,067,471		26,581		3.48
Brokered deposits		1,860,820		11,819		2.55			1,954,201		15,038		3.09
Total interest-bearing deposits		8,456,740		38,046		1.80			8,190,904		49,541		2.43
Customer sweep accounts		248,938		206		0.33			362,342		245		0.27
Other borrowings		1,124,888		5,543		1.98			1,682,118		6,319		1.51
Total interest-bearing liabilities		9,830,566		43,795		1.79			10,235,364		56,105		2.20
Noninterest-bearing liabilities
Noninterest-bearing deposits		1,111,239							1,074,739
Other noninterest-bearing liabilities		163,920							235,432
Total liabilities		11,105,725							11,545,535
Shareholders' equity		893,805							1,540,021
Total liabilities and shareholders' equity	$	11,999,530						$	13,085,556
Net interest income (tax-equivalent)			$	69,528		2.55	%			$	87,046		2.94	%
Less: tax-equivalent adjustment (3)				60							1,116
Net interest income			$	69,468						$	85,930

Supplemental data:
Customer funding (5)	$	7,956,097	$	26,433		1.33	%	$	7,673,784	$	34,748		1.82	%
Wholesale borrowings (6)		2,985,708		17,362		2.33			3,636,319		21,357		2.36
Total funding (7)	$	10,941,805	$	43,795		1.61	%	$	11,310,103	$	56,105		1.99	%

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

(2)	The average balances for investment securities exclude the unrealized gain/loss recorded for available for sale securities.

(3)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

(4)

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

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

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

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

Note: Average balances are derived from daily balances.

Table 23 (continued)
Comparative Average Balances - Yields and Costs
(dollars in thousands)
	Six Months Ended June 30,
	2010							2009
	Average		Income/		Yield/			Average		Income/		Yield/
Assets	Balance		Expense		Rate			Balance		Expense		Rate
Earning assets
Commercial loans	$	6,572,811	$	148,197		4.55	%	$	7,993,050	$	167,764		4.23	%
Consumer loans		1,288,143		29,609		4.64			1,468,903		34,848		4.78
Indirect loans		203,588		7,684		7.61			569,000		20,389		7.23
Risk management derivatives tied to loans		-		8,566					-		22,941
Total loans (1)		8,064,542		194,056		4.85			10,030,953		245,942		4.94
Investment securities, taxable (2)		2,185,685		34,954		3.20			1,767,043		38,688		4.38
Investment securities, nontaxable (2) (3)		20,483		527		5.15			256,243		6,625		5.17
Total investment securities		2,206,168		35,481		3.22			2,023,286		45,313		4.48
Federal funds sold and interest-bearing bank balances (4)		617,349		773		0.25			98,640		1		-
Total earning assets		10,888,059	$	230,310		4.26			12,152,879	$	291,256		4.83
Non-earning assets		1,074,385							1,166,663
Total assets	$	11,962,444						$	13,319,542

Liabilities and Shareholders' Equity
Liabilities
Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking	$	1,024,776	$	1,303		0.26		$	1,083,635	$	1,589		0.30
Savings		358,238		1,515		0.85			202,948		1,001		0.99
Money market		1,963,486		9,492		0.97			1,919,010		14,505		1.52
Time deposits, excluding brokered deposits		3,156,700		39,482		2.52			3,133,084		55,448		3.57
Brokered deposits		1,861,832		23,938		2.59			1,930,136		31,841		3.33
Total interest-bearing deposits		8,365,032		75,730		1.83			8,268,813		104,384		2.55
Customer sweep accounts		266,620		431		0.33			408,803		543		0.27
Other borrowings		1,125,694		10,971		1.97			1,790,344		13,062		1.47
Total interest-bearing liabilities		9,757,346		87,132		1.80			10,467,960		117,989		2.27
Noninterest-bearing liabilities
Noninterest-bearing deposits		1,099,749							1,048,217
Other noninterest-bearing liabilities		168,937							233,099
Total liabilities		11,026,032							11,749,276
Shareholders' equity		936,412							1,570,266
Total liabilities and shareholders' equity	$	11,962,444						$	13,319,542
Net interest income (tax-equivalent)			$	143,178		2.65	%			$	173,267		2.87	%
Less: tax-equivalent adjustment (3)				185							2,319
Net interest income			$	142,993						$	170,948

Supplemental data:
Customer funding (5)	$	7,869,569	$	52,223		1.34	%	$	7,795,697	$	73,086		1.89	%
Wholesale borrowings (6)		2,987,526		34,909		2.36			3,720,480		44,903		2.43
Total funding (7)	$	10,857,095	$	87,132		1.62	%	$	11,516,177	$	117,989		2.07	%

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

(2)	The average balances for investment securities exclude the unrealized gain/loss recorded for available for sale securities.

(3)	The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.

(4)

(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.

Fully tax-equivalent net interest income decreased to $143.2 million for the first six months of 2010 from $173.3 million for the first six months of 2009 due to continued contraction in loan balances, increased liquidity, and maturing balance sheet hedges, partially offset by lower funding costs. The tax-equivalent net interest margin for the first six months of 2010 decreased to 2.65%, down 22 basis points from 2.87% for the same period in 2009. The margin decline was primarily driven by TSFG’s ongoing liquidity positioning, which reduced the net interest margin by approximately 25 basis points, as well as the impact of $855 million of balance sheet management hedges that matured in fourth quarter 2009, reducing net interest income by $3.2 million and the net interest margin by approximately 12 basis points. These decreases were partially offset by lower funding costs, which improved the net interest margin.

Comparing second quarter 2010 to second quarter 2009, fully tax-equivalent net interest income decreased to $69.5 million for second quarter 2010 from $87.0 million for second quarter 2009. The tax-equivalent net interest margin for second quarter 2010 decreased to 2.55%, down 39 basis points from 2.94% for second quarter 2009, primarily due to an increased level of excess cash maintained as a liquidity management measure and maturing balance sheet hedges, partially offset by downward pricing of deposits, particularly time deposits.

TSFG’s average earning assets were $10.9 billion for the first six months of 2010 compared to $12.2 billion for the first six months of 2009. Average loans as a percentage of average earning assets were 74.1% for the first six months of 2010 compared to 82.5% for the first six months of 2009. At June 30, 2010, approximately 54% of TSFG’s accruing loans were variable rate loans, the majority of which are tied to the prime rate. At June 30, 2010, loans with floating rates, primarily limited to prime or LIBOR, included loans with floors totaling $1.3 billion with an average floor of 5.16%. The Company uses certain interest rate swaps to hedge the cash flows of certain pools of variable rate loans tied to prime or LIBOR. Certain of these swaps with a notional amount of $265.0 million were terminated or de-designated in the first half of 2010. The current balance left in OCI relating to these hedges is a pre-tax gain of approximately $8.9 million that will be amortized to the statement of operations as the hedged cash flows impact earnings.

Liquidity initiatives have had and are expected to continue to have a negative impact on the net interest margin due to the effect of low-yielding interest-bearing bank balances being included in average earning assets and the higher costs of longer-term funding exceeding the return on short-term assets. In addition, net interest income and the net interest margin have been negatively impacted by elevated levels of nonperforming assets and the reversal of accrued interest income as loans have been moved to nonaccrual status. In the first six months of 2010, liquidity initiatives had an approximate adverse impact of 25 basis points on the net interest margin, while credit had an approximate adverse impact of 33 basis points.

As stated previously in the section captioned “Recent Legislation Impacting the Financial Services Industry,” effective one year after the date of enactment, the Dodd-Frank Act repeals the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. Although the ultimate impact of this legislation on TSFG has not yet been determined, the Company expects interest costs associated with demand deposits to increase.

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 $209.0 million for the first six months of 2010, compared to $274.0 million for the first six months of 2009. The lower provision largely reflected a decrease in the rate of migration of loans into higher risk categories.

Net loan charge-offs were $181.5 million, or 4.55% (annualized) of average loans held for investment, for the first six months of 2010, compared with $229.7 million, or 4.63% (annualized), for the first six months of 2009. The allowance for credit losses equaled 5.23% of loans held for investment as of June 30, 2010, compared to 4.45% and 3.11%, respectively, as of December 31, 2009 and June 30, 2009. Management expects the level of charge-offs and provision expense to remain elevated due to the current credit environment. See “Loans,” “Credit Quality,” and “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.”

Noninterest Income

Table 24 shows the components of noninterest income.

Table 24
Components of Noninterest Income
(dollars in thousands)
	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Service charges on deposit accounts	$	9,385	$	9,535	$	18,608	$	18,803
Debit card income, net		2,564		2,168		4,780		4,093
Customer service fee income		1,189		1,264		2,315		2,473
Total customer fee income		13,138		12,967		25,703		25,369

Insurance income		1,584		1,765		3,460		4,222
Retail investment services, net		1,603		1,646		3,190		3,656
Trust and investment management income		1,161		1,495		2,263		2,960
Benefits administration fees		-		571		-		1,213
Total wealth management income		4,348		5,477		8,913		12,051

Bank-owned life insurance income		4,480		2,560		6,924		5,062
Mortgage banking income		1,493		2,050		2,782		3,255
Gain on certain derivative activities		573		1,085		632		2,220
Merchant processing income, net		-		817		-		1,427
Gain on securities, net		10,487		4,580		10,098		1,626
Other		2,446		2,736		3,045		5,003
Total noninterest income	$	36,965	$	32,272	$	58,097	$	56,013

Noninterest income increased to $58.1 million in the first six months of 2010 from $56.0 million in the first six months of 2009, driven primarily by a $10.1 million net gain on securities, partially offset by decreases in several other categories. Total wealth management income decreased due to the effects of the economic downturn, resulting in lower asset valuations, and the sale of two ancillary businesses (retirement plan administrator and financial planning group) during the third quarter of 2009. Mortgage banking income decreased 14.5% in the first six months of 2010 compared to the first six months of 2009. Mortgage loans originated by TSFG originators totaled $125.7 million and $201.9 million in the first six months of 2010 and 2009, respectively. Gain on certain derivative activities decreased in the first half of 2010 partly due to a reduction in both ineffectiveness and acceleration of gains of cash flow hedges (many of which matured or were terminated in fourth quarter 2009 and first quarter 2010). Debit card income improved in the first six months of 2010, as increased transactions led to an increase in this line item. Bank owned life insurance income increased $1.9 million in the first half of 2010 compared to the first half of 2009, while merchant processing income was eliminated with the sale of the merchant line of business in the third quarter of 2009.

Reductions in the values of our customer swap portfolio attributable to increased credit adjustments resulted in a net loss on customer swaps of $880,000 for the first six months of 2010 (included in other noninterest income), compared to $819,000 of income in the first six months of 2009. For the three months ended June 30, 2010, reductions in the values of our customer swap portfolio resulted in a net gain of $436,000 compared to $574,000 of income in first quarter 2009. At June 30, 2010, the fair value of swaps in this portfolio which were in an asset position was $32.4 million, net of a $1.6 million established reserve for credit losses.

Comparing second quarter 2010 to first quarter 2010, noninterest income increased to $37.0 million from $21.1 million, primarily due to a $10.5 million net gain on securities in second quarter 2010, as well as a $2 million increase in bank owned life insurance income due to the receipt of a death benefit, a $2.0 million decrease in credit valuation adjustments on customer swaps, and higher customer fee and mortgage income.

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

As stated previously in the section captioned “Recent Legislation Impacting the Financial Services Industry,” the Dodd-Frank Act amended the EFTA to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers, such as Carolina First Bank. Because of the uncertainty as to any future rulemaking by the Federal Reserve, TSFG cannot provide any assurance as to the ultimate impact of the Dodd-Frank Act on the amount of point of sale income from PIN-based debit card transactions reported in future periods.

Noninterest Expenses

Table 25 shows the components of noninterest expenses.

Table 25
Components of Noninterest Expenses
(dollars in thousands)
	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009
Salaries and wages, excluding employment contracts and severance	$	29,085	$	34,739		$	58,921	$	69,930
Employment contracts and severance		-		829			878		829
Employee benefits		6,793		8,925			11,305		17,848
Total salaries and wages and employee benefits		35,878		44,493			71,104		88,607

Goodwill impairment		214,118		2,511			214,118		2,511
Occupancy		9,771		9,506			19,471		18,942
Regulatory assessments		8,708		6,479			15,858		11,134
FDIC special assessment		-		5,700			-		5,700
Loss on other real estate owned		9,394		12,873			14,886		12,997
Furniture and equipment		6,335		6,801			12,941		13,746
Loan collection and foreclosed asset expense		5,940		7,247			10,632		12,138
Loss on nonmortgage loans held for sale		-		9,461			-		11,299
Professional services		5,295		4,351			10,624		8,858
Project NOW expense		-		281			-		1,579
Telecommunications		1,563		1,551			3,099		3,077
Advertising and business development		986		2,109			2,155		3,390
Amortization of intangibles		1,008		1,286			2,017		2,577
Loss on repurchase of auction rate securities		-		-			-		676
Impairment of long lived assets		-		17,376			-		17,376
Gain on early extinguishment of debt		-		(2,991	)		-		(3,043	)
Other		6,457		7,154			12,201		14,865
Total noninterest expenses	$	305,453	$	136,188		$	389,106	$	226,429

Noninterest expenses increased to $389.1 million in the first six months of 2010 from $226.4 million in the first six months of 2009, largely due to the goodwill impairment charge related to TSFG’s Carolina First Banking segment and insurance operations. The increase in noninterest expenses related to the goodwill impairment was partially offset by decreases in salaries and wages (excluding severance related benefits). During the first half of 2009, noninterest expenses included impairment charges of $17.4 million primarily on the campus facility, loss of $11.3 million on nonmortgage loans held for sale, and $5.7 million for an FDIC special assessment charge. Salaries and wages and employee benefits decreased $17.5 million for the first six months of 2010 compared to the first six months of 2009, as full-time equivalent employees declined to 2,066 at June 30, 2010 from 2,345 at June 30, 2009. In the first six months of 2010, TSFG recorded severance related benefits of $878,000 associated with staff reduction initiatives implemented during the first half of 2010. Regulatory assessments, excluding the FDIC special assessment, increased $4.7 million in the first half of 2010 based in part on TSFG’s participation in the TAGP related to noninterest-bearing deposit accounts and across-the-board rate increases designed to replenish the FDIC’s Deposit Insurance Fund. FDIC insurance premiums are expected to increase based in part on the adoption of a uniform three-basis point increase to assessment rates effective on January 1, 2011 (see “Deposit Insurance”). Further actions by regulatory agencies could also cause our assessments to increase. Loss on OREO increased $1.9 million due primarily to write-downs on OREO.

Comparing second quarter 2010 to first quarter 2010, noninterest expenses increased to $305.5 million from $83.7 million, primarily due to the goodwill impairment charge, write-downs on OREO and higher FDIC insurance premiums. Credit-related noninterest expenses (which include loan collection and foreclosed asset expenses, gains or losses on nonmortgage loans held for sale, and losses on other real estate owned) and FDIC insurance premiums increased $6.7 million over first quarter, primarily from increases in OREO write-downs, a full quarter of higher FDIC insurance premiums and increases in loan collection costs.

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

Income Taxes

Income tax benefit as a percentage of pretax loss was 1.07% and 1.73%, respectively, for the three and six months ended June 30, 2010. Income tax expense differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss for the three and six months ended June 30, 2010 primarily due to the valuation allowance recorded against the net deferred tax asset. The recorded benefit reflects the impact on the deferred tax valuation allowance of the increase to accumulated other comprehensive income (“OCI”). Income tax benefit as a percentage of pretax loss was 39.9% and 40.0%, respectively, for the three and six months ended June 30, 2009. Income tax benefit differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax income for the three and six months ended June 30, 2009 primarily as a result of permanent tax preference items and credits. Until the valuation allowance is released, income taxes from operations will generally reflect tax benefits recognized year-to-date from changes in OCI and adjustments to tax reserves, if any.

Enterprise Risk Management

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

Market Risk and Asset/Liability Management

There has been no significant change to the market risk and asset/liability management methodology as disclosed in TSFG’s 2009 Form 10-K. The interest sensitivity analysis which follows has been updated for June 30, 2010 numbers.

Interest Sensitivity Analysis. As discussed on pages 68 and 69 of TSFG’s 2009 Form 10-K, TSFG uses a simulation model to analyze various interest rate scenarios in order to monitor interest rate risk. The information presented in Tables 26 and 27 are not projections, and are presented with static balance sheet positions. This methodology allows for an analysis of our inherent risk associated with changes in interest rates. There are some similar assumptions used in both Table 26 and 27. These include, but are not limited to, the following:

a static balance sheet for net interest income analysis;

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

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

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

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

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

management takes no action to counter any change.

Table 26 reflects the sensitivity of net interest income to changes in interest rates. It shows the effect that the indicated changes in interest rates would have on net interest income over the next 12 months compared with the base case or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at June 30, 2010, and 2009 levels, respectively. The overall interest rate risk position of TSFG reflects continued asset sensitivity, reflecting high liquidity levels and increases in time deposits. Given the sales of investment securities and partial reinvestment in short-term agency securities subsequent to June 30, 2010, the Company expects its asset sensitive position to have increased substantially. This increase in asset sensitivity reflects the higher proportion of short-term securities than it held at June 30, 2010.

Table 26
Net Interest Income at Risk Analysis
Interest Rate Scenario (1)	Annualized Hypothetical Percentage Change in Net Interest Income June 30,
	2010			2009
2.00 %		2.3	%		3.2	%
1.00		1.8			1.6
Flat		-			-
(1.00) (2)		n/a			n/a
(2.00) (2)		n/a			n/a

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

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

On July 21, 2010, the Dodd-Frank Act was signed into law (see the section captioned “Recent Legislation Impacting the Financial Services Industry” included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report). The Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. Although the ultimate impact of this legislation on the Company has not yet been determined, TSFG expects interest costs associated with demand deposits to increase. Furthermore, TSFG’s balance sheet is expected to become less asset sensitive.

Table 27 reflects the sensitivity of the economic value of equity (“EVE”) to changes in interest rates. EVE is a measurement of the inherent, long-term balance sheet-related economic value of TSFG (defined as the fair value of all assets minus the fair value of all liabilities and their associated off balance sheet amounts) at a given point in time. Table 27 shows the effect that the indicated changes in interest rates would have on the fair value of net assets at June 30, 2010 and 2009, respectively, compared with the base case or flat interest rate scenario. The base case or flat scenario assumes interest rates stay at June 30, 2010 and 2009 levels, respectively. The change in the percentage change in EVE at June 30, 2010 compared to June 30, 2009 is due primarily to the increased liquidity position of TSFG.

Table 27
Economic Value of Equity Risk Analysis
Interest Rate Scenario (1)	Annualized Hypothetical Dollar Change in Economic Value of Equity June 30,
	2010		2009
2.00%	$	36,490	$	(80,897	)
1.00		33,936		(32,765	)
Flat		-		-
(1.00) (2)		n/a		n/a
(2.00) (2)		n/a		n/a

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

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

There are material limitations with TSFG’s models presented in Tables 26 and 27, which include, but are not limited to, the following:

the flat scenarios are base case and are not indicative of historical results;

they do not project an increase or decrease in net interest income or the fair value of net assets, but rather the risk to net interest income and the fair value of net assets because of changes in interest rates;

they present the balance sheet in a static position; however, when assets and liabilities mature or reprice, they do not necessarily keep the same characteristics (e.g., variable or fixed interest rate);

the computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results; and

the computations do not contemplate any additional actions TSFG could undertake in response to changes in interest rates.

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. 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.

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, 2010, TSFG’s management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated its disclosure controls and procedures as currently in effect. Based on this evaluation, TSFG’s management concluded that as of June 30, 2010, TSFG’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by TSFG in the reports filed or submitted by it under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by TSFG in such reports was accumulated and communicated to TSFG’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls over Financial Reporting

TSFG continually assesses the adequacy of its internal control over financial reporting and strives to enhance its controls in response to internal control assessments and internal and external audit and regulatory recommendations. There were no changes in TSFG’s internal control over financial reporting identified in connection with its assessment during the quarter ended June 30, 2010 or through the date of this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, TSFG’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The MOU contemplates that the parties will enter into a stipulation of settlement. The stipulation of settlement will be subject to customary conditions, including Court approval following notice to TSFG’s shareholders. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the proposed Merger, the Merger Agreement and the transactions contemplated thereby, and any disclosure made or shareholder vote held in connection therewith, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. Upon Court approval, plaintiffs’ attorneys are expected to apply for an award of attorneys’ fees and expenses. There can be no assurance that the parties will ultimately enter into a stipulation of settlement or that the Court will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the MOU may be terminated.

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

Item 1A. Risk Factors

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

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

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

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

The Risk Factors should be read in light of the fact that the Company has entered into a definitive agreement with TD providing for the merger of The South Financial Group and a wholly-owned subsidiary of TD. The definitive agreement was included as Exhibit 2.1 in TSFG’s Current Report on Form 8-K dated May 20, 2010.

In the event that the acquisition of the Company by TD is not consummated, the Company would be forced to pursue other strategic alternatives involving a sale of all or part of the Company and/or a capital raising transaction. It is uncertain whether the Company would be successful in the pursuit of such alternatives. Failure to successfully execute sale and/or capital-raising transactions would likely result in the Company being unable to continue as a going concern.

On May 16, 2010, the Company entered into a definitive agreement with TD providing for the merger of TSFG and a wholly-owned subsidiary of TD. Completion of the merger requires, among other things, the approval of TSFG’s shareholders and customary regulatory approvals. If these conditions to consummation are not met, and the merger agreement with TD is terminated (without the merger being consummated), TSFG would have to pursue other strategic alternatives, including separate or related transactions involving the sale of all or a part of the Company and/or capital raising transactions. If TSFG were forced to pursue such alternatives, it is uncertain whether such could be done successfully. Such would depend upon a variety of factors, many of which are completely outside TSFG’s control. Failure to successfully execute such sale and/or capital-raising transactions, including transactions which adequately addressed the requirements of the Consent Order with the FDIC and the Written Agreement with the Federal Reserve Board, would likely result in the Company being unable to continue as a going concern. In addition, the failure to execute any subsequent strategic actions could also induce its banking regulators to take further action (including the implementation of a receivership), which could effectively terminate its operations.

Nasdaq may delist the shares of TSFG common stock upon the issuance of the Series M Preferred Stock to TD without shareholder approval which may adversely affect the market price and liquidity of the shares of TSFG’s common stock. If the merger is not consummated and TSFG is unable to relist its common stock on the Nasdaq Capital Market, the market price and liquidity of the shares of TSFG common stock may be further adversely affected.

The Audit Committee of TSFG’s Board of Directors determined that the issuance of the Series M Preferred Stock to TD without shareholder approval was necessary to avoid seriously jeopardizing the financial viability of TSFG, as contemplated by Nasdaq Rule 5635(f). Following announcement of the merger, however, the staff of Nasdaq informed TSFG that it has interpreted Rule 5635(f) to not apply in the specific context of the merger. Because there is no process for appealing this conclusion other than as part of the delisting appeal process, because the TD preferred share issuance remains an important requirement under the terms of the proposed transaction, and because the TSFG board determined that the issuance is in the best interests of TSFG, its shareholders and other constituents, TSFG has determined to proceed with the issuance of the Series M Preferred Stock to TD following the receipt of required regulatory approvals (and expiration of related waiting periods). Following the issuance, Nasdaq may initiate delisting proceedings. If Nasdaq initiates such proceedings, TSFG intends to exercise its right under Nasdaq’s rules to request a hearing on the matter before the Nasdaq Hearings Panel and will reassert its position that reliance upon the financial viability exception was appropriate under the circumstances. TSFG cannot predict the timing or outcome of any such process, but if shares of TSFG common stock were to be delisted prior to completion of the merger, the trading price and liquidity levels would likely be negatively impacted.

If the shares of TSFG common stock are ultimately delisted from the Nasdaq Capital Market, there is no guarantee that they will begin trading on the Over-the-Counter Bulletin Board, the “Pink Sheets” or any other established market. The delisting of TSFG’s common stock would likely negatively impact the trading price of TSFG common stock and result in a reduction of the liquidity of the common stock. Delisting could reduce the ability of holders of TSFG’s common stock to purchase or sell shares as quickly and as inexpensively as they could have done in the past. In addition, following any delisting, certain investors may become obligated by law or contractual mandate to sell their shares of TSFG common stock, TSFG common stock would not be eligible for margin loans and TSFG common stock would be subject to Rule 15g-9 of the Exchange Act.

If the merger is not consummated, TSFG may not be able to meet the criteria for relisting its shares of common stock on the Nasdaq Capital Market due to certain listing requirements. The listing requirements include a minimum bid price of $4.00 per share and a market value of publicly held shares of at least $15 million. The inability to relist the shares of TSFG common stock following any termination of the merger agreement may have further negative effects on the market price and liquidity of TSFG’s common stock.

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

From time to time, TSFG repurchases 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. TSFG did not record any stock repurchases for the three months ended June 30, 2010.

On May 17, 2010, 1,048 shares of Preferred Stock Series 2008D-V were converted into 161,230 common shares and 3,602 shares of Preferred Stock Series 2008D-NV were converted into 554,153 common shares.. This issuance of common shares was not registered under the Securities Act of 1933 in reliance upon the exemption set forth in Section 3a(9) thereof.

Item 3. Defaults upon Senior Securities

During first quarter 2010, TSFG suspended dividend payments on its preferred stock and all remaining outstanding equity and capital instruments. (This suspension of dividends does not constitute a default under the applicable documents governing such instruments.) As a result, the Company is in arrears in the payment of dividends with respect to the Series 2008-T Preferred Stock, trust preferred securities, and REIT preferred securities, all of which are cumulative preferred securities. As of the date of the filing of this report, the arrearage with respect to the Series 2008-T Preferred Stock, trust preferred securities, and REIT preferred securities held by third parties was $8.8 million, $1.6 million, and $1.6 million, respectively, or $11.9 million in the aggregate.

Item 4. Reserved

Item 5. Other Information

None.

Item 6. Exhibits

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

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

32.1+

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

32.2+

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

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

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

The above exhibits may be found on TSFG’s electronic filing of its June 30, 2010 Quarterly Report on Form 10-Q with the Securities and Exchange Commission (“SEC”) and is accessible at no cost on TSFG’s web site, www.thesouthgroup.com , through the Investor Relations link. TSFG’s SEC filings are also available through the SEC’s web site at www.sec.gov.

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 6, 2010	/s/ James R. Gordon
	James R. Gordon
	Senior Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

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