10-K 1 form10k.htm SOUTH FINANCIAL GROUP 10-K 12-31-2009 form10k.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

x
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2009 or
¨
Transition report pursuant to section 12 or 15(d) of the Securities Exchange Act of 1934 for 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)
(I.R.S. 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

Securities registered pursuant to Section 12(b) of the Act:
None
None
(Title of Each Class)
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ Nox

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ Nox

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨  (Do not check if a smaller reporting company)
Smaller reporting company ¨

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 30, 2009, was approximately $187 million.

The number of shares of the Registrant's common stock, $1.00 par value, outstanding on March 5, 2010 was 215,625,225.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission are specifically identified and incorporated by reference into Part II and III.

The Exhibit Index begins on page 141.
 
 
 
 


     
Page
PART I
      
       
 
Item 1.
1
 
Item 1A.
10
 
Item 1B.
19
 
Item 2.
19
 
Item 3.
19
 
Item 4.
(Reserved)
  
       
PART II
      
       
 
Item 5.
20
 
Item 6.
22
 
Item 7.
23
 
Item 7A.
73
 
Item 8.
74
 
Item 9.
138
 
Item 9A.
138
 
Item 9B.
139
       
PART III
      
       
 
Item 10.
140
 
Item 11.
140
 
Item 12.
140
 
Item 13.
140
 
Item 14.
140
       
PART IV
      
       
 
Item 15.
141

 
 


Item 1. 
Business

The Company

The South Financial Group, Inc., a South Carolina corporation headquartered in Greenville, South Carolina, is a bank holding company. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise. TSFG operates principally through Carolina First Bank, a South Carolina-chartered commercial bank headquartered in Greenville, South Carolina, which conducts banking operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).

TSFG's subsidiaries provide a full range of financial services, including deposits, loans, treasury management, investments, wealth management, and private banking services. At December 31, 2009, TSFG conducted business through 83 branch offices in South Carolina, 67 in Florida, and 27 in North Carolina. At December 31, 2009, TSFG had $11.9 billion in assets, $8.4 billion in loans, $9.3 billion in deposits, and $993.2 million in shareholders' equity.

TSFG began its operations in 1986 under the name “Carolina First Corporation” with the de novo opening of its banking subsidiary, Carolina First Bank, in Greenville, South Carolina. Its opening was undertaken, in part, in response to opportunities resulting from the takeovers of several South Carolina-based banks by larger Southeastern regional bank holding companies in the mid-1980s. In the late 1990’s, TSFG perceived a similar opportunity in Florida where banking relationships were in a state of flux due to the acquisition of several larger Florida banks. In 1999, TSFG entered the Florida market with the same view of capitalizing on the environment through strategic acquisitions. Substantial expansion in Florida occurred as a result of three bank acquisitions in 2004 and 2005. TSFG entered North Carolina in 2000 through the acquisition of a bank which had three branch locations in eastern North Carolina, and then expanded its presence there in 2003 via a bank acquisition in western North Carolina.

TSFG focuses on Southeastern banking markets which have historically had long-term growth potential. TSFG has emphasized internal growth through the acquisition of market share from the large out-of-state bank holding companies and other competitors. It attempts to acquire market share by providing quality banking services and personal service to individuals and business customers.

Available Information

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 accessible at no cost on TSFG’s web site, www.thesouthgroup.com, through the “Investor Relations” link. In addition, through the “Corporate Governance” link, TSFG makes available its Corporate Governance Guidelines, Code of Conduct, Code of Ethics for Senior Executive and Financial Officers, Whistleblower Policy, Policy Regarding Consideration of Director Candidates Recommended by Shareholders, Excessive and Luxury Expenditure Policy, and charters for Board Committees, including the Executive, Audit, Compensation, Nominating and Corporate Governance, and Risk Committees. TSFG’s SEC filings are also available through the SEC’s web site at www.sec.gov.

Subsidiary Bank

TSFG manages its banking operations by dividing its franchise into Carolina First (North and South Carolina) and Mercantile (Florida) and then into eleven banking markets run by market presidents. This structure allows TSFG to operate like a community bank focusing on personal customer service. However, because of the size of the overall organization, TSFG’s subsidiary bank can also offer a full range of sophisticated products and services more typical of larger regional banks.

Carolina First currently focuses its operations in the following six principal market areas:

 
·
the Greenville, Spartanburg, and Anderson metropolitan area (located in the Upstate region of South Carolina);
 
·
the Hendersonville and Asheville metropolitan area (located in the Western region of North Carolina);
 
·
the Rock Hill, or greater South Charlotte, metropolitan area (located in the Piedmont region of South Carolina);
 
·
the Columbia metropolitan area (located in the Midlands region of South Carolina);

 
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·
the Myrtle Beach, Georgetown, and Wilmington metropolitan areas (located in the North Coast of South Carolina and Wilmington, North Carolina ); and
 
·
the Charleston and Hilton Head metropolitan areas (located in the South Coast of South Carolina).

TSFG entered Florida in 1999 with two acquisitions in central Florida and a de novo branch in Jacksonville. Since then, TSFG has completed five other Florida acquisitions. Carolina First Bank currently operates (as Mercantile) in five principal Florida market areas:

 
·
the Jacksonville metropolitan area (located in the North East Florida region);
 
·
the Gainesville metropolitan area (located in the North Central region);
 
·
the Orlando metropolitan area and the Marion County area (located in the Central Florida region);
 
·
the Tampa Bay metropolitan area (located in the Tampa Bay region); and
 
·
the Palm Beach County, Miami-Dade County, and Broward County area (located in the South Florida region).

Because some of our markets are resort areas that are seasonal in nature, most of the businesses in those markets, including financial institutions, are subject to moderate swings in activity between the winter and summer months. Otherwise, Carolina First Bank’s business is not subject to significant seasonal factors.

Carolina First Bank targets small business and middle-market companies, retail consumers, and high-net worth clients in its markets and surrounding areas. Carolina First Bank provides a full range of banking services, including deposits and loans; treasury management; investments; and wealth management and private banking services. Carolina First Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").

Non-Bank Subsidiaries

TSFG has a number of non-bank subsidiaries. The following describes certain of the more significant subsidiaries.

Bowditch Insurance Corporation. In 2005, TSFG acquired Bowditch Insurance Corporation and Lossing Insurance Agency, both property and casualty insurance companies operating in northern Florida. Lossing Insurance Agency is operated as a division of Bowditch Insurance Corporation.

Carolina First Community Development Corporation. In 2003, Carolina First Bank formed a subsidiary, Carolina First Community Development Corporation (“CFCDC”), to underwrite low-income community business loans. CFCDC has been certified by the Department of the Treasury as a qualified Community Development Entity and has received allocations totaling $260 million under the 2007, 2008, and 2009 New Markets Tax Credit Program, a federal program which offers tax incentives in connection with making equity and debt investments in borrowers and projects located in low to moderate income census tracts.

Carolina First Mortgage Loan Trust. TSFG has one real estate investment trust subsidiary (“REIT”), which has issued preferred securities to institutional investors as a means of raising regulatory capital. It does not engage in other activities apart from the internal management of its assets and liabilities.

Carolina First Insurance Services, Inc. In 2005, TSFG combined Gardner Associates, Inc., which operates an insurance agency business primarily in the Midlands area of South Carolina, with several of its smaller insurance subsidiaries to create Carolina First Insurance Services, Inc.

Summit Title, LLC. In April 2004, TSFG acquired the stock of Summit Title, LLC (“Summit”), a North Carolina limited liability company. Summit is a title insurance agency based in Hendersonville, North Carolina.

During 2009, TSFG sold two subsidiaries, American Pensions, Inc., a retirement plan administrator, and Koss Olinger, a financial planning group, to third parties.

Business Segments

Item 8, Note 32 to the Consolidated Financial Statements discusses TSFG's business segments, which information is incorporated herein by reference.

 
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Competition

Each of TSFG's markets is highly competitive with the largest banks in their respective states represented. The competition among the various financial institutions is based upon a variety of factors including interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality of services rendered, the convenience of banking facilities and, in the case of loans to large commercial borrowers, relative lending limits. In addition to banks and savings associations, TSFG competes with other financial institutions, such as securities firms, insurance companies, credit unions, leasing companies, and finance companies.

The banking industry continues to consolidate, which presents opportunities for TSFG to gain new business. However, consolidation may further intensify competition if additional financial services companies enter TSFG’s market areas through the acquisition of local financial institutions. In the current market environment, new owners of failed banks with more capital and FDIC loss share arrangements (i.e., private equity firms) may also serve to intensify competition.

Size gives larger banks certain advantages in competing for business from large commercial customers. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina, North Carolina, Florida, and the Southeastern United States region. As a result, TSFG concentrates its efforts on small- to medium-sized businesses and individuals. TSFG believes it competes effectively in this market segment by offering quality, personalized service.

Employees

At December 31, 2009, TSFG and its subsidiaries employed 2,214 full-time equivalent employees. TSFG provides a variety of benefit programs including retirement plans and health, life, disability, and other insurance. TSFG also maintains training, educational, and affirmative action programs designed to prepare employees for positions of increasing responsibility. TSFG believes that its relations with employees are good.

Executive Officers of the Registrant (Section 16 Reporting Persons)

TSFG’s executive officers (reporting persons under Section 16 of the Securities Exchange Act of 1934) are appointed by the Board of Directors and set forth below as of March 1, 2010.

Name
  
Age
  
TSFG Offices Currently Held
  
TSFG Officer Since
H. Lynn Harton
  
48
  
President and Chief Executive Officer
  
2007
Tanya A. Butts
  
51
  
Executive Vice President – Chief Operations and Technology Officer
  
2009
William P. Crawford, Jr.
  
47
  
Executive Vice President – Chief Legal and Risk Officer and Secretary
  
2002
J. Ernesto Diaz
  
44
  
President – Mercantile
  
2008
Robert A. Edwards
  
45
  
Executive Vice President – Chief Credit Officer
  
2008
Christopher S. Gompper
  
50
  
Interim President – Carolina First
  
2008
James R. Gordon
  
44
  
Senior Executive Vice President – Chief Financial Officer
  
2007
Christopher G. Speaks
  
44
  
Executive Vice President – Chief Accounting Officer
  
2008

Mr. Harton joined TSFG in February 2007. On February 9, 2009, he was appointed President and Chief Executive Officer, after serving since November 2008 as Interim President and CEO. From June 2004 to December 2006, he served as Chief Credit Officer for Regions Financial Corporation, a bank holding company headquartered in Birmingham, AL. From June 2003 to June 2004, he served as Chief Credit Officer for Union Planters Corporation, a bank holding company headquartered in Memphis, Tennessee. From January 1983 to June 2003, he served in various senior line and credit administration roles for BB&T Corporation, a bank holding company headquartered in Winston Salem, NC.

Ms. Butts joined TSFG as Chief Operations Officer in January 2006 and currently serves as Executive Vice President, Chief Operations and Technology Officer. From late 2004 to 2006, Ms. Butts served as a strategy consultant for FIS Management Services LLC in Jacksonville, Florida. From 2003 until late 2004, Ms. Butts served in various senior management roles at Colonial Bank including Chief Operations Officer.

 
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Mr. Crawford has served as General Counsel of TSFG since April 2002. In addition, he has served as Chief Risk Officer since December 2008.

Mr. Diaz joined TSFG in September 2007 as Market President in South Florida. He assumed the role of President of Mercantile in December 2008. Prior to joining TSFG, Mr. Diaz worked with Regions Bank for seven years, most recently as a market executive for Southeast Florida.

Mr. Edwards joined TSFG in April 2007 as Executive Vice President, Senior Credit Administrator. In June 2008, he was appointed Chief Risk Officer and in December 2008 he ceased serving as Chief Risk Officer and became Chief Credit Officer. From 2003 until joining TSFG in 2007, Mr. Edwards served in various capacities responsible for lending and credit policy at Regions Bank.

Mr. Gompper joined TSFG in June 2005 and currently serves as Interim President of Carolina First. Prior to joining TSFG, Mr. Gompper served in various senior management roles with AmSouth from January 2003 to late 2004.

Mr. Gordon joined TSFG on March 15, 2007 and serves as Senior Executive Vice President and Chief Financial Officer. From December 2004 until his appointment with the Company, Mr. Gordon served as a partner in the Jackson, Mississippi office of Horne LLP, a regional accounting and consulting firm. From April 2004 until November 2004, he served as chief accounting officer of National Commerce Financial Corp. (until acquired by SunTrust Banks), a bank holding company headquartered in Memphis, Tennessee. From June 2002 to April 2004, he served as chief risk officer for Union Planters Corporation (until acquired by Regions Financial), a bank holding company headquartered in Memphis, Tennessee.

Mr. Speaks joined TSFG in 1998 and currently serves as Chief Accounting Officer.

Monetary Policy

The policies of regulatory authorities, including the Board of Governors of the Federal Reserve System (the "Federal Reserve") affect TSFG's earnings. An important function of the Federal Reserve is regulation of the money supply. Various methods employed by the Federal Reserve include open market operations in U.S. Government securities, changes in the target Federal funds rate on bank borrowings, and changes in reserve requirements against member bank deposits. The Federal Reserve uses these methods in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits. The use of these methods may also affect interest rates charged on loans or paid on deposits.

The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Due to the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, TSFG can make no prediction as to the future impact that changes in interest rates, securities, deposit levels, or loan demand may have on its business and earnings. TSFG strives to manage the effects of interest rates through its asset/liability management processes.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of financial institutions such as TSFG's subsidiaries are primarily monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. TSFG strives to manage the effects of interest rate movements through its asset/liability management processes.

Supervision and Regulation

TSFG and its subsidiaries are extensively regulated under federal and state law. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws may have a material effect on TSFG's business and prospects. TSFG's operations may be affected by possible legislative and regulatory changes and by the monetary policies of the United States.

In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Proposals for legislation that could substantially intensify the regulation of the financial services industry are expected to be introduced in the U.S. Congress and in state legislatures. The agencies
 
 
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regulating the financial services industry also frequently adopt changes to their regulations. Substantial regulatory and legislative initiatives, including a comprehensive overhaul of the regulatory system in the U.S., are possible in the months or years ahead. Any such action could have a materially adverse effect on our business, financial condition and results of operations.

General

The South Financial Group, Inc. TSFG, a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), is subject to regulation and supervision by the Federal Reserve. Under the BHCA, TSFG's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The BHCA prohibits TSFG from acquiring direct or indirect control of more than 5% of any class of outstanding voting stock, or substantially all of the assets of any bank, or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. The BHCA prohibits TSFG from acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be properly incident thereto.

As of June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

The Federal Deposit Insurance Act, as amended ("FDIA"), authorizes the merger or consolidation of any Bank Insurance Fund ("BIF") member with any Savings Association Insurance Fund ("SAIF") member, the assumption of any liability by any BIF member to pay any deposits of any SAIF member or vice versa, or the transfer of any assets of any BIF member to any SAIF member in consideration for the assumption of liabilities of such BIF member or vice versa, provided that certain conditions are met. In the case of any acquiring, assuming or resulting depository institution which is a BIF member, such institution will continue to make payment of SAIF assessments on the portion of liabilities attributable to any acquired, assumed or merged SAIF-insured institution (or, in the case of any acquiring, assuming or resulting depository institution which is a SAIF member, that such institution will continue to make payment of BIF assessments on the portion of liabilities attributable to any acquired, assumed or merged BIF-insured institution).

In addition, the "cross-guarantee" provisions of the FDIA require insured depository institutions under common control to reimburse the FDIC for any loss suffered by either the SAIF or the BIF as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF, or both. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

Law and regulatory policy impose a number of obligations and restrictions on bank holding companies and their depository institution subsidiaries that are designed to minimize potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds. Current federal law requires a bank holding company to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would have been necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan. The Federal Reserve requires a bank holding company to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve also has the authority under the BHCA to require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal law grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition.

 
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The Gramm-Leach-Bliley Act of 1999 (“GLB”) covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. GLB also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, investment and merchant banking, insurance underwriting and sales, and brokerage activities. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating.

GLB adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. GLB repeals the broad exemption of banks from the definitions of "broker" and "dealer" for purposes of the Securities Exchange Act of 1934, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a "broker", and a set of activities in which a bank may engage without being deemed a “dealer.”

GLB contains extensive customer privacy protection provisions, which require the institution to provide notice of the privacy policies and provide the opportunity to opt-out of many disclosures of personal information. Additionally, GLB limits the disclosure of customer account numbers or other similar account identifiers for marketing purposes.

TSFG, through its banking subsidiary, is also subject to regulation by the South Carolina state banking authorities. TSFG must receive the approval of the state authorities prior to engaging in the acquisitions of banking or nonbanking institutions or assets. It also must file periodic reports with these authorities showing its financial condition and operations, management, and intercompany relationships between TSFG and its subsidiaries.

Carolina First Bank. Carolina First Bank is an FDIC-insured, state-chartered banking corporation and is subject to various statutory requirements and rules and regulations promulgated and enforced primarily by the FDIC and the South Carolina State Board of Financial Institutions. These statutes, rules, and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches and other aspects of the business of Carolina First Bank. The FDIC has broad authority to prohibit Carolina First Bank from engaging in what it determines to be unsafe or unsound banking practices. In addition, federal law imposes a number of restrictions on state-chartered, FDIC-insured banks, and their subsidiaries. These restrictions range from prohibitions against engaging as a principal in certain activities to the requirement of prior notification of branch closings. Carolina First Bank is not a member of the Federal Reserve System.

Carolina First Bank is subject to the requirements of the Community Reinvestment Act ("CRA"). The CRA requires that financial institutions have an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's efforts in meeting community credit needs are evaluated as part of the examination process pursuant to three assessment factors. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility.

Other Regulations. Interest and certain other charges collected or contracted for by TSFG subsidiaries are subject to state usury laws and certain federal laws concerning interest rates, including limits on rates paid if the Company falls below “well capitalized.” TSFG's loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers. The deposit operations of Carolina First Bank are also subject to various laws and regulations, such as the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic services. In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010, amends Regulation E to prohibit 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.

 
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Dividends

From a corporate law perspective, the holders of TSFG's common stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available. Because TSFG is a legal entity separate and distinct from its subsidiaries and because it does not conduct revenue-generating operations at the holding company level, TSFG depends on the payment of dividends from its subsidiaries for its revenues. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered "undercapitalized," as that term is defined in applicable regulations. In addition, South Carolina banking regulations restrict under certain circumstances the amount of dividends that the subsidiary bank can pay to TSFG. The terms of TSFG’s preferred stock include a restriction on declaring or paying common dividends unless all preferred dividends are paid. Also, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. During 2009, TSFG suspended dividend payments on its common stock. Effective first quarter 2010, TSFG suspended dividend payments on its preferred stock and all remaining outstanding equity and capital instruments, including its trust preferred and REIT preferred securities. Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.

Capital Adequacy

TSFG. The Federal Reserve has adopted risk-based capital guidelines for bank holding companies. Under these guidelines, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "tier 1 capital," principally consisting of common shareholders' equity, non-cumulative preferred stock, a limited amount of cumulative perpetual preferred stock, and mandatory redeemable preferred stock, less certain goodwill items and disallowed deferred tax assets. The remainder (tier 2 capital) may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the allowance for loan losses. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum tier 1 (leverage) capital ratio under which a bank holding company must maintain a minimum level of tier 1 capital (as determined under applicable rules) to average total consolidated assets of at least 3% in the case of bank holding companies which have the highest regulatory examination ratios and are not contemplating significant growth or expansion. All other bank holding companies, including TSFG, are required to maintain a ratio of at least 4%. At December 31, 2009, TSFG's capital levels exceeded both the risk-based capital guidelines and the applicable minimum leverage capital ratio.

Carolina First Bank. Carolina First Bank is subject to capital requirements imposed by the FDIC. The FDIC requires state-chartered nonmember banks to comply with risk-based capital standards substantially similar to those required by the Federal Reserve, as described above. The FDIC also requires state-chartered nonmember banks to maintain a minimum leverage ratio similar to that adopted by the Federal Reserve. Under the FDIC's leverage capital requirement, state nonmember banks that (i) receive the highest rating during the examination process and (ii) are not anticipating or experiencing any significant growth are required to maintain a minimum leverage ratio of 3% of tier 1 capital to average assets; all other banks, including Carolina First Bank, are required to maintain an absolute minimum leverage ratio of not less than 4%. However, the FDIC may impose higher standards based on review of the bank’s financial condition. As of December 31, 2009, Carolina First Bank exceeded each of the applicable regulatory capital requirements.

Deposit Insurance Assessments

Substantially all of the deposits of Carolina First Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating. Carolina First Bank expensed FDIC insurance premiums of $28.0 million and $9.6 million, respectively, in 2009 and 2008 which included $606,000 and $36,000, respectively, in additional premiums associated with participation in the Transaction Account Guarantee Program (see below). The 2009 expense also included a $5.7 million special assessment by the FDIC. 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 a result, TSFG paid $89.4 million in prepaid assessments to the FDIC in fourth quarter 2009, of which $5.9 million was expensed in 2009, with the remaining $83.5 million to be recognized over the next three years based on the FDIC assessment. FDIC insurance premiums are expected to increase based in part on the adoption of a uniform three-basis point increase to assessment rates effective January 1,

 
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2011. The FDIC assessment rate could also increase due to downgrades in Carolina First Bank’s risk category which is impacted by changes in the regulatory rating by the FDIC and the capital ratios of the bank.

In addition, TSFG expensed $1.1 million in each of 2009 and 2008 in Financing Corporation (“FICO”) assessments related to outstanding FICO bonds to the FDIC as collection agent. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987 whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation.

Emergency Economic Stabilization Act of 2008

The Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law on October 3, 2008. Pursuant to the EESA, the U.S. Treasury was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The U.S. Treasury has since injected capital into many financial institutions, including TSFG, under the Troubled Asset Relief Program Capital Purchase Program (the “CPP”). On December 5, 2008, TSFG entered into a Securities Purchase Agreement–Standard Terms with the U.S. Treasury pursuant to which, among other things, TSFG sold preferred stock and warrants to the U.S. Treasury for an aggregate purchase price of $347.0 million. Under the terms of the CPP, TSFG is prohibited from increasing dividends on its common stock, and from making certain repurchases of equity securities, including its common stock, without the U.S. Treasury’s consent. Furthermore, as long as the preferred stock issued to the U.S. Treasury is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including TSFG’s common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. If dividends payable on the shares of preferred stock have not been paid for six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors of TSFG shall automatically be increased by two, and the U.S. Treasury would have the right to elect two directors to the board.

Temporary Liquidity Guarantee Program

In November 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLGP”). The TLGP was announced by the FDIC in October 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012 (extended from June 30, 2012 by subsequent amendment), certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before October 31, 2009 (extended from June 30, 2009 by subsequent amendment) and (ii) provide full FDIC deposit insurance coverage for noninterest-bearing transaction deposit accounts and certain interest-bearing checking accounts (for which the rate paid will not exceed 50 basis points) held at participating FDIC insured institutions through June 30, 2010 (extended from December 31, 2009, subject to an opt-out provision, by subsequent amendment), otherwise known as the Transaction Account Guarantee Program (“TAGP”). The Company opted into the TAGP. The fee assessment for deposit insurance coverage was 10 basis points per quarter during 2009 on amounts in covered accounts exceeding $250,000. During the six-month extension period in 2010, the fee assessment increases based on an institution’s rating under the risk-based premium system.

Other Safety and Soundness Regulations

Prompt Corrective Action. Current law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon the capitalization of the institutions. Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a tier 1 risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An "adequately capitalized" bank is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a tier 1 risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater. A bank is considered (A) "undercapitalized" if it has (i) a total risk-based capital ratio of less than 8%, (ii) a tier 1 risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4%; (B) "significantly undercapitalized" if the bank has (i) a total risk-based capital ratio of less than 6%, (ii) a tier 1 risk-based capital ratio of less than 3%, or (iii) a leverage ratio of less than 3%; and (C) "critically undercapitalized" if the bank has a ratio of tangible equity to total assets equal to or less than 2%. As of December 31, 2009, Carolina First Bank met the definition of well capitalized.

 
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Under certain circumstances, a well capitalized, adequately capitalized or undercapitalized institution may be treated as if the institution were in the next lower capital category. A depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately but not well capitalized cannot accept, renew or rollover brokered deposits except with a waiver from the FDIC and are subject to limitations on the maximum interest rates that can be paid on deposits. Undercapitalized institutions may not accept, renew or rollover brokered deposits.

The banking regulatory agencies are permitted or, in certain cases, required to take certain actions with respect to institutions falling within one of the three undercapitalized categories. Depending on the level of an institution’s capital, the agencies’ corrective powers include, among other things:

 
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prohibiting the payment of principal and interest on subordinated debt;
 
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prohibiting the holding company from making distributions without prior regulatory approval;
 
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placing limits on asset growth and restrictions on activities;
 
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placing additional restrictions on transactions with affiliates;
 
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limiting the maximum interest rate the institution may pay on deposits;
 
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prohibiting the institution from accepting deposits from correspondent banks; and
 
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in the most severe cases, appointing a conservator or receiver for the institution.

A banking institution that is in any of the three undercapitalized categories is required to submit a capital restoration plan, and such a plan will not be accepted unless, among other things, the banking institution’s holding company guarantees the plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.

Transactions between TSFG, its Subsidiaries, and Affiliates

TSFG's subsidiaries are subject to certain restrictions on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons; and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Aggregate limitations on extensions of credit also may apply. TSFG's subsidiaries are also subject to certain lending limits and restrictions on overdrafts to such persons.

Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to the bank holding company or its nonbank subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. Such restrictions may limit TSFG's ability to obtain funds from its bank subsidiary for its cash needs, including funds for acquisitions, interest, and operating expenses. Certain of these restrictions are not applicable to transactions between a bank and a savings association owned by the same bank holding company, provided that every bank and savings association controlled by such bank holding company complies with all applicable capital requirements without relying on goodwill.

In addition, under the BHCA and certain regulations of the Federal Reserve, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services.

Anti-Money Laundering Legislation

TSFG’s banking subsidiary is subject to the Bank Secrecy Act and its implementing regulations and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require financial institutions such as TSFG to take steps to prevent the use of its banking subsidiary for facilitating the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. TSFG is also required to develop and implement a comprehensive anti-money laundering compliance program. TSFG must also have in place appropriate "know your customer" policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

 
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Sarbanes-Oxley

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, internal controls, executive compensation, and enhanced and timely disclosure of corporate information. In accordance with Section 302(a) of the Sarbanes-Oxley Act, written certifications by TSFG’s Chief Executive Officer and Chief Financial Officer are obtained. These certifications attest that TSFG’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact or omit material facts necessary to make such reports not misleading. TSFG has also implemented a program designed to comply with Section 404 of the Sarbanes-Oxley Act, which includes the identification of key controls over significant processes and accounts, evaluation of the control design effectiveness, and testing of the operating effectiveness of key controls. See Item 9A “Controls and Procedures” for TSFG’s evaluation of its disclosure controls and procedures and internal control over financial reporting.

Future Legislation

Changes to the laws and regulations (including changes in interpretation or enforcement) at the federal level and in the states where we do business can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. From time to time, various legislative and regulatory proposals are introduced. These proposals, if codified, may change banking statutes and regulations and our operating environment in substantial and unpredictable ways. If codified, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. We cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon our financial condition or results of operations. It is likely, however, that the current high level of enforcement and compliance-related activities of federal and state authorities will continue and potentially increase.

Additional Information

See Item 7, “Critical Accounting Policies and Estimates” and “Recently Adopted/Issued Accounting Pronouncements,” for discussion of certain accounting matters, which is incorporated herein by reference.

Risk Factors

Our business, operating results and/or the market price of our common stock may be significantly affected by a number of factors, including the following:

Our ability to raise additional capital could be limited and this could affect our liquidity and could be dilutive to existing shareholders.

In order to remain well capitalized under federal banking agencies’ guidelines and to satisfy higher regulatory capital expectations generally, we believe that we will need to raise substantial additional capital to absorb the potential future credit losses associated with the disposition of our nonperforming assets. We may also be required or choose to raise further additional capital for strategic, regulatory or other reasons. Current conditions in the capital markets are such that traditional sources of capital may not be available to us on reasonable terms if we need to raise additional capital. In such case, there is no guarantee that we will be able to successfully raise additional capital at all or on terms that are favorable or otherwise not materially dilutive to existing shareholders.

Regulatory actions could have a material negative effect on our business, operations, financial condition, results of operations or the value of our common stock.

Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. If this occurs we will become subject to additional, heightened enforcement actions and orders. The terms of any such consent order could have a material adverse effect on our business, operations, financial condition, results of operations or the value of our common stock.

 
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A consent order would, among other things, result in us being deemed “adequately capitalized” (irrespective of the fact that we may be “well capitalized”) and could require that we raise additional capital within a specified timeframe and limit our access to the brokered CD market and restrict the rates we can offer on customer deposits. If we are unable to raise the capital required or otherwise comply with the terms of any such consent order, further regulatory actions could be taken, and our 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 such announcement, which could put further pressure on our funding capability and liquidity needs.

Our access to the capital markets and other sources of funding and liquidity remains under pressure.

We fund our business operations through a combination of customer deposits, other customer funding and wholesale borrowing (including short-term and long-term borrowings as well as brokered deposits). These funding sources have been less available and have become more expensive in recent periods as a result of our financial performance, including the performance of our loan portfolio, decreased confidence in the financial markets generally among borrowers, lenders and depositors, as well as disruption and extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. Our customer deposit funding has been low relative to peers because of our traditional focus on commercial lending, which has caused us to utilize wholesale funding to a greater degree than some of our peers. Customer deposits typically provide cost and liquidity advantages relative to wholesale funding, particularly in a higher interest rate environment. We have been working to strengthen our liquidity by shifting into customer deposits, reducing our reliance on wholesale funding and, where we do rely on wholesale funding, shifting to longer-term and more diversified borrowings. However, we may not be successful in increasing customer deposits or otherwise improving our funding capability and liquidity. With increased concerns about bank failures, traditional deposit customers are increasingly concerned about the extent to which their deposits are insured by the FDIC. Customers may withdraw deposits from our subsidiary bank in an effort to ensure that the amount that they have on deposit is fully insured. The termination of the FDIC's temporary transactional account guarantee program, scheduled to occur June 30, 2010 could put further pressure on our ability to retain certain deposits.

Any occurrence that limits participation in the capital markets or our access to the capital markets, such as the loss of access to the brokered CD market, the Federal Reserve Bank discount window or FHLB advances, a further downgrade of our debt ratings, or a loss of our well capitalized status, may adversely affect our capital costs, our ability to raise capital and our ability to raise capital on terms that meet our funding and liquidity needs. The failure to establish and maintain appropriate funding and capital markets access on acceptable terms when needed could have a material adverse effect on our businesses, financial condition and results of operations, the willingness of certain counterparties and customers to do business with us and on the potential for criticism or adverse action by our regulators or the rating agencies.

Among other things, if we fail to remain well capitalized for bank regulatory purposes, because we do not qualify under the minimum capital standards or the FDIC otherwise downgrades our capital category, it could affect customer confidence, the rates we are allowed to pay on customer deposits, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock, and our ability to make acquisitions, and we would not be able to accept brokered deposits without prior FDIC approval. To be well capitalized, a bank must generally maintain a leverage capital ratio of at least 5%, a tier 1 risk-based capital ratio of at least 6%, and a total risk-based capital ratio of at least 10%. However, our regulators could require us to increase our capital levels. For example, regulators frequently require financial institutions with high levels of classified assets to maintain a leverage ratio of at least 8% and could also impose other and even higher regulatory capital requirements. Our failure to remain well capitalized or to maintain any higher capital requirements imposed on us could negatively affect our business, results of operations and financial condition, generally.

If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations and financial condition.

The NASDAQ’s listing requires that companies have a minimum bid price of $1 per share.

NASDAQ rules classify a security as “deficient” if it has a closing bid price of less than $1 per share for thirty consecutive business days. Once deficient, issuers have an automatic 180-day period to regain compliance by having a closing bid price of at least $1 per share for ten consecutive business days, and can receive an additional 180 days if all other listing requirements are met. On December 4, 2009, we received a letter from the NASDAQ notifying us of our non-compliance with such minimum bid price requirement. As a result, we have until June 2, 2010 to comply with the minimum bid price requirement. If we do not regain compliance with the minimum bid price rule by that date, we may appeal the delisting determination or we could be eligible for an additional grace period of 180 days if we apply to transfer the listing of our common shares to The NASDAQ Capital Market. If we do not meet this listing requirement, liquidity in our stock could be materially and adversely affected.
 
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Issuances or sales of common stock or other equity securities could result in an “ownership change” as defined for U.S. federal income tax purposes. In the event an “ownership change” were to occur, our ability to utilize a significant portion of our U.S. federal and state tax net operating losses could be impaired, and we could lose certain built-in losses that have not been recognized for tax purposes as a result of the operation of Section 382 of the Internal Revenue Code of 1986, as amended.

Our ability to use certain realized net operating losses and unrealized built-in losses to offset future taxable income may be significantly limited if we experience an “ownership change” as defined by Section 382 of the Internal Revenue Code of 1986, as amended. An “ownership change” under Section 382 generally occurs if the aggregate percentage ownership of the stock of the corporation held by one or more “five-percent shareholders” increases by more than fifty percentage points over such shareholders’ lowest percentage ownership during the testing period, which is generally the three year-period ending on the transaction date. Upon an “ownership change,” a corporation generally is subject to an annual limitation on its utilization of pre-change losses and certain recognized built-in losses equal to the value of the stock of the corporation immediately before the “ownership change,” multiplied by the long-term tax-exempt rate (subject to certain adjustments). The annual limitation is increased each year to the extent that there is an unused limitation in a prior year. Since U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation also effectively provides a cap on the cumulative amount of pre-change losses and certain recognized built-in losses that may be utilized. Pre-change losses and certain recognized built-in losses in excess of the cap are effectively lost.

The relevant calculations under Section 382 are technical and highly complex. In some circumstances, issuances or sales of our stock (including any debt-for-equity exchanges and certain transactions involving our stock that are outside of our control) could result in an “ownership change” under Section 382. An “ownership change” could occur if, due to the sale or issuance of additional common stock, the aggregate ownership of one or more persons treated as “five-percent shareholders” were to increase by more than fifty percentage points over such shareholders’ lowest percentage ownership during the relevant testing period. As of December 31, 2009, our federal net operating loss carryforward was approximately $468.5 million. If an “ownership change” were to occur, we believe we would permanently lose the ability to realize a portion of the net operating loss carryforwards and a portion of the net unrealized built-in losses, which could adversely impact our ability to recognize capital from the potential future release of our valuation allowance.

If an “ownership change” were to occur, it is possible that the limitations imposed on our ability to use pre-change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect.

Based on available information, we have estimated that the aggregate percentage ownership change over the testing period through the current date is approximately 45%. In reviewing the calculation, we have concluded that if we choose or are required to raise additional capital (including conversion of other capital instruments), an “ownership change” under Section 382 is likely. Also, due to the infrequent reporting requirements for “five-percent shareholders,” an “ownership change” could occur and not be known to us until reported by the new or existing “five-percent shareholder.”  We are not able to estimate the impact of an “ownership change” because the limitation on the utilization of the pre-change losses and certain recognized built-in losses is calculated as of the date of the “ownership change” and is affected, among other things, by the value of our stock on that date.
 
We have incurred significant losses and will incur additional losses.

We incurred a net loss available to common shareholders of $736.9 million, or $5.22 loss per share for the year ended December 31, 2009, and $568.8 million, or $7.78 loss per share, for the year ended December 31, 2008. These losses are primarily a result of losses in our loan portfolio and associated write-offs of goodwill, as well as the increase in our deferred tax asset valuation allowance, and we expect to continue to incur losses in 2010. Additional detail regarding various matters relating to our credit exposure, portfolio concentrations, nonperforming assets and related matters is included below.

Our geographic and product concentrations and the downturn in the real estate market have significantly affected our results of operations, and further credit deterioration could have further adverse effects on collateral values and borrowers’ ability to repay, and consequently our financial condition and results of operations.

Our commercial, real estate and consumer loans are concentrated predominantly in South Carolina, western North Carolina and larger markets in Florida. In addition, commercial real estate

 
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loans in South Carolina, North Carolina and Florida represented approximately 42% of our total loan portfolio as of December 31, 2009. Included in these commercial real estate loans are loans related to residential construction, which represented approximately 10% of our total loan portfolio as of December 31, 2009. Because of the concentration of real estate and other loans in the same geographic regions, adverse economic conditions in these areas have contributed to higher rates of loss and delinquency on our loans than if the loans had been more diversified on a geographic or product basis.

The effects of recent mortgage market challenges, combined with the ongoing decrease in commercial and residential real estate market prices and demand, could result in further price reductions in commercial and residential real estate values, adversely affecting the value of collateral securing the loans that we hold, as well as loan originations and gains on sale of real estate and construction loans. Prices of properties in South Carolina, North Carolina and Florida – where a large portion of our loans have real estate as a primary or secondary component of collateral – remain under significant pressure, with rising unemployment levels and the impact of the real estate downturn on the general economy. If we are required to liquidate the collateral during this period of reduced real estate values, our profitability and financial condition could be further adversely affected. As the extent and duration of this downturn is not known, we must estimate, based on current portfolio knowledge and analysis, the amount of our probable losses when recording our allowance for loan losses. This estimate requires substantial judgment on the part of management which may or may not prove valid and could be too low.

As noted above, as part of our credit quality and risk management efforts, we have been seeking to reduce our levels of problem loans and nonperforming assets, address weaknesses in lending relationships and manage geographic and product lending concentrations. However, while we expect that these actions will help mitigate the overall effects of the credit down cycle, the weaknesses in our loan portfolio are expected to continue, and we will continue to have substantial geographic and product concentrations even with respect to new loans. Accordingly, it is anticipated that our nonperforming asset and charge-off levels will remain elevated and could accelerate as a result of efforts (including by further charge-offs and loan sales) to reduce our levels of problem loans. In addition, our regulators could require us to take more aggressive measures in the future in connection with our nonperforming assets. If we are not successful in our efforts to successfully manage our existing loan portfolio or new lending activities, or if we experience higher than expected delinquencies and greater than expected charge-offs in future periods, we could experience additional credit losses that materially and adversely affect our financial condition, our results of operations and our capital position. We are currently operating under increased regulatory scrutiny, and we could be exposed to increased potential for criticism or adverse action by our regulators or the rating agencies due to our credit quality.
 
Credit losses, in particular credit losses in excess of what we anticipate, impact our earnings, capital, and operations.

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their contractual terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and have had a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio relates principally to the creditworthiness of corporations and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio relates principally to the general creditworthiness of businesses and individuals within our local markets.

Our credit risk management system is defined by policies approved by our board of directors that govern the risk, underwriting, portfolio monitoring, and problem loan administration processes. We seek to ensure adherence to underwriting standards through a credit approval process and after-the-fact review by credit risk management, and supervise compliance with underwriting and loan monitoring policies through daily reviews by credit risk managers, monthly reviews of exception reports and ongoing analysis of asset quality trends. We administer problem loans through the use of policies that require written plans for resolution and periodic meetings with credit risk management to review progress. Ultimately, credit risk management activities are monitored by our board of directors’ risk committee. As part of our credit quality efforts, we continually assess the effectiveness of our policies and processes, and we have been and will continue to seek to reduce our levels of problem loans, address weaknesses in lending relationships and manage lending concentrations. However, our credit and risk management efforts are subject to substantial risks, including the risk of failure to develop adequate policies and procedures, failure to reduce problem loans and address lending and concentration weaknesses, failure of personnel to comply with our policies and procedures, assumptions and judgments that are not realized and other failures of our policies and procedures. Such failures could result in credit losses that exceed our expectations and adversely impact our financial condition, our capital position and the potential for criticism or adverse action by our regulators or the rating agencies.

In connection with our credit risk management, business planning and forecasting, we make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for estimated credit losses based on a number of factors. We believe that our allowance for credit losses is adequate. However, if our assumptions or judgments are wrong, our

 
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allowance for credit losses may not be sufficient to cover our actual credit losses. We may need to increase our allowance in the future in response to regulatory requests, changing conditions and assumptions, or deterioration in the quality of our loan portfolio. The actual amount of future provisions for credit losses cannot be determined at this time and may vary from the amounts of past provisions.

We may be required to pay significantly higher FDIC premiums in the future.

A significant increase in insured institution failures during 2009 has resulted in a decline in the designated reserve ratio of the Deposit Insurance Fund (“DIF”) to historical lows. On November 12, 2009, the FDIC adopted a final rule requiring substantially all institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.  On September 29, 2009, the FDIC increased annual assessment rates uniformly by 3 basis points beginning in 2011. As a result, an institution’s total base assessment rate for purposes of estimating an institution’s prepaid assessment for 2011 and 2012 will be increased by an annualized 3 basis points beginning in 2011. Again for purposes of calculating the amount that an institution will prepay, an institution’s third quarter 2009 assessment base will be increased quarterly at a 5 percent annual growth rate through the end of 2012.  At least semi-annually hereafter, the FDIC will update its loss and income projections for the DIF. If necessary to return the reserve ratio to its mandated minimum, the FDIC could increase assessment rates during its restoration period, which could have an adverse impact on our results of operations. The FDIC assessment rate could also increase due to downgrades in Carolina First Bank’s risk category which is impacted by changes in the regulatory rating by the FDIC and the capital ratios of the bank.

While we currently do not pay dividends on our common stock, holders of our common stock may be unable to use the dividends-received deduction with respect to any distributions we may make on our common stock in the future.

While we currently pay no dividends on our common stock, if we were to pay a dividend or other distribution on our common stock, distributions paid to corporate U.S. holders on our common stock may be eligible for the dividends received deduction if we have current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Although we believe we have accumulated earnings and profits at December 31, 2009, we may not have sufficient current or accumulated earnings and profits during future taxable years for the distributions on our common stock to qualify as dividends for federal income tax purposes. If any distributions on our common stock with respect to any taxable year are not eligible for the dividends-received deduction because of insufficient current or accumulated earnings and profits, the amount for which you may be able to sell our common stock may decline.

We may not pay dividends on our common stock unless all accrued and unpaid dividends for all past dividend periods are fully paid on our outstanding Series T Preferred Stock issued to the U.S. Treasury.

We are prohibited from paying dividends on our common stock until all accrued and unpaid dividends are paid on our Series T Preferred Stock issued to the U.S. Treasury. Additionally, if we do not pay dividends on the shares of Series T Preferred Stock for six quarterly dividend periods or more, the authorized number of directors on our board will automatically increase by two, and the U.S. Treasury will have the right to elect two directors to our board. In first quarter 2010, we suspended dividend payments on our Series T Preferred Stock and all remaining outstanding equity and capital instruments.

We may not be able to redeem the Series T Preferred Stock and the warrant sold to the U.S. Treasury.

Until such time as we redeem our Series T Preferred Stock, we will remain subject to the respective terms and conditions set forth in the agreements we entered into with the U.S. Treasury under the Capital Purchase Program. Among other things, prior to December 5, 2011, unless we have redeemed the Series T Preferred Stock issued to the U.S. Treasury or the U.S. Treasury has transferred the Series T Preferred Stock to a third party, the consent of the U.S. Treasury will be required for us to (1) declare or pay any dividend or make any distribution on our common stock (other than regular quarterly cash dividends of not more than $0.01 per share of common stock) or (2) redeem, purchase or acquire any shares of our common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the related purchase agreement. It is unlikely that we will be able to redeem the Series T Preferred Stock until, among other things, we increase our capital and return to profitability. See “Risk Factors— We have incurred significant losses and will incur additional losses,” above.

 
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Further, the continued existence of the Capital Purchase Program investment subjects us to increased regulatory and legislative oversight. See “Risk Factors — Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity or stock price,” below.

Our business may be further adversely affected by conditions in the financial markets and economic conditions generally.

Since late 2007, the United States has been in a recession. Business activity across a wide range of industries and regions is greatly reduced and local governments and many businesses are in serious difficulty due to the lack of consumer spending and the lack of liquidity in the credit markets. Unemployment has increased significantly.

Since mid-2007, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all asset classes, including equities. Over this period, the global markets were characterized by substantially increased volatility and short-selling and an overall loss of investor confidence, initially in financial institutions, but also subsequently in companies in a number of other industries and in the broader markets.

Market conditions also led to the failure or merger of a number of prominent financial institutions. Financial institution failures or near-failures resulted in further losses as a consequence of defaults on securities issued by them and defaults under contracts entered into with such entities as counterparties. Furthermore, declining asset values, defaults on mortgages and consumer loans, and the lack of market and investor confidence, as well as other factors, combined to increase credit default swap spreads, to cause rating agencies to lower credit ratings, and to otherwise increase the cost and decrease the availability of liquidity, despite very significant declines in Federal Reserve borrowing rates and other government actions. Some banks and other lenders suffered significant losses and became reluctant to lend, even on a secured basis, due to the increased risk of default and the impact of declining asset values on the value of collateral. The foregoing significantly weakened the strength and liquidity of some financial institutions worldwide. In 2008 and 2009, the U.S. government, the Federal Reserve and other regulators took numerous steps to increase liquidity and to restore investor confidence, including investing in the equity of banking organizations, but certain asset values have continued to decline and access to liquidity continues to be constrained.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we operate. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; natural disasters; or a combination of these or other factors. Overall, during 2008 and 2009, the business environment has been adverse for many households and businesses in the United States and worldwide. It is expected that the business environment in the United States and worldwide will continue to be challenged for the foreseeable future. There can be no assurance that these conditions will improve in the near term. Such conditions could adversely affect the credit quality of our loans, results of operations and financial condition.

The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.

Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including central government monetary policies, domestic and international economic and political conditions, and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, our investment securities.

The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.

 
15
 
Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect our financial condition, results of operation, liquidity or stock price.

Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus on and scrutiny of the financial services industry. The U.S. government has intervened on an unprecedented scale. In addition to the Capital Purchase Program (in which we participated) under the Troubled Asset Relief Program (“TARP”) announced in 2008, the U.S. government has taken steps that include enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances, and increasing insurance on bank deposits. The U.S. Congress, through the Emergency Economic Stabilization Act of 2008 (“EESA”) and the American Recovery and Reinvestment Act of 2009 (“ARRA”), also has imposed a number of restrictions and limitations on the operations of financial services firms participating in the federal programs. There can be no assurance as to the impact that these programs and measures will have on the financial markets, including the high levels of volatility and limited credit availability currently being experienced, or on the U.S. banking and financial industries and the broader U.S. and global economies. The failure of these programs and measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our common stock.

These programs and measures also subject participating financial institutions, like us, to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. In particular, ARRA made amendments to the executive compensation provisions of EESA, under which TARP was established. These amendments apply not only to future participants under TARP, but also apply retroactively to companies like us that are current TARP participants.

In addition, new legislative proposals continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including with respect to compensation, interest rates and the impact of bankruptcy proceedings on consumer real property mortgages and otherwise. These, and any future legal requirements and implementing standards under TARP may have unforeseen or unintended adverse effects on TARP participants and on the financial services industry as a whole. Further, federal and state regulatory agencies also frequently adopt changes to their regulations and/or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance. Additionally, the evolving regulations concerning executive compensation may impose limitations on us that affect our ability to compete successfully for executive and management talent.

We are subject to extensive government regulation and supervision and could be subjected to additional restrictions on our business and operations.

TSFG and its subsidiaries are subject to extensive federal and state regulation and supervision affecting, among other things, our lending practices, capital structure, investment practices, dividend policy, and growth. Banking regulations are primarily intended to protect depositors’ funds, consumers, federal deposit insurance funds, and the banking system as a whole, not security holders. Under federal and state law, our regulators have broad powers with respect to our company and subsidiaries, which entail risks and uncertainties. These risks and uncertainties include the risk that additional capital will be required by our regulators. In addition, our regulators may impose other directives relating to various aspects of our business, such as risk management, credit and lending policies and procedures, asset/liability management, loan and securities portfolio composition, funding and liquidity and dividend policies if they determine that any of these aspects of our business pose undue risk to the institution and we fail to take or are unable to take sufficient action to mitigate such risks. Any such laws, requirements or directives, or the failure or inability to comply with them, could result in negative regulatory consequences, including becoming subject to supervisory action or to the imposition of restrictions on our business and operations. Such restrictions could adversely impact our financial condition, our access to the equity and capital markets, the way in which we operate our businesses and the value of our common stock.

 
16

Laws and regulations also exist that require financial institutions like us to take steps to prevent the use of our banking subsidiary to facilitate the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. We are also required to develop and implement a comprehensive anti-money laundering compliance program. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

In addition, Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. It is likely that there will be significant changes to the banking and financial institutions regulatory regimes in the near future in light of the recent performance of and government intervention in the financial services sector. Changes to statutes, regulations, regulatory policies, or regulatory ratings (including changes in interpretation or implementation), could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit access to certain funding sources, limit the types of financial services, products, and rates we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things.

Our credit ratings are reviewed periodically, and could be subject to further downgrade.

Our credit ratings are currently below investment grade. A further downgrade to our, or our affiliates’, credit ratings could increase our cost of funds and negatively impact our profitability, or could lead to a loss of deposits due to decreased depositor confidence. Rating agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, and level and quality of earnings. In addition, ratings agencies have themselves been subject to scrutiny arising from the financial crisis and there is no assurance that ratings agencies will not make or be required to make substantial changes to their ratings policies and practices or that such changes would not affect ratings of our securities or of securities in which we have an economic interest. Failure to raise additional capital, further credit quality deterioration and other factors relating to our business could cause us to have lower capital ratios, which could result in the further downgrade of our credit ratings.

Our stock price can be volatile in response to a number of factors.
 
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price can fluctuate significantly in response to a variety of factors including, among other things:  variations in our quarterly operating results; recommendations by securities analysts; significant acquisitions or business combinations; performance of other companies that investors deem comparable to us; news reports relating to trends, concerns and other issues in the financial services industry; and changes in government regulations. General market fluctuations, industry factors, and general economic and political conditions and events could also cause our stock price to decrease regardless of our operating results. Declining stock prices could create customer concern, which could weaken our competitive position and, in turn, adversely affect our financial condition and results of operations.
 
Industry competition may have an adverse effect on our success.

Our profitability depends on our ability to compete successfully. We operate in a highly competitive environment. Certain of our competitors are larger and have more resources than we do and as a result may be perceived as stronger institutions. In our market areas, we face competition from other commercial banks, savings and loan associations, credit unions, internet banks, finance companies, mutual funds, insurance companies, brokerage and investment banking firms, and other financial intermediaries that offer similar services. Some of our non-bank competitors are not subject to the same extensive regulations that govern TSFG or Carolina First Bank and may have greater flexibility in competing for business. We expect competition to intensify among financial services companies due to the recent consolidation of certain competing financial institutions and the conversion of certain investment banks to bank holding companies. Should competition in the financial services industry intensify, our ability to market our products and services may be adversely affected.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in most activities engaged in by us can be intense, and we may not be able to hire sufficiently skilled people or to retain them. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel. Moreover, our current trading price, reported losses and other matters have, and will likely continue to, hurt our ability to retain and hire employees.

 
17

Significant litigation could have a material adverse effect on us.

We face legal risks in our business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against us may have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects.

We rely on our systems and certain counterparties, and certain failures could materially adversely affect our operations.

Our businesses are dependent on our ability to process, record and monitor a large number of complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Third parties with which we do business could also be sources of operational risk to us, including relating to breakdowns or failures of such parties’ own systems. Any of these occurrences could diminish our ability to operate one or more of our businesses, or result in potential liability to clients, reputational damage and regulatory intervention, any of which could materially adversely affect us. If personal, confidential or proprietary information of customers or clients in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage and financial loss. We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses or electrical or telecommunications outages, natural disasters, disease pandemics or other damage to property or physical assets, or events arising from local or larger scale politics, including terrorist acts. Such disruptions may give rise to losses in service to customers and loss or liability.

Our framework for managing risks may not be effective in mitigating risk and loss.

Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially adversely affected.

We are a holding company and depend on our subsidiaries for dividends, distributions and other payments.

From a corporate law perspective, the holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available. Because TSFG is a legal entity separate and distinct from its subsidiaries and because it does not conduct revenue-generating operations at the holding company level, TSFG depends on the payment of dividends from its subsidiaries for its revenues. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered “under-capitalized,” as that term is defined in applicable regulations. In addition, South Carolina banking regulations restrict under certain circumstances the amount of dividends that the subsidiary bank, Carolina First Bank, can pay to TSFG.

In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, such authority may require, after notice and hearing, that such bank cease and desist from such practice. Depending on the financial condition of Carolina First Bank, the applicable regulatory authority might deem us to be engaged in an unsafe or unsound practice if Carolina First Bank were to pay dividends. The Federal Reserve and other regulatory authorities have issued policy statements generally requiring insured banks and bank holding companies only to pay dividends out of current operating earnings. Payment of dividends could also be subject to regulatory limitations. For example, if Carolina First Bank became “under-capitalized,” current law provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions.

Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.

 
18

In addition, if any of our subsidiaries becomes insolvent, the direct creditors of that subsidiary will have a prior claim on its assets. Our rights and the rights of our creditors will be subject to that prior claim, unless we are also a direct creditor of that subsidiary.

Our historical financial information may not permit you to predict our cost of operations.

In addition to the impact on our provision for credit losses and charge-offs, the current credit environment has adversely affected our noninterest expenses. We have recorded significant write-downs and losses on sales of foreclosed properties, write-downs and losses on sales of loans and impairment of long-lived assets and goodwill, all of which are reported in noninterest expense. In addition, increased regulatory assessments and loan collection expense have also impacted noninterest expense. The magnitude and volatility in these line items may make it hard for you to accurately predict our basic cost of operations, absent the impact of credit.

Unresolved Staff Comments

None.

Properties

TSFG's principal executive offices are located at 102 South Main Street, Greenville, South Carolina. TSFG leases approximately 111,000 square feet of this location, which also houses Carolina First Bank's Greenville main office branch. The majority of TSFG's administrative functions presently reside at this location. TSFG owns a 130,000 square foot building in Lexington, South Carolina which houses the technology and operations departments. TSFG leases the land for the technology building under a 30 year lease. In addition, TSFG leases non-banking office space in 18 locations in South Carolina, North Carolina, and Florida.

TSFG occupies approximately 60,000 square feet of its corporate campus. See Item 8, Note 11 to the Consolidated Financial Statements for a discussion of TSFG’s decision to market its campus facility for sale.

At December 31, 2009, TSFG operated 177 branch offices, including 83 in South Carolina, 67 in Florida, and 27 in North Carolina. Of these locations, TSFG or one of its subsidiaries owns 101 locations, which includes 21 locations with land leases, and leases 76 locations. In addition, TSFG or one of its subsidiaries owns 7 stand-alone ATM locations, including 5 locations with land leases, and leases 22 locations.

Legal Proceedings

In March 2009, Carolina First Bank was named as a defendant in a complaint filed in the In re Louis J. Pearlman bankruptcy pending in the United States Bankruptcy Court, Middle District of Florida, Orlando Division. The complaint seeks, among other things, to avoid certain fraudulent transfers Carolina First Bank allegedly received in connection with repayment of a loan and alleges approximately $24 million in compensatory damages, plus punitive damages. TSFG intends to vigorously defend the allegations and has moved to dismiss the complaint, or in the alternative, for a more definite statement. 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. 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. In the complaint, which seeks damages of $36 million, 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 the Carolina First Bank loan. TSFG intends to vigorously defend the allegations and has moved to dismiss the complaint.

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.

 
19
 

Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

Market for Common Stock and Related Matters

TSFG's common stock trades on The NASDAQ Global Select Market under the symbol TSFG. At March 5, 2010, TSFG had 7,650 shareholders of record and 215,625,225 shares outstanding. A discussion of certain limitations on the ability of TSFG to pay dividends on its common stock is set forth in Item 1 “Business” under the heading “Supervision and Regulation—Dividends”. Also see Item 7, "Capital and Liquidity" and Item 8, Notes 23 and 25 to the Consolidated Financial Statements for a discussion of capital stock and dividends (including limitations on payment of dividends), which information is incorporated herein by reference.

   
Three Months Ended
  
   
December 31
    
September 30
    
June 30
    
March 31
  
2009
                        
Common stock price:
                        
High
   $ 1.60     $ 2.20     $ 3.40     $ 4.51  
Low
     0.53       0.98       1.05       0.66  
Close
     0.64       1.47       1.19       1.10  
Cash common dividend declared
     -       -       0.01       0.01  
Volume traded
     328,692,978       280,363,211       139,651,924       70,663,648  

   
Three Months Ended
  
   
December 31
    
September 30
    
June 30
    
March 31
  
2008
                        
Common stock price:
                        
High
   $ 9.53     $ 13.50     $ 15.52     $ 18.02  
Low
     2.48       2.52       3.66       12.25  
Close
     4.32       7.33       3.92       14.86  
Cash common dividend declared
     0.01       0.01       0.01       0.19  
Volume traded
     68,949,220       106,046,605       172,874,695       73,719,377  

Unregistered Sales of Securities

None.

Equity Compensation Plan Data

See Equity Compensation Plan Data to be included in the Registrants’ Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

 
20

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES
  
Period
  
Total Number of Shares Purchased
    
Average Price Paid per Share
    
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
    
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plans or Programs (in thousands)
  
October 1, 2009 to October 31, 2009
     -     $ -       -     $ -  
November 1, 2009 to November 30, 2009
     -       -       -       -  
December 1, 2009 to December 31, 2009
     1,409 (1)     0.56       -       -  
Total
     1,409     $ 0.56       -     $ -  

(1)
These shares were canceled in connection with vesting of restricted stock. Pursuant to TSFG’s restricted stock plans, participants may tender shares of vested restricted stock as payment for taxes due at the time of vesting. Shares surrendered by participants of these plans are repurchased at current market value pursuant to the terms of the applicable restricted stock plan and not pursuant to publicly announced share repurchase programs.

Total Shareholder Return

The following graph sets forth the performance of TSFG’s common stock for the five year period ended December 31, 2009 as compared to the S&P 500 Index and the NASDAQ Bank Index. The graph assumes $100 originally invested on December 31, 2004 and that all subsequent dividends were reinvested in additional shares. The performance graph represents past performance and should not be considered to be an indication of future performance. 

 
   
12/31/04
    
12/31/05
    
12/31/06
    
12/31/07
    
12/31/08
    
12/31/09
  
                                     
The South Financial Group
   $ 100     $ 87     $ 86     $ 52     $ 15     $ 2  
NASDAQ Bank Index
     100       98       110       87       63       53  
S&P 500
     100       105       121       128       81       102  

 
21

Selected Financial Data

See Item 8, Consolidated Financial Statements and the accompanying notes for factors including but not limited to business combinations and accounting changes that affect the comparability of the information presented.

SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(dollars and shares (except per share data) in thousands)

   
Years Ended December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
    
2004
  
Earnings Summary
                                    
Net interest income
   $ 331,532     $ 380,163     $ 382,781     $ 401,371     $ 409,056     $ 335,841  
Noninterest income
     118,033       121,967       113,712       118,210       43,893       115,728  
Total revenue
     449,565       502,130       496,493       519,581       452,949       451,569  
Provision for credit losses
     668,904       344,589       68,568       32,789       40,592       34,987  
Noninterest expenses
     419,121       792,233       321,249       326,244       316,736       241,095  
(Loss) income from continuing ops
     (676,254 )     (547,118 )     73,276       112,866       70,217       119,998  
Net (loss) income
     (676,254 )     (547,118 )     73,276       112,866       69,821       119,508  
Net (loss) income available to common shareholders
     (736,943 )     (568,776 )     72,611       112,348       69,653       119,188  
                                                 
Per Common Share
                                                
Basic:
                                                
(Loss) income from continuing ops
   $ (5.22 )   $ (7.78 )   $ 0.99     $ 1.50     $ 0.96     $ 1.85  
Net (loss) income
     (5.22 )     (7.78 )     0.99       1.50       0.95       1.85  
Diluted:
                                                
(Loss) income from continuing ops
     (5.22 )     (7.78 )     0.98       1.49       0.94       1.81  
Net (loss) income
     (5.22 )     (7.78 )     0.98       1.49       0.93       1.80  
Average common shares outstanding:
                                                
Basic
     141,208       73,137       73,618       74,940       73,307       64,592  
Diluted
     141,208       73,137       74,085       75,543       74,595       66,235  
Cash dividends declared
   $ 0.02     $ 0.22     $ 0.73     $ 0.69     $ 0.65     $ 0.61  
Common book value (December 31)
     3.05       14.12       21.40       20.73       19.90       19.56  
Market price (December 31)
     0.64       4.32       15.63       26.59       27.54       32.53  
                                                 
Balance Sheet Data (Year End)
                                                
Loans held for investment
   $ 8,386,127     $ 10,192,072     $ 10,213,420     $ 9,701,867     $ 9,439,395     $ 8,107,757  
Allowance for credit losses
     373,126       249,874       128,695       112,688       109,350       96,918  
Securities
     2,222,917       2,094,367       1,990,570       2,743,518       3,092,064       4,237,355  
Intangible assets
     229,825       246,020       678,182       685,568       691,758       611,450  
Total assets
     11,894,982       13,602,326       13,877,584       14,210,516       14,319,285       13,798,689  
Customer funding (1)
     7,666,801       7,989,962       8,178,471       8,392,597       8,201,571       6,827,268  
Deposits
     9,296,212       9,405,717       9,788,568       9,516,740       9,234,437       7,670,944  
Long-term debt
     1,116,869       707,769       698,340       1,130,475       1,922,151       2,972,270  
Shareholders' equity
     993,174       1,620,531       1,550,308       1,562,032       1,486,907       1,393,460  
Balance Sheet Data (Averages)
                                                
Loans
   $ 9,478,536     $ 10,374,423     $ 10,013,387     $ 9,621,846     $ 8,883,837     $ 6,927,336  
Securities (excludes unrealized gains, losses on available for sale securities)
     2,018,845       2,087,745       2,525,317       3,043,385       4,388,351       4,158,202  
Total earning assets
     11,497,608       12,478,993       12,545,223       12,692,872       13,307,956       11,101,951  
Total assets
     12,819,697       13,833,355       14,044,565       14,202,649       14,752,973       12,208,069  
Customer funding (1)
     7,723,889       8,065,982       8,216,762       8,077,605       7,606,071       6,167,731  
Shareholders' equity
     1,450,273       1,558,081       1,543,552       1,506,195       1,463,125       1,164,004  
                                                 
Performance Ratios
                                                
Return on average assets
     (5.28 )%     (3.96 )%     0.52 %     0.79 %     0.47 %     0.98 %
Return on average equity
     (46.63 )     (35.11 )     4.75       7.49       4.77       10.27  
Net interest margin (tax-equivalent)
     2.92       3.09       3.10       3.22       3.12       3.06  
Tangible equity to tangible assets
     6.54       10.29       6.61       6.48       5.83       5.93  
Dividend payout ratio
     n/m       n/m       73.74       46.31       69.15       33.89  
                                                 
Credit Quality
                                                
Nonperforming loans
   $ 399,046     $ 365,664     $ 80,191     $ 37,168     $ 33,255     $ 45,082  
Nonperforming assets
     522,360       414,657       88,467       41,509       43,977       55,976  
Nonperforming assets as a % of
                                                
loans and foreclosed property
     6.13 %     4.04 %     0.86 %     0.43 %     0.46 %     0.69 %
Nonperforming assets as a % of total assets
     4.39       3.05       0.64       0.29       0.31       0.41  
Net charge-offs to average loans hfi
     5.72       2.16       0.53       0.28       0.36       0.46  
Allowance for credit losses as a % of loans hfi
     4.45       2.45       1.26       1.16       1.16       1.20  
                                                 
Operations Data
                                                
Branch offices
     177       180       172       167       172       154  
Employees (full-time equivalent)
     2,214       2,505       2,474       2,618       2,607       2,308  

(1)  Customer funding is total deposits less brokered deposits plus customer sweep accounts.

 
22

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 audited Consolidated Financial Statements and accompanying Notes presented in Item 8 of this report and the supplemental financial data appearing throughout this report. Percentage calculations contained herein have been calculated based upon actual, not rounded, results.

TSFG primarily operates through its subsidiary bank, Carolina First Bank, which conducts operations in South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile).
 
 
Index to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
Page
   
Forward-Looking Statements
23
Non-GAAP Financial Information
24
Overview
25
Critical Accounting Policies and Estimates
26
Balance Sheet Review
30
Capital and Liquidity
56
Results of Operations
60
Enterprise Risk Management
68
Off-Balance Sheet Arrangements
72
Recently Adopted/Issued Accounting Pronouncements
73

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, some of which are discussed in more detail in Item 1A – Risk Factors, may affect the operations, performance, business strategy and results of TSFG including, but not limited to, the following:

 
·
significant changes in, or additions to, banking laws or regulations, including, without limitation, as a result of the Emergency Economic Stabilization Act of 2008 (“EESA”), the Troubled Asset Relief Program (“TARP”), including the Capital Purchase Program (the “Capital Purchase Program”) of the U.S. Department of Treasury (the “U.S. Treasury”), and related executive compensation requirements;
 
·
additional losses in our loan portfolio and ability to mitigate credit issues in our loan portfolio;
 
·
continuation or worsening of current recessionary conditions, as well as continued turmoil in the financial markets;
 
·
continued volatility and deterioration of the capital and credit markets;
 
·
ability to maintain required capital levels and adequate sources of funding and liquidity;
 
·
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 scheduled termination on June 30, 2010;
 
·
rating agency action such as a ratings downgrade;
 
·
continued weakness in the real estate market, including the markets for commercial and residential real estate, which may affect, among other things, the level of nonperforming assets, charge-offs, and provision expense;
 
·
ability to raise capital or otherwise comply with Federal and state capital requirements imposed on TSFG and Carolina First;
 
·
adverse customer reaction associated with any public regulatory actions;

 
23

 
·
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 premiums due to market developments and regulatory changes;
 
·
level, composition, and repricing characteristics of the securities portfolio;
 
·
fluctuations in consumer spending;
 
·
increased competition in our markets;
 
·
income and expense projections, ability to control expenses, and expense reduction initiatives;
 
·
changes in the compensation, benefit, and incentive plans, including compensation accruals;
 
·
risks associated with income taxes, including the potential for adverse adjustments and the inability to reverse valuation allowances on deferred tax assets;
 
·
acquisitions, greater than expected deposit attrition or customer loss, inaccuracy of related cost savings estimates, inaccuracy of estimates of financial results, and unanticipated integration issues;
 
·
valuation of goodwill and intangibles and any potential future impairment;
 
·
significant delay or inability to execute strategic initiatives designed to grow revenues;
 
·
changes in management’s assessment of and strategies for lines of business, asset, and deposit categories;
 
·
changes in the evaluation of the effectiveness of our hedging strategies or access to derivative instruments; and
 
·
changes, costs, and effects of litigation and environmental remediation.

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

Non-GAAP Financial Information

This report also contains financial information determined by methods other than in accordance with Generally Accepted Accounting Principles (“GAAP”). TSFG’s management uses these non-GAAP measures to analyze TSFG’s performance. In particular, TSFG presents certain designated net interest income amounts on a tax-equivalent basis (in accordance with common industry practice). Management believes that these presentations of tax-equivalent net interest income aid in the comparability of net interest income arising from both taxable and tax-exempt sources over the periods presented. In discussing its deposits, TSFG presents information summarizing its funding generated by customers using the following definitions:  “customer deposits,” which are defined by TSFG as total deposits less brokered deposits, and “customer funding,” which is defined by TSFG as total deposits less brokered deposits plus customer sweep accounts. TSFG also discusses its funding generated from non-customer sources using the following definition: “wholesale borrowings” which are defined by TSFG as short-term and long-term borrowings less customer sweep accounts plus brokered deposits. Management believes that these presentations of “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

 
24

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 $11.9 billion in total assets and 177 branch offices in South Carolina, Florida, and North Carolina at December 31, 2009. 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 South Carolina and North Carolina (as Carolina First) and in Florida (as Mercantile). At December 31, 2009, approximately 45% of TSFG’s customer deposits (total deposits less brokered deposits) were in South Carolina, 43% were in Florida, and 12% were in North Carolina.

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

As discussed in Item 8, Note 1 to the Consolidated Financial Statements, due to TSFG’s 2009 financial results and capital levels, the substantial uncertainty throughout the U.S. banking industry, and other matters, the Company has assessed its ability to continue as a going concern and has concluded that, based on current and expected liquidity needs and sources, management expects TSFG to be able to meet its obligations at least through December 31, 2010. If unanticipated market factors emerge, or if the Company is unable to raise additional capital, successfully execute its plans, or comply with regulatory requirements, then its banking regulators could take further action, which could include actions that may have a material adverse effect on the Company’s business, results of operations and financial position. Also see “Capital and Liquidity.”

Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. A consent order would, among other things, result in Carolina First Bank being deemed “adequately capitalized” (irrespective of the fact that it may be “well capitalized”) and could require that the Company raise additional capital within a specified timeframe and limit TSFG's access to the brokered CD market and restrict the rates it can offer on customer deposits. In addition, a consent order would likely impose higher capital ratios on Carolina First Bank than would otherwise be required. If the Company is unable to raise the capital required or otherwise comply with the terms of any such consent order, further regulatory actions could be taken, and its ability to operate as a going concern could be negatively impacted. Furthermore, because such consent orders are public, there could be an adverse customer or market reaction to such announcement.

TSFG reported a net loss available to common shareholders of $736.9 million, or $(5.22) per diluted share, for 2009, primarily due to recording a full valuation allowance against its deferred tax asset and higher credit and related costs. For 2008, TSFG reported a net loss available to common shareholders of $568.8 million, or $(7.78) per diluted share for 2008, primarily due to a $426.0 million goodwill impairment charge resulting from a decrease in the value of the Mercantile banking segment and elevated credit costs. The following is a summary of the consolidated statements of operations (in thousands, except per share data):

   
Year Ended December 31,
    
Increase
  
   
2009
    
2008
    
(Decrease)
  
Net interest income
   $ 331,532     $ 380,163     $ (48,631 )
Provision for credit losses
     668,904       344,589       324,315  
Noninterest income
     118,033       121,967       (3,934 )
Noninterest expenses
     419,121       792,233       (373,112 )
Income tax expense (benefit)
     37,794       (87,574 )     125,368  
Net loss
     (676,254 )     (547,118 )     (129,136 )
Preferred stock dividends and other
     (60,689 )     (21,658 )     (39,031 )
Net loss available to common shareholders
   $ (736,943 )   $ (568,776 )   $ (168,167 )
                         
Loss per common share, diluted
   $ (5.22 )   $ (7.78 )   $ 2.56  

 
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At December 31, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 6.13% from 4.04% at December 31, 2008. The increase in nonperforming assets was primarily attributable to continued deterioration in residential construction and development-related loans (which are included in commercial real estate loans). For 2009, net loan charge-offs totaled 5.72% of average loans held for investment, compared to 2.16% for 2008. TSFG’s provision for credit losses increased to $668.9 million for 2009 compared to $344.6 million for 2008.

During 2009, TSFG evaluated the expected realization of its deferred tax assets, primarily comprised of future tax benefits associated with the allowance for loan losses and net operating loss carryforwards, and concluded that a $286.5 million increase to the valuation allowance was required. This non-cash charge was included in income tax expense during 2009.

In June 2009, TSFG announced a capital plan (the “Capital Plan”) to bolster its common equity. This plan is substantially complete. In connection with this plan, TSFG issued $85 million of common equity in a public offering (with net proceeds of $79.7 million) and converted $185.4 million of convertible preferred stock into 44.9 million common shares (including 16.3 million shares valued at $25.9 million as an inducement to convert). In addition, TSFG sold ancillary businesses (which added approximately $16 million to tangible common equity) and reduced its assets during 2009, partly by sales of indirect auto loans and shared national credits. During 2009, TSFG contributed $195 million to its subsidiary bank to increase its capital.

In 2009, preferred stock dividends included $32.4 million treated as deemed dividends to preferred shareholders resulting from induced conversion of $234.1 million of preferred stock into common shares.

At December 31, 2009, all regulatory capital ratios exceeded well-capitalized minimums. TSFG’s tangible equity to tangible asset ratio decreased to 6.54% at December 31, 2009, from 10.29% at December 31, 2008 primarily due to net losses in 2009, partially offset by proceeds from the common stock offering and lower total assets. Tangible common equity to tangible assets was 3.67% at December 31, 2009, compared to 6.05% at December 31, 2008. The common stock offering, lower total assets, and the conversion of $234.1 million of the Series 2008 and Series 2009-A Convertible Preferred Stock partially offset the impact of our net loss and dividends for 2009.

Tax-equivalent net interest income was $335.8 million for 2009, a $49.7 million decrease from $385.5 million in 2008. The net interest margin decreased to 2.92% in 2009 from 3.09% in 2008, primarily due to yields on earning assets declining more than funding costs and the impact of the credit environment, including increased nonperforming asset levels and higher interest reversals for nonperforming loans.

Noninterest income totaled $118.0 million for 2009, compared to $122.0 million for 2008, reflecting decreases in most categories. During 2009, TSFG sold certain ancillary businesses for a gain of $7.2 million which, combined with a $4.9 million increase in gain on securities and a $4.1 million increase in gain on certain derivative activities, partially offset the declines in other categories.

Noninterest expenses for 2009 totaled $419.1 million, compared to $792.2 million for 2008. In 2008, noninterest expenses included a $426.0 million goodwill impairment charge and higher employment contract and severance expense related to the retirement of TSFG’s CEO. In 2009, regulatory assessments and credit-related costs continued to increase, and TSFG recorded $21.6 million in impairment charges on long-lived assets. However, salaries and wages (excluding employment contract and severance expense) and employee benefits decreased $15.8 million when comparing 2009 to 2008.
 
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, income tax assets or liabilities, the effectiveness of derivatives and other hedging activities, the fair value of certain financial instruments (securities, derivatives, and privately held investments), share-based compensation, and accounting for acquisitions, including the fair value determinations and the analysis of goodwill impairment. To a lesser extent, significant estimates are also associated with the determination of contingent liabilities, discretionary compensation, and other employee benefit agreements. Different assumptions in the application of these policies could result in material changes in TSFG’s Consolidated Financial Statements. Accordingly, as this information changes, the Consolidated Financial Statements could reflect the use of

 
26

different estimates, assumptions, and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions, and judgments, and as such have a greater possibility of producing results that could be materially different than originally reported. TSFG has procedures and processes in place to facilitate making these judgments.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses (“Allowance”) represents management’s estimate of probable incurred losses in the lending portfolio. See “Balance Sheet Review – Allowance for Loan Losses and Reserve for Unfunded Lending Commitments” for additional discussion, including the methodology for analyzing the adequacy of the Allowance. This methodology relies upon management’s judgment in segregating the portfolio into risk-similar segments, computing specific allocations for impaired loans, and setting the amounts within the probable loss range (from 95% to 105% of the adjusted historical loss ratio). Management’s judgments evolve from an assessment of various issues, including but not limited to the pace of loan growth, collateral values, borrower’s ability and willingness to repay, emerging portfolio concentrations, risk management system changes, new product offerings, loan portfolio quality trends, and uncertainty in current economic and business conditions.

Assessing the adequacy of the Allowance is a process that requires considerable judgment. Management considers the year-end Allowance appropriate and adequate to cover probable incurred losses in the loan portfolio. However, management's judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current Allowance amount or that future increases in the Allowance will not be required. No assurance can be given that management's ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the Allowance, thus adversely affecting the operating results of TSFG.

The 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 TSFG to adjust its Allowance based on information available to them at the time of their examination.

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

Income Taxes

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

Tax returns submitted by management or the income tax reported on the Consolidated Financial Statements may be subject to adjustment by either adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service (“IRS”). TSFG is subject to potential adverse adjustments, including but not limited to: an increase in the statutory federal or state income tax rates, the permanent nondeductibility of amounts currently considered deductible either now or in future periods, and the dependency on the generation of future taxable income, including capital gains, in order to ultimately realize deferred income tax assets.

TSFG will only include the current and deferred tax impact of its tax positions in the financial statements when it is more likely than not (likelihood of greater than 50%) that such positions will be sustained by taxing authorities, with full knowledge of relevant information, based on the technical merits of the tax position. While TSFG supports its tax positions by unambiguous tax law, prior experience with the taxing authority, and analysis that considers all relevant facts, circumstances and regulations, management must still rely on assumptions and estimates to determine the overall likelihood of success and proper quantification of a given tax position.

 
27

TSFG recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Management regularly reviews the Company’s deferred tax assets for recoverability. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During third quarter 2009, the estimated realization period for the deferred tax asset based on forecasts of future earnings extended further into the 20-year carryforward period compared to the realization period forecasted in second quarter 2009. This extended realization period, combined with the objective evidence of a three-year cumulative loss position and continued near-term losses represented significant negative evidence that caused the Company to conclude that a $286.5 million increase to the deferred tax valuation allowance was required in 2009. To the extent that TSFG generates taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance will ultimately reverse (subject to ownership change limitations) through income tax expense when TSFG can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the 20-year carryforward period.

At December 31, 2009, TSFG had federal income tax net operating loss (NOL) carryforwards of approximately $468.5 million that originated in 2009 and will expire in 2029. TSFG was able to carry back a portion of its net operating losses to two prior years (2006 and 2007), to the extent it had taxable income in those years; however, as a participant in the TARP Capital Purchase Program, TSFG was ineligible for the five year carryback implemented in late 2009 through the Worker, Homeownership and Business Assistance Act of 2009. The ability of TSFG to utilize NOL carryforwards to reduce future federal taxable income and the federal income tax liability of the Company is 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 ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock by TSFG during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of TSFG. Based on available information, the Company has estimated that the aggregate percentage ownership change over the testing period through the current date is approximately 45%. Future equity transactions by TSFG or by 5% stockholders (including transactions beyond our control) could cause a Section 382 ownership change and therefore a limitation on the annual utilization of NOLs.

In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are unrecognized built-in losses on the balance sheet prior to a change in ownership. Therefore, the amount of any potential Section 382 limitation cannot be reasonably estimated until an actual change occurs.

Derivatives and Hedging Activities

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

Fair Value of Certain Financial Instruments

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. When measuring fair value, an entity must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value is based on quoted market prices for the same or similar instruments, adjusted for any differences in terms. If market values are not readily available, then the fair value is estimated. For example, when TSFG has an investment in a privately held company, TSFG’s management evaluates the fair value of these investments based on the entity’s ability to generate cash through its operations, obtain alternative financing, and subjective factors. Modeling techniques, such as discounted cash

 
28

flow analyses, which use assumptions for interest rates, credit losses, prepayments, and discount rates, are also used to estimate fair value if market values are not readily available.

TSFG carries its available for sale securities and derivatives at fair value. (Effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis.) The unrealized gains or losses, net of income tax effect, on available for sale securities and the effective component of derivatives qualifying as cash flow hedges are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity. The fair value adjustments for derivative financial instruments not qualifying as cash flow hedges are included in earnings. In addition, for hedged items in a fair value hedge, changes in the hedged item’s fair value attributable to the hedged risk are also included in noninterest income. No fair value adjustment is allowed for the related hedged asset or liability in circumstances where the derivatives do not meet the requirements for hedge accounting.

TSFG periodically evaluates its investment securities portfolio for other-than-temporary impairment. If a security is considered to be other-than-temporarily impaired, the related unrealized loss is charged to operations (or, in some cases the related unrealized loss attributable to credit is charged to operations), and a new cost basis is established. Factors considered include the reasons for the impairment, recent events specific to the issuer or industry, the severity and duration of the impairment, volatility of fair value, changes in value subsequent to period-end, external credit ratings, and forecasted performance of the security issuer. In addition, TSFG considers whether it intends to sell the security, whether it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. However, for equity securities, which typically do not have a contractual maturity with a specified cash flow on which to rely, the ability to hold an equity security indefinitely, by itself, does not allow for avoidance of other-than-temporary impairment.

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

We may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from write-downs of individual assets. For example, nonrecurring fair value adjustments to loans held for investment reflect full or partial write-downs that are based on the loan’s observable fair value or the fair value of the underlying collateral. Nonrecurring fair value adjustments to other real estate owned reflect the application of the principle of lower of cost or fair value less cost to sell.

Additionally, as part of the second step of goodwill impairment testing (see Critical Accounting Policies and Estimates -Accounting for Acquisitions), we may be required to estimate the fair value of assets and liabilities of a reporting unit. The estimated fair value of loans 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.

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

See Note 31 to the Consolidated Financial Statements for more information on fair value measurements.

Share-Based Compensation

TSFG measures compensation cost for share-based awards at fair value and recognizes compensation expense over the service period for awards expected to vest. The fair value of restricted stock and restricted stock units is based on the number of shares granted and the quoted price of our common stock and the fair value of service-based stock options is determined using the Black-Scholes valuation model. The Black-Scholes model requires the input of subjective assumptions, changes to which can

 
29

materially affect the fair value estimate. In addition, the estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. TSFG considers many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Accounting for Acquisitions (including Goodwill)

TSFG has grown its operations, in part, through bank and non-bank acquisitions. TSFG has used the purchase method of accounting to account for acquisitions. Under this method, TSFG is required to record assets acquired and liabilities assumed at their fair value, which in many instances involves estimates based on third party, internal, or other valuation techniques. These estimates also include the establishment of various accruals for planned facilities dispositions and employee benefit related considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill or other intangible assets, which are subject to periodic impairment tests on an annual basis, or more often, if events or circumstances indicate that there may be impairment. These tests, which TSFG has performed annually as of June 30th since 2002 (and on an interim basis, as needed), use estimates such as projected cash flows, discount rates, time periods, and comparable market values in their calculations. Management believes these estimates and assumptions are reasonable; however, the fair value of each reporting unit could be different in the future if actual results and market conditions differ from the estimates and assumptions used. Furthermore, the determination of which intangible assets have finite lives is subjective, as well as the determination of the amortization period for such intangible assets.

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

TSFG has assigned goodwill to its Carolina First, Mercantile, and Insurance reporting units. Although it does not meet the definition of a reportable operating segment as discussed in Note 32 - Business Segments to the Consolidated Financial Statements, the Insurance reporting unit is tested separately for goodwill impairment because it has a dissimilar product set and separate discrete financial information. Goodwill is assigned to the reporting units at the date the goodwill is initially recorded and no longer retains its association with a particular acquisition. All of the activities within a reporting unit, whether acquired or organically generated, are available to support the value of the goodwill. Determining the fair value of the Company’s reporting units requires management to make judgments and assumptions related to various items, including estimates of future operating results, allocations of indirect expenses, and discount rates. See “Goodwill” for additional discussion of management’s process and the assumptions and the judgments applied.

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

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

Balance Sheet Review

Loans

TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At December 31, 2009, outstanding loans totaled $8.4 billion, which equaled 90.4% of total deposits (109.6% of customer funding) and 70.6% of total assets. Loans held for investment decreased $1.8 billion, or 17.7%, to $8.4 billion at December 31, 2009 from $10.2 billion at December 31, 2008, partly due to sales and liquidations of problem loans, net loan charge-offs, weaker loan demand, and management’s decision to exit or substantially reduce its exposure to certain loan products with limited relationship opportunity.

 
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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, North Carolina, and Florida. At December 31, 2009, approximately 5% 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 2009 TSFG transferred $557.0 million from the held for investment portfolio to the held for sale portfolio, and subsequently sold the loans. The transfers and subsequent sales included $247.5 million of nonperforming loans (including shared national credits) for which TSFG charged-off $84.0 million against the allowance for loan losses prior to transferring them to loans held for sale. The transfers and subsequent sales also included $230.3 million of indirect auto loans and $79.2 million of performing shared national credits, which resulted in an allowance adjustment of $4.5 million. At December 31, 2009, none of these loans remained in held for sale.

At December 31, 2008, loans held for sale included $16.3 million of nonperforming loans originally held for investment. During 2008, TSFG transferred nonperforming loans with an unpaid principal balance totaling $117.3 million from the held for investment portfolio to the held for sale portfolio, and charged-off $53.4 million of these loans against the allowance for loan losses on or before the date of transfer. Of these loans, approximately $41 million (net of charge-offs) were sold and $3.1 million were transferred back to loans held for investment. The remaining balance was reduced by lower of cost or fair value adjustments and unscheduled paydowns.

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. Mortgage loans held for sale increased to $15.8 million at December 31, 2009 from $14.7 million at December 31, 2008, primarily due to timing of mortgage sales. Effective January 1, 2008, TSFG elected to account for its mortgage loans held for sale at fair value pursuant to the fair value option. However, effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis.

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

 
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Table 1
  
Loan Portfolio Composition Based on Loan Purpose
  
(dollars in thousands)
                              
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Commercial Loans
                              
Commercial and industrial
   $ 2,080,329     $ 2,722,611     $ 2,742,863     $ 2,491,210     $ 2,258,789  
Commercial owner - occupied real estate
     1,271,525       1,270,746       1,070,376       830,179       801,953  
Commercial real estate (1)
     3,501,809       4,074,331       4,158,384       4,171,631       3,933,927  
      6,853,663       8,067,688       7,971,623       7,493,020       6,994,669  
Consumer Loans
                                        
Indirect - sales finance
     230,426       635,637       699,014       660,401       916,318  
Consumer lot loans
     144,315       225,486       311,386       357,325       310,532  
Direct retail
     83,460       95,397       107,827       98,181       107,295  
Home equity
     787,645       813,201       754,158       512,881       553,194  
      1,245,846       1,769,721       1,872,385       1,628,788       1,887,339  
                                         
Mortgage Loans
     286,618       354,663       369,412       580,059       557,387  
                                         
   Total loans held for investment
   $ 8,386,127     $ 10,192,072     $ 10,213,420     $ 9,701,867     $ 9,439,395  
                                         
Percentage of Loans Held for Investment
                                        
Commercial and industrial
     24.8 %     26.7 %     26.9 %     25.7 %     23.9 %
Commercial owner - occupied real estate
     15.2       12.5       10.5       8.6       8.5  
Commercial real estate
     41.8       40.0       40.7       43.0       41.7  
Consumer
     14.8       17.3       18.3       16.7       20.0  
Mortgage
     3.4       3.5       3.6       6.0       5.9  
Total
     100.0 %     100.0 %     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 ten years up to 20 years. Although secured by mortgages on the properties financed, these loans are underwritten based on the cash flows generated by operations of the businesses they house.

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

Indirect - sales finance loans are loans to individuals to finance the purchase of motor vehicles. They are closed at the auto dealership but approved in advance by TSFG for immediate purchase. Loans are extended on new and used motor vehicles with terms varying from two to six years. TSFG has effectively stopped originating indirect auto loans in its markets, with the exception of a few dealers that fit within our relationship strategy. During 2009, TSFG sold $230.3 million of indirect auto loans.

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

 
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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 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 December 31, 2009, TSFG’s house lending limit was $35 million, and 9 credit relationships totaling $396.4 million were in excess of the house lending limit (but not the legal lending limit). The 20 largest credit relationships have an aggregate outstanding principal balance of $578.6 million, or 6.9% of total loans held for investment, at December 31, 2009, compared to 5.3% of total loans held for investment at December 31, 2008. Approximately $9 million of these loans were considered nonperforming loans as of December 31, 2009.

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 December 31, 2009, the loan portfolio included commitments totaling $965.3 million in SNCs. Outstanding borrowings under these commitments totaled $495.6 million, decreasing from $711.6 million at December 31, 2008. The largest commitment was $30.9 million and the largest outstanding balance was $19.7 million at December 31, 2009. All of our SNC relationships are underwritten and managed in a centralized Corporate Banking Group staffed with experienced bankers. Our strategy targets borrowers whose management teams are well known to us and whose risk profile is above average. Going forward, we expect to reduce the percentage of our portfolio invested in SNCs due to the lack of relationship opportunity on much of the portfolio. During 2009, we transferred $173.2 million of these loans to the held for sale portfolio, including $94.0 million in problem loans, and subsequently sold or otherwise settled the loans.

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. Going forward, TSFG plans to sell substantially all of the SBA-guaranteed portion of the loans into the SBA loan secondary market, generating gains from the sales, and retain the un-guaranteed portion (generally 10% to 20% of the principal). 

 
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Table 2 presents remaining maturities of certain loan classifications at December 31, 2009. The table also provides the breakdown between those loans with a predetermined interest rate and those loans with a floating interest rate.

Table 2
  
Selected Loan Maturity and Interest Sensitivity
  
(dollars in thousands)
                          
         
Over One But
    
Over
          
   
One Year
    
Less Than
    
Five
          
   
or Less
    
Five Years
    
Years
    
Total
  
Commercial and industrial
   $ 892,601     $ 930,709     $ 257,019     $ 2,080,329  
Commercial owner - occupied real estate
     128,988       688,561       453,976       1,271,525  
Commercial real estate
     1,221,652       1,780,862       499,295       3,501,809  
Total of loans with:
                                
Floating interest rates (1)
     1,702,461       1,799,753       598,516       4,100,730  
Predetermined interest rates
     540,780       1,600,379       611,774       2,752,933  

(1)
TSFG has entered into swaps to hedge the forecasted interest income from certain prime-based and LIBOR-based loans. The notional amount of the swaps totaled $780.0 million at December 31, 2009. Swaps totaling $265.0 million were terminated or dedesignated in first quarter 2010. Additionally, loans with floating rates, primarily limited to prime or LIBOR, included loans with floors totaling $1.3 billion with an average floor of 5.10%.

Table 3 summarizes TSFG's loan relationships, including unused loan commitments, which are greater than $20 million.

Table 3
  
Loan Relationships Greater than $20 Million
  
                   
   
 
      
Outstanding Principal Balance
  
   
Number
of Borrowers
  
Total
Commitment
  
Amount
  
Percentage of
Loans Held
for Investment
  
December 31, 2009
     40  
$1.1 billion
  
$0.8 billion
     9.9 %
December 31, 2008
     53  
1.6 billion
  
1.1 billion
     10.3  

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 for commercial real estate loans. Table 4 presents selected characteristics of commercial real estate loans by product type.
 
 
34
 
Table 4
  
Selected Characteristics of Commercial Real Estate Loans
  
(dollars in thousands)
                        
   
December 31, 2009
  
         
Weighted Average
  
Weighted
  
Largest
  
         
Time to Maturity
  
Average
  
Ten
  
Commercial Real Estate Product Type
  
Policy LTV
  
(in months)
  
Loan Size
  
Total O/S
  
Completed income property (1)
     80 %     35.8     $ 533     $ 147,678  
Residential A&D
     75       8.3       515       85,937  
Commercial A&D
     75       7.1       964       58,745  
Commercial construction
     80       37.7       2,642       89,632  
Residential construction
     80       10.4       239       40,825  
Residential condo
     80       8.0       1,031       90,090  
Undeveloped land
     65       9.5       645       55,330  
                                 
Overall
             28.1     $ 585     $ 568,237  

(1)
The policy LTV on completed income property was changed to 80% from 85% in December 2009.

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

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

Construction Advances. TSFG monitors construction advances on all new construction projects and existing or renewed construction projects over set thresholds to ensure inspections are properly obtained and advances are consistent with the construction budget. The appropriateness of the construction budget is part of the underwriting package and considered during the approval process. The monitoring is administered by the centralized Construction Loan Administration department on an ongoing basis.

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

Appraisal Policies. It is TSFG’s policy to comply with Interagency Appraisal and Evaluation Guidelines as issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the “Agencies”). These guidelines address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions and provide guidance to both examiners and regulated institutions about prudent appraisal and evaluation programs. Under the Agencies’ appraisal regulations, the appraiser is selected and engaged directly by TSFG or its agent. Additionally, because the appraisal and evaluation process is an integral component of the credit underwriting process, these processes should be isolated from influence by our loan production process. TSFG orders and reviews all appraisals for loans over a set threshold through a centralized review function.

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

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

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

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

 
·
Funds are being advanced to increase the loan above the originally committed loan amount and the appraisal is more than 18 months old;
 
·
Loan is downgraded to substandard or worse, and the appraisal is more than three years old or significant adverse changes have occurred in the market where the property is located;
 
·
Loan is downgraded to watch, and the appraisal is more than five years old or significant adverse changes have occurred in the market where the property is located;
 
·
Loan is restructured to advance additional funds or extend the original amortization term, and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located;
 
·
Property is being cross-pledged to another loan (other than an abundance of caution), and the appraisal is over three years old or significant adverse changes have occurred in the market where the property is located.

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

Table 5 presents the commercial real estate portfolio by geography, while Table 6 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 8, 9, and 13, respectively. TSFG monitors trends in these categories in order to evaluate the possibility of higher credit risk in its commercial real estate portfolio.

 
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Table 5
  
Commercial Real Estate Loans by Geographic Diversification (1)
  
(dollars in thousands)
                        
   
December 31, 2009
    
December 31, 2008
  
         
% of
          
% of
  
   
Balance
    
Total
    
Balance
    
Total
  
South Carolina, excluding Coastal:
                        
Upstate South Carolina (Greenville)
   $ 569,018       16.2 %   $ 539,920       13.3 %
Midlands South Carolina (Columbia)
     232,088       6.6       238,285       5.9  
Greater South Charlotte South Carolina (Rock Hill)
     142,114       4.1       164,709       4.0  
Coastal South Carolina:
                                
North Coastal South Carolina (Myrtle Beach)
     331,819       9.5       401,325       9.9  
South Coastal South Carolina (Charleston)
     292,207       8.3       268,951       6.6  
Western North Carolina (Hendersonville/Asheville)
     639,264       18.3       762,559       18.7  
Central Florida (Orlando/Ocala)
     356,239       10.2       431,260       10.6  
North Florida:
                                
Northeast Florida (Jacksonville)
     219,202       6.3       276,942       6.8  
North Central Florida
     271,085       7.7       311,426       7.6  
South Florida (Ft. Lauderdale)
     198,874       5.7       232,437       5.7  
Tampa Bay Florida
     249,899       7.1       446,517       11.0  
Total commercial real estate loans
   $ 3,501,809       100.0 %   $ 4,074,331       100.1 %

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

Table 6
  
Commercial Real Estate Loans by Geography and Product Type
  
(dollars in thousands)
                                          
   
December 31, 2009 Commercial Real Estate Loans by Geography
  
   
SC, Excl
    
Coastal
    
Western
    
Central
    
North
    
South
    
Tampa
    
Total
    
% of
  
   
Coastal
    
SC
    
NC
    
FL
    
FL
    
FL
    
Bay
    
CRE
    
LHFI
  
Commercial Real Estate
                                                      
Loans by Product Type
                                                      
Completed income property
   $ 566,178     $ 428,243     $ 380,430     $ 204,184     $ 346,489     $ 131,096     $ 113,709     $ 2,170,329       25.9 %
Residential A&D
     64,999       51,002       129,540       19,292       43,308       11,798       33,204       353,143       4.2  
Commercial A&D
     31,742       27,243       33,199       24,034       5,480       15,355       21,070       158,123       1.9  
Commercial construction
     188,376       14,193       23,231       37,441       15,284       9,375       29,081       316,981       3.8  
Residential construction
     39,786       6,541       14,802       8,815       10,629       5,037       3,313       88,923       1.1  
Residential condo
     12,430       36,941       7,597       11,884       29,927       16,033       13,021       127,833       1.5  
Undeveloped land
     39,709       59,863       50,465       50,589       39,170       10,180       36,501       286,477       3.4  
Total CRE Loans
   $ 943,220     $ 624,026     $ 639,264     $ 356,239     $ 490,287     $ 198,874     $ 249,899     $ 3,501,809       41.8 %
                                                                         
CRE Loans as % of Total Loans HFI
     11.3 %     7.4 %     7.6 %     4.3 %     5.8 %     2.4 %     3.0 %     41.8 %        

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

 
37

require written plans for resolution and periodic meetings with credit risk management to review progress. Credit risk management activities are monitored by 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.

Table 7 presents a summary of TSFG’s credit quality indicators.

Table 7
Credit Quality Indicators
(dollars in thousands)
                              
   
December 31,
   
2009
    
2008
    
2007
    
2006
    
2005
  
Loans held for sale
   $ 15,758     $ 30,963     $ 17,867     $ 28,556     $ 37,171  
Loans held for investment
     8,386,127       10,192,072       10,213,420       9,701,867       9,439,395  
Allowance for loan losses
     365,642       247,086       126,427       111,663       107,767  
Allowance for credit losses (1)
     373,126       249,874       128,695       112,688       109,350  
                                         
Nonaccrual loans - commercial and industrial
   $ 77,527     $ 35,998     $ 22,963     $ 7,052     $ 25,145  
Nonaccrual loans - commercial owner - occupied real estate
     43,701       14,876       4,085       4,512    
included above
Nonaccrual loans - commercial real estate
     240,377       230,373       36,634       16,913    
included above
Nonaccrual loans - consumer
     16,314       39,009       11,606       5,250       3,417  
Nonaccrual loans - mortgage
     21,127       29,126       4,903       3,441       4,693  
Total nonperforming loans held for investment (2)
     399,046       349,382       80,191       37,168       33,255  
Nonperforming loans held for sale - CRE
     -       16,282       -       -       -  
Foreclosed property (other real estate owned and personal property repossessions)
     123,314       48,993       8,276       4,341       10,722  
Total nonperforming assets
   $ 522,360     $ 414,657     $ 88,467     $ 41,509     $ 43,977  
                                         
Restructured loans accruing interest (2)
   $ 26,128     $ 6,249     $ 1,440     $ -     $ -  
Loans past due 90 days or more (interest accruing)
   $ 10,465     $ 47,481     $ 5,349     $ 3,129     $ 4,548  
                                         
Total nonperforming assets as a percentage of loans and foreclosed property
     6.13 %     4.04 %     0.86 %     0.43 %     0.46 %
Total nonperforming assets as a percentage of total assets
     4.39       3.05       0.64       0.29       0.31  
Allowance for loan losses as a percentage of loans held for investment
     4.36       2.42       1.24       1.15       1.14  
Allowance for credit losses as a percentage of loans held for investment
     4.45       2.45       1.26       1.16       1.16  
Allowance for loan losses to nonperforming loans held for investment
     0.92 x     0.71 x     1.58 x     3.00 x     3.24 x

(1)
The allowance for credit losses is the sum of the allowance for loan losses and the reserve for unfunded lending commitments.
(2)
During 2009, TSFG began excluding restructured loans accruing interest from its nonperforming loans. Amounts for prior periods have been reclassified to conform to the current presentation.

TSFG’s nonperforming asset ratio (nonperforming assets as a percentage of loans and foreclosed property) increased to 6.13% at December 31, 2009 from 4.04% at December 31, 2008. The increase in nonperforming assets was primarily attributable to market deterioration in residential construction and development-related loans and general economic conditions which have impacted other commercial loan categories.

Troubled debt restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. In certain cases, TSFG will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise

 
38

be considered may be granted resulting in classification as a troubled debt restructuring. Troubled debt restructurings can involve loans remaining on nonaccrual, moving to nonaccrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, 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 may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.

In certain cases, and in compliance with the Agencies’ guidance on prudent commercial real estate loan workouts, a restructuring may involve a multiple note structure in which, for example, a troubled loan is restructured into two notes. TSFG may separate a portion of the current outstanding debt into a new legally enforceable note (i.e., the first note) that is reasonably assured of repayment and performance according to prudently modified terms. This note may be placed back on accrual status in certain situations. In returning the loan to accrual status, sustained historical payment performance for a reasonable time prior to the restructuring may be taken into account. The portion of the debt that is not reasonably assured of repayment (i.e., the second note) is adversely classified and charged-off as appropriate. To date, TSFG’s use of multiple note structures has not been material, but use of this structure could increase in future periods.

Table 8 presents CRE nonaccrual loans by geography and product type, while Table 9 provides detail regarding commercial real estate loans past due 30 days or more. At December 31, 2009, there were no commercial real estate loans that were 90 days past due and still accruing interest.

Table 8
  
Commercial Real Estate Nonaccrual Loans
  
(dollars in thousands)
  
   
December 31, 2009 CRE Nonaccrual Loans HFI ("NAL") by Geography
  
   
SC, Excl
    
Coastal
    
Western
    
Central
    
North
    
South
    
Tampa
    
Total
    
% of
  
   
Coastal
    
SC
    
NC
    
FL
    
FL
    
FL
    
Bay
    
CRE NAL
    
NAL
  
CRE Nonaccrual Loans by
                                                      
Product Type
                                                      
Completed income property
   $ 10,757     $ 9,307     $ 21,270     $ 4,333     $ 5,562     $ 3,613     $ 12,986     $ 67,828       17.0 %
Residential A&D
     9,947       6,235       22,821       4,576       5,790       1,092       5,302       55,763       14.0  
Commercial A&D
     1,788       670       2,074       960       -       608       17,677       23,777       5.9  
Commercial construction
     15,029       -       4,161       -       -       -       5,184       24,374       6.1  
Residential construction
     730       464       2,409       6,637       2,689       -       892       13,821       3.5  
Residential condo
     2,496       13,850       654       720       8       75       2,850       20,653       5.2  
Undeveloped land
     4,582       2,295       1,418       2,276       10,768       5,050       7,772       34,161       8.5  
 Total CRE Nonaccrual Loans
   $ 45,329     $ 32,821     $ 54,807     $ 19,502     $ 24,817     $ 10,438     $ 52,663     $ 240,377       60.2 %
                                                                         
CRE Nonaccrual Loans as %of Total Nonaccrual Loans HFI
     11.4 %     8.2 %     13.7 %     4.9 %     6.2 %     2.6 %     13.2 %     60.2 %        
 
Table 9
  
Commercial Real Estate Loans Past Due 30 Days or More (excluding nonaccruals)
  
(dollars in thousands)
                        
   
December 31, 2009
    
December 31, 2008
  
   
Balance
    
% of CRE
    
Balance
    
% of CRE
  
North Carolina
   $ 17,747       0.51 %   $ 21,364       0.53 %
South Carolina
     23,714       0.68       34,268       0.84  
Florida
     71,877       2.05       44,471       1.09  
Total CRE loans past due 30 days or more
   $ 113,338       3.24 %   $ 100,103       2.46 %

Potential problem loans consist of commercial loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. These loans are identified through our internal risk grading processes. Management monitors these loans closely and reviews their performance on a regular basis. Table 10 provides additional detail regarding potential problem loans.

 
39
 
Table 10
Potential Problem Loans
(dollars in thousands)
   
December 31, 2009
  
December 31, 2008
   
Outstanding Principal Balance
  
Outstanding Principal Balance
               
% of Loans
                
% of Loans
  
   
Number
          
Held for
    
Number
          
Held for
  
   
of Loans
    
Amount
    
Investment
    
of Loans
    
Amount
    
Investment
  
Large potential problem loans ($5 million or more)
     40     $ 377,230       4.50 %     23     $ 217,688       2.13 %
Small potential problem loans (less than $5 million)
     1,112       558,700       6.66       732       282,189       2.77  
Total potential problem loans (1)
     1,152     $ 935,930       11.16 %     755     $ 499,877       4.90 %

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

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

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

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

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

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

 
40

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, 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 $193.0 million at December 31, 2009, based on the portfolio historical loss rates, compared to $81.8 million at December 31, 2008.

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 commercial loans over $1 million that have been placed in nonaccrual status). Once a loan is identified as impaired, reserves are based on a thorough analysis of the most probable source of repayment which is normally the liquidation of collateral, but may also include discounted future cash flows or the market value of the loan itself. Generally, for collateral dependent loans, current market appraisals are utilized for larger credits; however, in situations where a current market appraisal is not available, management uses the best available information (including appraisals for similar properties, communications with qualified real estate professionals, information contained in reputable publications and other observable market data) to estimate the current fair value less cost to sell of the subject property. TSFG had Level II reserves of $37.7 million at December 31, 2009, compared to $44.4 million at December 31, 2008.

Level III Reserves. The third component of the Allowance represents subjective and judgmental adjustments determined by management to account for the effect of risks or losses that are not fully captured elsewhere. This part of the methodology is calculated and reflects adjustments to historical loss experience to incorporate current economic conditions and other factors which impact the inherent losses in the portfolio. This component includes amounts for new loan products or portfolio categories which are deemed to have risks not included 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. Although the adjustment related to declining land values has been a factor since first quarter 2008, the appraisal discount and default rate assumptions on land were increased during third quarter 2009 to reflect value declines indicated by recent appraisals. The Level III Reserves totaled $135.0 million at December 31, 2009, compared to $117.0 million at December 31, 2008.

Reserve for Unfunded Commitments. At December 31, 2009 and 2008, the reserve for unfunded commitments was $7.5 million and $2.8 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 Allowance and the lower boundary amounts for each category in our model. The sum of these differences at December 31, 2009 was $21.3 million, compared to $13.9 million at December 31, 2008. The unallocated Allowance is the result of management’s best estimate of risks inherent in the portfolio, economic uncertainties and other

 
41

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. Specifically, impaired loans increased to $392.3 million at December 31, 2009 from $287.5 million at December 31, 2008, primarily attributable to commercial real estate loans. Most of the loans contributing to the increase were over $1 million and were evaluated for whether a specific reserve was warranted based on the analysis of the most probable source of repayment including liquidation of the collateral. Based on this analysis, the Level II Reserves decreased 15% compared to the 36% increase in impaired loans.

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

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 11, which summarizes the changes in the Allowance, and Table 12, which reflects the component percentage allocation of the Allowance at the end of each year, provide additional information with respect to the activity in the Allowance.

 
42
 
Table 11
  
Summary of Loan Loss Experience
  
(dollars in thousands)
                              
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Allowance for loan losses, beginning of year
   $ 247,086     $ 126,427     $ 111,663     $ 107,767     $ 96,434  
Purchase accounting adjustments
     -       -       -       -       3,741  
Allowance adjustment for loans sold
     (4,471 )     -       -       (3,089 )     -  
Charge-offs:
                                        
Commercial and industrial
     137,909       44,647       18,651       16,440       22,989  
Commercial owner-occupied real estate
     18,197       3,671       2,576       1,693       652  
Commercial real estate
     301,607       135,414       12,714       10,638       7,436  
Indirect - sales finance
     14,272       14,927       6,582       4,205       4,658  
Consumer lot loans
     37,544       14,349       15,225       83       7  
Direct retail
     4,346       731       1,117       1,468       1,221  
Home equity
     18,818       6,239       1,284       1,452       1,428  
Mortgage loans
     23,892       10,983       1,259       644       823  
Total loans charged-off
     556,585       230,961       59,408       36,623       39,214  
Recoveries:
                                        
Commercial and industrial
     4,736       2,577       3,898       6,522       4,652  
Commercial owner-occupied real estate
     342       179       270       739       73  
Commercial real estate
     4,927       2,544       1,440       1,699       1,269  
Indirect - sales finance
     1,220       794       538       746       522  
Consumer lot loans
     3,181       680       9       3       4  
Direct retail
     272       -       339       311       325  
Home equity
     430       180       285       241       379  
Mortgage loans
     296       597       68       -       89  
Total loans recovered
     15,404       7,551       6,847       10,261       7,313  
Net charge-offs
     541,181       223,410       52,561       26,362       31,901  
Additions through provision expense
     664,208       344,069       67,325       33,347       39,493  
Allowance for loan losses, end of year
   $ 365,642     $ 247,086     $ 126,427     $ 111,663     $ 107,767  
                                         
Average loans held for investment
   $ 9,456,636     $ 10,351,897     $ 9,985,751     $ 9,581,602     $ 8,848,279  
Loans held for investment (period end)
     8,386,127       10,192,072       10,213,420       9,701,867       9,439,395  
Net charge-offs as a percentage of average loans held for investment
     5.72 %     2.16 %     0.53 %     0.28 %     0.36 %

Table 12
  
Composition of Allowance for Loan Losses
  
(dollars in thousands)
    
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Commercial and industrial
   $ 88,577     $ 58,712     $ 35,834     $ 32,004     $ 27,130  
Commercial owner-occupied real estate
     53,282       27,533       14,875       10,321       10,599  
Commercial real estate
     156,897       108,125       56,519       52,080       45,957  
Indirect - sales finance
     7,093       9,750       6,499       4,623       8,825  
Consumer lot loans
     11,776       7,470       879       1,201       1,777  
Direct retail
     2,927       3,160       304       330       614  
Home equity
     12,681       12,154       2,369       2,256       3,309  
Mortgage loans
     11,069       6,245       3,132       2,487       3,965  
Unallocated
     21,340       13,937       6,016       6,361       5,591  
Total
   $ 365,642     $ 247,086     $ 126,427     $ 111,663     $ 107,767  

 
43

Table 13 provides additional detail for 2009 commercial real estate net charge-offs.

Table 13
  
CRE Net Charge-Offs by Product Type
  
(dollars in thousands)
  
   
Year Ended December 31, 2009 CRE Net Charge-Offs ("NCO") by Geography
  
   
SC, Excl
    
Coastal
    
Western
    
Central
    
North
    
South
    
Tampa
    
Total
    
% of
  
   
Coastal
    
SC
    
NC
    
FL
    
FL
    
FL
    
Bay
    
CRE NCO
    
NCO
  
CRE Net Charge-Offs by
                                                      
Product Type
                                                      
Completed income property
   $ 6,368     $ 14,536     $ 11,995     $ 5,687     $ 679     $ 11,286     $ 17,630     $ 68,181       12.6 %
Residential A&D
     24,006       5,638       9,507       3,893       15,964       1,837       13,194       74,039       13.7  
Commercial A&D
     1,364       1,899       1,058       4,474       398       -       20,131       29,324       5.4  
Commercial construction
     -       150       53       -       -       123       8,337       8,663       1.6  
Residential construction
     5,089       10,321       2,627       7,453       1,667       11       2,834       30,002       5.5  
Residential condo
     5,461       5,070       52       210       -       2,750       4,102       17,645       3.3  
Undeveloped land
     6,882       83       1,030       14,330       11,274       9,235       25,992       68,826       12.7  
  Total CRE Net Charge-Offs
   $ 49,170     $ 37,697     $ 26,322     $ 36,047     $ 29,982     $ 25,242     $ 92,220     $ 296,680       54.8 %
                                                                         
CRE Net Charge-Offs as %
                                                                        
of Total Net Charge-Offs
     9.1 %     7.0 %     4.9 %     6.6 %     5.5 %     4.7 %     17.0 %     54.8 %        

In addition to the allowance for loan losses, TSFG also estimates probable losses related to binding unfunded lending commitments. The methodology to determine such losses is inherently similar to the methodology utilized in calculating the allowance for commercial loans, adjusted for factors specific to binding commitments, including the probability of funding. The reserve for unfunded lending commitments is included in other liabilities on the balance sheet. Changes to the reserve for unfunded lending commitments are made by changes to the provision for credit losses. (See Item 8, Note 9 to the Consolidated Financial Statements for information regarding the reserve for unfunded lending commitments, which information is incorporated herein by reference.)

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, TT&L advances, FHLB advances, derivatives, and securities sold under repurchase agreements. TSFG strives to provide adequate flexibility to proactively manage cash flow as market conditions change. Cash flow may be used to pay-off borrowings, to fund loan growth, or to reinvest in securities at then current market rates. Table 14 shows the carrying values of the investment securities portfolio at the end of each of the last five years.

 
44
 
Table 14
  
Investment Securities Portfolio Composition
  
(dollars in thousands)
  
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Trading Account (at fair value)
                              
U.S. Treasury
   $ -     $ -     $ -     $ -     $ 22  
U.S. Government agencies
     -       -       -       -       137  
State and municipal
     -       -       -       -       1,243  
      -       -       -       -       1,402  
Securities Available for Sale (at fair value)
                                        
U.S. Treasury
     2,045       2,069       27,592       166,719       182,468  
U.S. Government agencies
     79,707       313,729       503,571       653,034       656,442  
Agency residential mortgage-backed securities
     1,980,305       1,468,639       1,088,427       1,400,288       1,688,862  
Private label residential mortgage-backed securities
     8,504       12,771       -       -       -  
State and municipal
     23,158       262,248       302,586       341,488       373,892  
Other investments: (1)
                                        
Corporate bonds
     -       9,963       20,380       113,365       112,246  
Community bank stocks
     399       672       4,988       12,406       10,067  
Other equity investments
     1,283       1,567       3,335       3,910       4,037  
      2,095,401       2,071,658       1,950,879       2,691,210       3,028,014  
Securities Held to Maturity (at amortized cost)
                                        
State and municipal
     16,217       22,609       39,451       52,208       62,548  
Agency residential mortgage-backed securities
     111,199       -       -       -       -  
Other investments
     100       100       240       100       100  
      127,516       22,709       39,691       52,308       62,648  
   Total
   $ 2,222,917     $ 2,094,367     $ 1,990,570     $ 2,743,518     $ 3,092,064  
                                         
Total securities as a percentage of total assets
     18.7 %     15.4 %     14.3 %     19.3 %     21.6 %

(1)
During 2009, TSFG reclassified FHLB stock from securities available for sale to other assets. Amounts for prior periods have been reclassified to conform to the current presentation.

Securities (i.e., trading securities, securities available for sale, and securities held to maturity), excluding the unrealized gain on available for sale securities, averaged $2.0 billion in 2009 and $2.1 billion in 2008. The average tax-equivalent portfolio yield decreased in 2009 to 4.24% from 4.65% in 2008. The securities yield decreased primarily due to an overall decline in interest rates resulting in reinvestment of maturities and calls at lower yields, and to a lesser extent, the fourth quarter 2009 sales of higher-yielding mortgage-backed securities and municipal securities.

The expected duration of the debt securities portfolio was approximately 3.2 years at December 31, 2009, an increase from approximately 2.9 years at December 31, 2008. If interest rates rise, the duration of the debt securities portfolio may extend. Conversely, if interest rates fall, the duration of the debt securities portfolio may decline. Since total securities include callable bonds and mortgage-backed securities, security paydowns are likely to accelerate if interest rates fall or decline if interest rates rise. Changes in interest rates and related prepayment activity impact yields and fair values of TSFG’s securities. At December 31, 2009 securities had unamortized premiums of $31.3 million and unamortized discounts of $3.2 million. Faster than expected paydowns would adversely impact yields and market values of securities with unamortized premiums while slower than expected paydowns would adversely impact yields and market values of securities with unamortized discounts.

Approximately 62% of mortgage-backed securities (“MBS”) are collateralized mortgage obligations (“CMOs”) with an average expected duration of 3.1 years. At December 31, 2009, approximately 12% of the MBS portfolio was variable rate or hybrid variable rate, where the rate adjusts on an annual basis after a specified fixed rate period, generally ranging from one to ten years.

The majority of these securities are government or agency securities and, therefore, pose minimal credit risk. The net unrealized gain on securities available for sale (pre-tax) totaled $28.4 million at December 31, 2009, compared with $10.9 million at December 31, 2008, primarily due to a decrease in long-term interest rates and a contraction in spreads. If interest rates increase,

 
45

credit spreads widen, and/or market illiquidity worsens, TSFG expects its net unrealized gain on securities available for sale to decrease and possibly become a net unrealized loss. See Item 8, Note 7 to the Consolidated Financial Statements for information about TSFG’s securities in unrealized loss positions.

During fourth quarter 2009, in an effort to strengthen liquidity, reduce sources of tax-exempt income, and reduce interest rate risk, TSFG sold approximately $325 million of higher-yielding mortgage-backed securities and municipal securities available for sale with maturities longer than six months for a net gain of $6.2 million. The proceeds were reinvested into lower-yielding mortgage-backed securities, primarily conservative CMO structures such as planned amortization class (“PAC”) and sequential-pay CMOs intended to limit the extension of expected durations if interest rates rise.

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 investments included in the other investments category.

In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. In third quarter 2008, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. Additionally in 2008, TSFG recorded $2.1 million in other-than-temporary impairment on certain community bank-related investments included in the other investments portfolio due to the severity and/or duration of the impairment. In 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio, and sold approximately $70 million of those bonds.

 
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Table 15 shows the credit risk profile of the securities portfolio for the years ended December 31, 2009 and 2008.

Table 15
  
Investment Securities Portfolio Credit Risk Profile
  
(dollars in thousands)
                        
   
December 31, 2009
    
December 31, 2008
  
   
Balance
    
% of Total
    
Balance
    
% of Total
  
Government and agency
                        
U.S. Treasury
   $ 2,045       0.1 %   $ 2,069       0.1 %
U.S. Government agencies (1)
     79,707       3.6       313,729       15.0  
Agency residential mortgage-backed securities (MBS) (1)(2)
     2,091,504       94.0       1,468,639       70.1  
Total government and agency
     2,173,256       97.7       1,784,437       85.2  
State and municipal (3)(4)(5)
                                
Pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund
     19,392       0.9       188,598       9.0  
Underlying issuer or collateral rated A or better (including South Carolina State Aid)
     15,127       0.7       81,238       3.9  
Underlying issuer or collateral rated BBB
     2,337       0.1       7,344       0.3  
Non-rated
     2,519       0.1       7,677       0.4  
Total state and municipal
     39,375       1.8       284,857       13.6  
Corporate bonds AA or A-rated
     -       -       9,963       0.5  
Private label residential mortgage-backed securities AAA-rated (2)
     8,504       0.4       12,771       0.6  
Community bank stocks and other
     1,782       0.1       2,339       0.1  
Total securities
   $ 2,222,917       100.0 %   $ 2,094,367       100.0 %
                                 
Percent of total securities: (4)
                                
Rated A or higher
             99.7 %             99.2 %
Investment grade
             99.8               99.5  
 
(1)
At December 31, 2009, these amounts include, in the aggregate, $29.4 million and $1.8 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 include $111.2 million of securities held to maturity at amortized cost. At December 31, 2009 and 2008, state and municipal securities include $16.2 million and $22.6 million, respectively, of securities held to maturity at amortized cost.
(4)
Ratings shown above do not reflect the benefit of guarantees by bond insurers. At December 31, 2009 and 2008, $4.9 million and $39.1 million, respectively, of municipal bonds are guaranteed by bond insurers.
(5)
At December 31, 2009, the breakdown by current bond rating is as follows: $19.4 million pre-funded with collateral or AAA-rated backed by Texas Permanent School Fund, $17.5 million AA or A-rated, and $2.5 million non-rated.
Note:
Within each category, securities are ordered based on risk assessment from lowest to highest. TSFG holds no collateralized debt obligations, or subordinated debt or equity investments in FNMA or FHLMC.

Table 16 shows the contractual maturity schedule for securities held to maturity and securities available for sale at December 31, 2009. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. The table also reflects the weighted average tax-equivalent yield of the investment securities.

 
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Table 16
  
Investment Securities Maturity Schedule
  
(dollars in thousands)
                                    
                                     
Available for Sale -- Fair Value
                                    
         
After One
    
After Five
          
No
        
   
Within
    
But Within
    
But Within
    
After
    
Contractual
        
   
One Year
    
Five Years
    
Ten Years
    
Ten Years
    
Maturity (1)
    
Total
  
                                     
U.S. Treasury
   $ -     $ 2,045     $ -     $ -     $ -     $ 2,045  
U.S. Government agencies
     -       79,707       -       -       -       79,707  
Agency residential MBS
     42,025       1,179,446       175,203       583,631       -       1,980,305  
Private label residential MBS
     -       -       -       8,504       -       8,504  
State and municipal
     22,908       200       50       -       -       23,158  
Other investments
     -       2       -       -       1,680       1,682  
    $ 64,933     $ 1,261,400     $ 175,253     $ 592,135     $ 1,680     $ 2,095,401  
                                                 
Weighted Average Tax-Equivalent Yield
                                                
U.S. Treasury
     - %     1.40 %     - %     - %     - %     1.40 %
U.S. Government agencies
     -       2.33       -       -       -       2.33  
Agency residential MBS
     3.35       3.33       4.31       4.58       -       3.78  
Private label residential MBS
     -       -       -       4.73       -       4.73  
State and municipal
     4.58       5.34       5.34       -       -       4.58  
Other investments
     -       4.00       -       -       n/a       4.00  
      3.79 %     3.26 %     4.31 %     4.58 %     - %     3.74 %
                                                 
Held to Maturity -- Amortized Cost
                                                
State and municipal
   $ 4,786     $ 10,697     $ 734     $ -     $ -     $ 16,217  
Agency residential MBS
     -       111,199       -       -       -       111,199  
Other investments
     50       50       -       -       -       100  
    $ 4,836     $ 121,946     $ 734     $ -     $ -     $ 127,516  
                                                 
Weighted Average Tax-Equivalent Yield
                                                
State and municipal
     5.44 %     5.32 %     5.20 %     - %     - %     5.35 %
Agency residential MBS
     -       4.02       -       -       -       4.02  
Other investments
     4.50       6.45       -       -       -       5.48  
      5.43 %     4.14 %     5.20 %     - %     - %     4.19 %

(1)
These securities have no contractual maturity or yield and accordingly are excluded from the "Other Investments" yield calculation, as well as the overall "Available for Sale" yield calculation.

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. Fair values are estimated based on information available as no quoted market prices are available. In 2009, 2008, and 2007, TSFG recorded $3.9 million, $589,000, and $2.0 million, respectively, in other-than-temporary impairment on these investments. Since certain of these investments are real estate-related or banking industry-related, additional impairment in future periods is possible. Additionally, in 2009 and 2008, TSFG sold certain of these investments and recorded $641,000 and $4.3 million, respectively, of realized gains. At December 31, 2009, TSFG's investment in these entities totaled $14.5 million, of which $7.1 million were accounted for under the cost method and $7.4 million were accounted for under the equity method. At December 31, 2009, TSFG’s remaining commitment to advance funds on these investments was $5.5 million. At December 31, 2008, TSFG's investment in these entities totaled $18.1 million, of which $5.3 million were accounted for under the cost method and $12.8 million were accounted for under the equity method.

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, as cost approximates fair value and there is

 
48

no ready market for such investments. At December 31, 2009 and 2008, FHLB stock totaled $58.8 million and $35.5 million, respectively.

Also included in other assets were $5.2 million of various auction rate preferred securities which TSFG repurchased from brokerage customers who purchased the securities during 2007. TSFG recorded a loss of $676,000 upon purchase of $6.9 million of these securities during first quarter 2009 to adjust these securities to estimated fair value based on illiquidity in the market.

Bank-Owned Life Insurance

TSFG had approximately $303 million invested in bank-owned life insurance (“BOLI”) at December 31, 2009. These investments are expected to provide a long-term source of earnings to support existing employee benefit programs and for other purposes. Approximately $153 million was held in separate accounts. The separate account holdings are invested in diversified portfolios of fixed income securities (substantially all of which are investment-grade) and cash equivalents, including U.S. Treasury and Agency securities, residential mortgage-backed securities, corporate debt, asset-backed and commercial mortgage-backed securities. The portfolios are managed by unaffiliated professional managers within parameters established in the portfolio's investment guidelines. The separate account policies have stable value agreements through either a large well-rated bank or insurance carrier that provides limited cash surrender value protection from declines in the value of each policy’s underlying investments. Losses are recognized when the decline in the cash surrender value exceeds the protection provided by the stable value agreements. At December 31, 2009, the cash surrender value protection had not been exceeded for any BOLI policies; however, two of the separate accounts with a $52.4 million cash surrender value exceeded the underlying fair value of the investments by approximately $4.8 million. No adjustment to the cash surrender value was recorded due to the fair value exceeding the protection of the stable value agreements. Among other things, the stable value agreements may also include terms which, upon surrender, may extend the payout period or limit the protection of the stable value agreements when the Company has net operating losses or a credit event as defined (including default on its obligations) or may prohibit future acquisition of BOLI for a specified period of time. For one of the policies with a net operating loss trigger, the payout of the cash surrender value of approximately $17 million would be expected to occur over 20 quarters. Accordingly, TSFG reduced the carrying value of this policy by approximately $1 million as of December 31, 2009 to reflect the present value of the expected cash flows. The remaining cash surrender value of $150 million primarily represented the cash surrender value of policies held in the general accounts and amounts due from various insurance companies with ratings of A or higher at December 31, 2009.

The majority of TSFG’s life insurance policies have modified endowment contract (“MEC”) classification which receives less advantageous tax treatment than non-MEC policies. Upon surrender of a MEC policy, the Company would reduce its net operating losses by the cumulative gain on the policy with no impact on income tax expense as the Company has recorded a valuation allowance on its deferred tax assets; however, the Company would also pay a 10% MEC tax penalty on the cumulative gain which would increase income tax expense. As of December 31, 2009, TSFG’s MEC policies had cumulative gains of approximately $92 million.

Goodwill

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

For purposes of the goodwill impairment evaluation performed at June 30, 2009, the fair value of the Carolina First reporting unit was determined primarily using discounted cash flow models based on internal forecasts (90% weighting) and, to a lesser extent, market-based trading and transaction multiples (10% weighting). More weight was given to the discounted cash flow models since market-based multiples are not considered directly comparable given the lack of a complete operational entity for each reporting unit, and based on the internal forecasts taking a longer term view of the Company’s performance. The

 
49

internal forecasts included certain assumptions made by management, including expected growth rates in loans and customer funding, changes in net interest margin, credit quality trends, and the forecasted levels of other income and expense items. Forecasts were prepared for each of the next five years, with a terminal cash flow assigned to the remainder of the forecast horizon. A range of terminal growth rates ranging from 3% to 7% were applied to the terminal cash flow. Each period’s cash flow was then discounted using a range of discount rates based on the risk-free rate plus a premium based on overall stock market level of risk compared to the level of risk of our own stock. The portion of the estimated value derived from market-based trading and transaction multiples was based on a weighting of market multiples for selected peer institutions based on such metrics as book value of equity, tangible equity, and assets. (Earnings multiples were not used because most peers did not have earnings.) The value assigned to the reporting unit for purposes of the goodwill impairment evaluation was based on the midpoint of the range of values determined using the method outlined above. This valuation indicated that the fair value of the Carolina First reporting unit was less than its carrying value. However, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value, and thus no impairment charge was required as of the June 30, 2009 test date for the Carolina First banking segment.

As TSFG, including its Carolina First reporting unit, continued to report additional losses and other conditions had changed during third quarter 2009, TSFG performed an updated evaluation of the goodwill related to the Carolina First reporting unit as of September 30, 2009. In connection with its evaluation, TSFG engaged an independent third party to review the methodology and assumptions in Step 1 and to perform the valuation of the loan portfolio and the core deposit intangible for the Carolina First banking segment for purposes of performing Step 2. (The remaining $12.5 million of goodwill for other segments was related to TSFG’s insurance operations and was not evaluated for impairment on an interim basis based on operating results.) Based on changes in management’s views on its current outlook and the review by the third party, the Company lowered the terminal growth rates to a range of 2% to 4% and increased the targeted capital level allocated to the Carolina First reporting unit to reflect current industry conditions and company-specific expectations as part of its Step 1 analysis. Although the valuation with the updated assumptions continued to indicate that the fair value of the Carolina First reporting unit was less than its carrying value, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value at September 30, 2009, primarily due to the excess of the book value of the Carolina First loan portfolio over its fair value based on exit price, and no impairment was recorded. No formal impairment evaluation was performed at December 31, 2009 since there were no material changes to the assumptions and expectations used as of September 30, 2009.

In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change, and as market conditions continue to be volatile and unpredictable. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test at September 30, 2009, we estimated that, holding the other valuation assumptions constant, a 100 basis point reduction in the range of terminal growth rates applied to the terminal cash flows of the Carolina First reporting unit, which has been allocated the majority of the remaining goodwill, would result in an estimated 5% decrease in its fair value. A 100 basis point increase in the range of discount rates would result in an estimated 8% reduction in the fair value of Carolina First. The Company also determined that a 10% reduction in the fair value of the Carolina First reporting unit would have resulted in the carrying value of its goodwill exceeding the implied fair value in Step 2, resulting in impairment. Accordingly, based on these sensitivity analyses and the possibility of changes in the fair value of the Carolina First reporting unit’s assets and liabilities, particularly loans, the Company has concluded that it is reasonably possible that the Carolina First reporting unit may become impaired in future periods.

During second quarter 2009, TSFG recorded a $2.1 million goodwill impairment charge on one of its nonbank subsidiaries 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. Both of these reporting units were sold during third quarter 2009.

During first quarter 2008, TSFG recognized $188.4 million in goodwill impairment in the Mercantile banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment primarily due to an increase in the discount rate used for valuing future cash flows of our Mercantile reporting unit and a reduction in the projected cash flows primarily over the next two years. The range of discount rates used increased to 14% to 18% at December 31, 2008 (from 10% to 14% in prior evaluations) due to increases in overall stock market volatility as well as volatility of our stock.

 
50

Other Real Estate Owned

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

During 2009, we sold $65.7 million of OREO and incurred losses of $10.5 million. Due to continuing weak market conditions, we revalued our OREO during second quarter 2009 and also changed our policies to record such assets at 70% of the most recent appraised value versus our previous practice of 80%. The result of the revaluation and change in policy was a downward adjustment in values by $21.9 million during 2009. At December 31, 2009, the carrying value of OREO totaled $122.1 million, compared to $44.7 million at December 31, 2008, and was included in other assets. Table 17 presents a rollforward of OREO, while Table 18 presents an OREO aging as of December 31, 2009.

Table 17
  
OREO Rollforward
  
(dollars in thousands)
            
   
Years Ended December 31,
  
   
2009
    
2008
  
Balance at beginning of year
   $ 44,668     $ 6,467  
Loans transferred in
     165,061       51,158  
Sales
     (65,696 )     (11,907 )
Write-downs
     (21,947 )     (1,050 )
Balance at end of year
   $ 122,086     $ 44,668  

Table 18
  
Number of Months in OREO at December 31, 2009
  
(dollars in thousands)
      
       
Less than three months
   $ 36,390  
Three months or more, but less than six months
     27,137  
Six months or more, but less than nine months
     24,684  
Nine months or more, but less than twelve months
     16,062  
Twelve months or more
     17,813  
Total OREO
   $ 122,086  

Impairment of Long-Lived Assets

During 2005, TSFG initiated plans for a “corporate campus” to meet current and future facility needs and serve as the primary headquarters for its banking operations. During 2009, TSFG announced its intention to market its campus facility for sale. The campus site contains approximately 60 acres. Two office buildings have been completed, the conference center is substantially complete, and ten additional building sites are available. At December 31, 2009, TSFG occupied approximately 20% of the available space in the office buildings at the campus in order to house certain of its operations that were previously located in facilities with leases expiring in 2009 or early 2010.

Based on the fair value of the property as determined by third-party appraisal, TSFG recorded impairment charges of $19.4 million in 2009, which are included in noninterest expense. In determining the impairment charge, the cost basis was reduced by the estimated net realizable value of state tax credits available to TSFG, which can be transferable in certain conditions. At December 31, 2009, the carrying amount of the campus was $56.1 million and the carrying amount of the state tax credits was $7.6 million. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.

 
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TSFG also recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of the corporate jet which was classified as an asset held for sale in 2009. The corporate jet was subsequently sold during 2009 with no significant gain or loss on the sale.

In addition, during 2009, TSFG recorded $1.6 million in impairment losses (also included in noninterest expense) associated with vacated branches and office locations, primarily attributable to subletting office space at less than the contractual lease rate.

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, 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 2009 and 2008, TSFG recorded credit losses of $1.9 million and $815,000, respectively, on its customer swaps. Deterioration in customers’ credit and in TSFG’s ability to collect on the derivative assets associated with customer swaps could negatively impact TSFG’s consolidated financial statements. If we are in a receivable position with respect to our interest rate swaps with customers, the fair value of the derivative asset represents additional credit exposure to the customer (without additional collateral). At December 31, 2009, the total fair value of TSFG’s customer swap derivative assets was $25.7 million.

In 2008, TSFG had counterparty credit exposure to Lehman Brothers Special Financing, Inc. (“LBSF”) in connection with derivatives. LBSF’s parent company filed for bankruptcy in 2008, triggering an event of default under the derivative agreement, resulting in termination. During fourth quarter 2008, TSFG recognized a loss related to the termination in the amount of $1.1 million, representing the excess of the value of the securities collateral held by LBSF above the amounts owed by TSFG under the agreement.

Please see Item 8, Notes 1 and 15 to the Consolidated Financial Statements for a description of TSFG’s significant accounting policies and additional information on derivatives.

Deposits

Deposits remain TSFG's primary source of funds. Average customer deposits equaled 66.1% of average total funding in 2009 and 61.9% in 2008. TSFG faces strong competition from other banking and financial services companies in gathering deposits. TSFG also maintains short and long-term wholesale sources, including federal funds, repurchase agreements, Federal Reserve borrowings, brokered CDs, and FHLB advances to fund a portion of loan demand and, if appropriate, any increases in investment securities.

Table 19 shows the breakdown of total deposits by type of deposit and the respective percentage of total deposits, while Table 20 shows the breakdown of customer funding by type.

 
52
 
Table 19
  
Types of Deposits
  
(dollars in thousands)
                              
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Noninterest-bearing demand deposits
   $ 1,124,404     $ 1,041,140     $ 1,127,657     $ 1,280,908     $ 1,458,914  
Interest-bearing checking
     1,060,470       1,078,921       1,117,850       1,208,125       1,162,891  
Money market accounts
     2,072,664       1,834,115       2,188,261       2,435,413       2,290,134  
Savings accounts
     322,924       190,519       158,092       181,192       187,101  
Core deposits
     4,580,462       4,144,695       4,591,860       5,105,638       5,099,040  
Time deposits under $100,000
     1,632,582       1,863,520       1,442,030       1,272,056       1,246,791  
Time deposits of $100,000 or more
     1,137,067       1,488,735       1,496,270       1,514,615       1,549,925  
Customer deposits (1)
     7,350,111       7,496,950       7,530,160       7,892,309       7,895,756  
Brokered deposits
     1,946,101       1,908,767       2,258,408       1,624,431       1,338,681  
Total deposits
   $ 9,296,212     $ 9,405,717     $ 9,788,568     $ 9,516,740     $ 9,234,437  
                                         
Percentage of Deposits
                                        
Noninterest-bearing demand deposits
     12.1 %     11.1 %     11.5 %     13.4 %     15.8 %
Interest-bearing checking
     11.4       11.5       11.4       12.7       12.6  
Money market accounts
     22.3       19.5       22.4       25.6       24.8  
Savings accounts
     3.5       2.0       1.6       1.9       2.0  
Core deposits
     49.3       44.1       46.9       53.6       55.2  
Time deposits under $100,000
     17.6       19.8       14.7       13.4       13.5  
Time deposits of $100,000 or more
     12.2       15.8       15.3       15.9       16.8  
Customer deposits (1)
     79.1       79.7       76.9       82.9       85.5  
Brokered deposits
     20.9       20.3       23.1       17.1       14.5  
Total deposits
     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
 
 
(1)
TSFG defines customer deposits as total deposits less brokered deposits.

Table 20
  
Types of Customer Funding
  
(dollars in thousands)
                              
   
December 31,
  
                               
   
2009
    
2008
    
2007
    
2006
    
2005
  
Customer deposits (1)
   $ 7,350,111     $ 7,496,950     $ 7,530,160     $ 7,892,309     $ 7,895,756  
Customer sweep accounts (2)
     316,690       493,012       648,311       500,288       305,815  
Customer funding
   $ 7,666,801     $ 7,989,962     $ 8,178,471     $ 8,392,597     $ 8,201,571  

(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 December 31, 2009, period-end customer funding decreased $323.2 million, or 4.0%, from December 31, 2008, as increases in lower-cost core deposit categories generated by a deposit campaign in 2009 were more than offset by decreases in time deposits and customer sweep accounts. Public deposits totaled $749.1 million at December 31, 2009, compared to $697.2 million at December 31, 2008 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 ($293.9 million at December 31, 2009) and 2) Eurodollar deposits ($22.8 million at December 31, 2009). These balances are tied directly to commercial customer checking accounts, including public funds depositors, and generate treasury services noninterest income.

 
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TSFG uses brokered deposits and other borrowed funds as an alternative funding source while continuing its efforts to maintain and grow its local customer funding base.

Average customer funding equaled 69.2% of average total funding for 2009 and 66.7% for 2008. Period-end customer funding increased to 71.4% of total funding at December 31, 2009, compared to 68.1% at December 31, 2008, due primarily to the decline in wholesale borrowings attributable to the sales of loans and securities during 2009. As part of its overall funding strategy, TSFG expects to continue its focus on lowering its funding costs by trying to improve the customer funding level, mix, and rate paid. TSFG attempts to enhance its deposit mix by working to attract lower-cost transaction accounts through actions such as new transaction account opening goals, new checking products, and 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 market environment.

TSFG elected to continue its participation in the FDIC’s Transaction Account Guarantee Program (the “TAGP”). Under the program, through June 30, 2010, all noninterest-bearing transaction accounts and certain interest-bearing checking accounts (for which the rate paid will not exceed 50 basis points) are fully guaranteed by the FDIC for the entire amount in the account. TSFG estimates that deposits that are neither insured nor collateralized would increase from approximately $265 million at December 31, 2009 to approximately $750 million without the benefit of the TAGP.

Table 21
  
Maturity Distribution of and Rates on Time Deposits
  
(dollars in thousands)
  
                               
   
Customer Time Deposits
    
Brokered Deposits
    
Total
  
         
Average
          
Average
        
   
Balance
    
Rate
    
Balance
    
Rate
    
Balance
  
                               
Three months or less
   $ 338,224       1.87 %   $ 176,094       3.70 %   $ 514,318  
Over three through six months
     305,272       1.97       209,695       2.15       514,967  
Over six through twelve months
     1,322,629       2.86       419,989       2.81       1,742,618  
Over twelve months
     803,524       2.66       1,140,323       2.83       1,943,847  
Total outstanding
   $ 2,769,649       2.58 %   $ 1,946,101       2.83 %   $ 4,715,750  

Table 22
  
Maturity Distribution of Time Deposits of $100,000 or More
  
(dollars in thousands)
      
       
Three months or less
   $ 151,492  
Over three through six months
     117,986  
Over six through twelve months
     573,518  
Over twelve months
     294,071  
Total outstanding
   $ 1,137,067  
 
 
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Borrowed Funds

Table 23 shows the breakdown of total borrowed funds by type.

Table 23
  
Types of Borrowed Funds
  
(dollars in thousands)
                              
   
December 31,
  
   
2009
    
2008
    
2007
    
2006
    
2005
  
Short-Term Borrowings
                              
Customer sweep accounts
   $ 316,690     $ 493,012     $ 648,311     $ 500,288     $ 305,815  
Treasury, tax and loan note
     5,987       3,516       752,195       139,989       20,131  
Federal funds purchased and repurchase agreements
     25       67,309       206,216       920,811       1,115,486  
Federal Reserve borrowings
     -       1,050,000       -       -       -  
Commercial paper
     -       12,537       30,828       32,631       32,933  
FHLB advances
     -       -       -       175,000       -  
      322,702       1,626,374       1,637,550       1,768,719       1,474,365  
Long-Term Borrowings
                                        
FHLB advances, net of discount
     752,646       233,497       223,087       328,113       852,140  
Repurchase agreements
     125,000       200,000       200,000       521,000       821,000  
Subordinated notes
     206,704       216,704       216,704       188,871       155,695  
Mandatorily redeemable preferred stock of REIT subsidiary
     31,800       56,800       56,800       89,800       89,800  
Note payable
     719       768       786       828       865  
Employee stock ownership plan note payable
     -       -       -       200       500  
Purchase accounting premiums, net of amortization
     -       -       963       1,663       2,151  
Total long-term borrowings
     1,116,869       707,769       698,340       1,130,475       1,922,151  
                                         
Total borrowings
     1,439,571       2,334,143       2,335,890       2,899,194       3,396,516  
Less: customer sweep accounts
     (316,690 )     (493,012 )     (648,311 )     (500,288 )     (305,815 )
Add: brokered deposits(1)
     1,946,101       1,908,767       2,258,408       1,624,431       1,338,681  
Total wholesale borrowings
   $ 3,068,982     $ 3,749,898     $ 3,945,987     $ 4,023,337     $ 4,429,382  
Total wholesale borrowings as a percentage of total assets
     25.8 %     27.6 %     28.4 %     28.3 %     30.9 %

(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 2009, average borrowings totaled $1.8 billion, compared with $2.4 billion in 2008.

Period-end wholesale borrowings decreased to $3.1 billion at December 31, 2009, compared to $3.7 billion at December 31, 2008 primarily due to sales of loans and securities during 2009. TSFG also shifted into borrowings with remaining maturities of more than one year in order to strengthen liquidity.

Table 24 shows balance and interest rate information on selected short-term borrowings. Balances in these accounts can fluctuate on a day-to-day basis based on availability of collateral and overall funding needs.

 
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Table 24
  
Selected Short-Term Borrowings Data
  
(dollars in thousands)
  
   
Maximum
                      
Interest
  
   
Outstanding
                      
Rate at
  
   
at any
    
Average
    
Average
    
Ending
    
Year
  
Year Ended December 31,
  
Month End
    
Balance
    
Interest Rate
    
Balance
    
End
  
                               
2009
                              
Customer sweep accounts
   $ 466,967     $ 353,830       0.29 %   $ 316,690       0.33 %
Federal funds purchased and repurchase agreements
     197,309       47,000       0.25       25       0.63  
Federal Reserve borrowings
     1,200,000       387,619       0.26       -       -  
Commercial paper
     2,476       1,044       2.63       -       -  
                                         
2008
                                        
Customer sweep accounts
   $ 741,206     $ 580,882       1.98 %   $ 493,012       0.58 %
Federal funds purchased and repurchase agreements
     589,229       329,503       2.52       67,309       0.05  
Federal Reserve borrowings
     1,150,000       478,954       1.82       1,050,000       0.28  
Commercial paper
     31,053       22,507       4.24       12,537       3.30  
                                         
2007
                                        
Customer sweep accounts
   $ 648,311     $ 525,606       4.32 %   $ 648,311       3.79 %
Federal funds purchased and repurchase agreements
     1,048,334       767,413       5.17       206,216       3.70  
Commercial paper
     35,704       33,454       5.35       30,828       5.04  

In 2009, TSFG repurchased $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary (priced at LIBOR plus 350 basis points) included in long-term borrowings in Table 23 and recognized an $8.3 million gain on the extinguishment. In addition, TSFG terminated $75.0 million (4.3% rate) in long-term repurchase agreements, and recognized a loss on extinguishment of $5.4 million. In connection with the termination of the repurchase agreement, TSFG also sold U.S. government agency securities with a book value of approximately $120 million (3.6% yield) for a gain of $5.4 million.

During 2008, TSFG recognized a loss on early extinguishment of debt of $2.1 million, primarily due to prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related swaps were called. During 2007, TSFG recognized a loss on early extinguishment of debt of $2.0 million, primarily from the write-off of unamortized debt issuance costs associated with the redemption of $131.5 million of subordinated notes and mandatorily redeemable preferred stock, with an average spread of 347 basis points over LIBOR.

Capital and Liquidity

Capital

Shareholders' equity totaled $993.2 million, or 8.3% of total assets, at December 31, 2009 compared with $1.6 billion, or 11.9% of total assets, at December 31, 2008. Shareholders' equity decreased primarily due to the net loss for 2009, partially offset by the net proceeds from the issuance of $85 million of common stock.

In connection with its capital plan announced in June 2009, TSFG issued $85 million of common equity in a public offering (with net proceeds of $79.7 million) and converted $90.9 million of Series 2008 Convertible Preferred Stock into 20.9 million common shares (including 6.9 million shares valued at $11.9 million as an inducement to convert). TSFG also exchanged $94.5 million of the Series 2008 Convertible Preferred Stock for a new series of preferred stock, Series 2009-A Convertible Preferred Stock, which automatically converted into 24.0 million common shares (including 9.4 million shares valued at $14.0 million as an inducement to convert) upon shareholder approval on September 11, 2009. In addition, TSFG sold ancillary businesses and reduced its assets during 2009, partly by sales of indirect auto loans and shared national credits. During 2009, TSFG contributed $195 million to its subsidiary bank to increase its capital.

However, the significant loss in the second half of 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced tangible common equity to tangible assets to 3.67% at December 31, 2009, compared to 6.05% at

 
56

December 31, 2008. While TSFG’s regulatory ratios were not impacted by the valuation allowance, the tangible common equity ratio, which is an important measure to investors, debt rating agencies, and others, was significantly impacted by the valuation allowance. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the conversion of certain debt and non-common equity instruments into common stock and/or cash and/or the issuance of additional equity in public or private offerings. No decision has been made and the company plans to conclude on such evaluations over the coming months and take such actions, if any, shortly thereafter. No assurance can be provided that the Company can or will undertake such actions.

In 2009, preferred stock dividends included $32.4 million treated as deemed dividends (non cash) to preferred shareholders resulting from induced conversions of $234.1 million of preferred stock into common shares. The deemed dividends had no effect on total equity or regulatory capital.

TSFG’s tangible equity to tangible asset ratio decreased to 6.54% at December 31, 2009, compared to 10.29% at December 31, 2008 primarily due to the 2009 net loss being partially offset by proceeds from the common stock offering and lower total assets. As interest rates increase, TSFG expects its unrealized gain on securities available for sale would decrease, leading to a lower tangible equity to tangible asset ratio, including accumulated other comprehensive income.

TSFG’s unrealized gain on securities available for sale and cash flow hedges, net of tax, which is included in accumulated other comprehensive income, decreased to $30.9 million at December 31, 2009, compared with $42.6 million at December 31, 2008 due primarily to an increase in long-term interest rates and realization of gains through sales of securities during 2009.

Common book value per common share at December 31, 2009 and 2008 was $3.05 and $14.12, respectively. The decrease in common book value per common share was primarily due to the issuance of 85 million common shares, the conversion of Series 2008 and Series 2009-A Convertible Preferred Stock into 54.9 million common shares, and the net loss during the period. Common tangible book value per common share at December 31, 2009 and 2008 was $1.98 and $10.83, respectively. Tangible book value was below book value as a result of goodwill and intangibles associated with acquisitions of entities and assets accounted for as purchases. At December 31, 2009, goodwill totaled $214.1 million, or $0.99 per share, and is not being amortized, while other intangibles totaled $15.7 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. TSFG and Carolina First Bank exceeded the well-capitalized regulatory requirements at December 31, 2009. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on our Consolidated Financial Statements. Based on the regulatory agencies’ view of projected future losses related to credit risk, the regulatory agencies could impose capital requirements exceeding the well-capitalized standards.

Table 25 sets forth various capital ratios for TSFG and Carolina First Bank. For further information regarding the regulatory capital of TSFG and Carolina First Bank, see Item 8, Note 24 to the Consolidated Financial Statements.

 
57
 
Table 25
  
Capital Ratios
  
             
     December 31,    
Well Capitalized
  
   
2009
    
Requirement
  
TSFG
            
Total risk-based capital
     11.24 %     n/a  
Tier 1 risk-based capital
     9.93       n/a  
Leverage ratio
     7.91       n/a  
                 
Carolina First Bank
                
Total risk-based capital
     10.55 %     10.00 %
Tier 1 risk-based capital
     8.96       6.00  
Leverage ratio
     7.13       5.00  
 
At December 31, 2009, trust preferred securities and shares of mandatorily redeemable preferred stock of a REIT subsidiary (“REIT preferred securities”) included in tier 1 capital totaled $200.5 million and $26.3 million, respectively. Under current regulatory guidelines and subject to certain limitations, debt associated with trust and REIT preferred securities qualifies for tier 1 capital treatment, although the allowable amounts can change as equity declines below certain levels. While a complete review of all the rules is beyond the scope of this document, it is important to be aware of certain limits that may begin to impact the Company’s ratios. The limitation regarding the inclusion of trust and REIT preferred securities in capital calculations impacts only the ratios calculated at the consolidated level and, accordingly, is not applicable to the Carolina First Bank ratios. (The trust preferred securities are not included in Carolina First Bank’s tier 1 capital since the related subordinated notes were issued by the parent company.) Regulatory rules allow trust and REIT preferred securities to be included in tier 1 capital up to 25.0% of the sum of selected tier 1 capital elements, including the trust and REIT preferred securities. Effective March 31, 2011, the 25.0% limitation will become more restrictive and could cause the Company’s tier 1 capital ratios to be negatively impacted. At December 31, 2009, trust and REIT preferred securities accounted for 23.9% of TSFG’s tier 1 capital.

During 2009, TSFG recorded a valuation allowance against its deferred tax assets (see “Critical Accounting Policies and Estimates – Income Taxes”). For regulatory purposes, the deferred tax assets were already deducted from tier 1 and total capital ratios for both TSFG and Carolina First Bank as capital regulations limit the amount of deferred tax assets that are dependent upon future taxable income to the lesser of the amount of deferred tax assets that are expected to be realized within one year of the quarter-end date, based on the projected future taxable income for that year, or 10% of tier 1 capital. Accordingly, the valuation allowance did not impact TSFG’s well-capitalized status at December 31, 2009.

Carolina First Bank is subject to certain regulatory restrictions on the amount of dividends it is permitted to pay. During third quarter 2009, TSFG suspended its common dividend. Future TSFG common dividends will depend upon a number of factors, including payment of the preferred stock dividends, financial performance, capital requirements and assessment of capital needs. In addition, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. Subsequent to year-end, TSFG suspended dividends on all remaining outstanding equity and capital instruments. Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.
 
As mentioned above, failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators, that, if undertaken, could have a direct material effect on our Consolidated Financial Statements. For example, a depository institution is generally prohibited from making capital distributions, including paying dividends, or paying management fees to a holding company if the institution would thereafter be undercapitalized. Institutions that are adequately but not well capitalized cannot accept, renew or rollover brokered deposits except with a waiver from the FDIC and are subject to limitations on the maximum interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew or rollover brokered deposits. For additional details regarding potential consequences of a failure to meet the well-capitalized standards, see Item 1, “Supervision and Regulation -- Prompt Corrective Action.”

 
58

Liquidity

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

Liquidity is managed at two levels. The first is the liquidity of the parent company, which is the holding company that owns Carolina First Bank, the banking subsidiary. The second is the liquidity of the banking subsidiary. The management of liquidity at both levels is essential because the parent company and banking subsidiary each have different funding needs and sources, and each are subject to certain regulatory guidelines and requirements. In addition, Carolina First Bank is subject to limitations on the amount of funds that may be transferred to the parent company. At December 31, 2009, Carolina First Bank could not pay any dividend to the parent company without prior regulatory approval. Through the Asset Liability Committee (“ALCO”), Corporate Treasury is responsible for planning and executing the funding activities and strategy.

TSFG’s liquidity policy strives to ensure a diverse funding base, with limits established by wholesale funding source as well as aggregate wholesale funding. Daily and short-term liquidity needs are principally met with deposits from customers, payments on loans, maturities and paydowns of investment securities, and excess cash balances. TSFG is focusing additional efforts aimed at acquiring new deposits from its customer base through its established branch network to enhance liquidity and reduce reliance on wholesale borrowing. Liquidity needs are a factor in developing the deposit pricing structure, which may be altered to retain or grow deposits as deemed necessary. However, TSFG may face regulatory limitations on the maximum rates it can pay on interest-bearing deposits if it falls below well capitalized.

As noted in Table 26 which follows, we have $2.8 billion of time deposits maturing in 2010, with maturities of customer and brokered CDs accounting for $2.0 billion and $805.8 million, respectively. We expect to replace maturing customer CDs through ongoing efforts to grow customer deposits and various deposit campaigns, replacing any shortfall through wholesale borrowings. We anticipate replacing brokered CD maturities through a combination of growth in core customer funding and balance sheet reductions. Our capacity to issue new brokered CDs could be significantly diminished or eliminated based on regulatory restrictions, our financial condition, our capital levels, and/or our performance.

Longer term funding needs are typically met through a variety of wholesale sources, which have a broader range of maturities than customer deposits and add flexibility in liquidity planning and management. These wholesale sources include advances from the FHLB with longer maturities, brokered CDs, and instruments that qualify as regulatory capital, including trust preferred securities and subordinated debt. 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 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. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $625 million currently, and would increase to approximately $1.5 billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at June 30, 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 $265 million currently, and would increase to approximately $750 million without the benefit of the TAGP. Public deposits which are currently insured but which would be uninsured and would therefore require collateralization without the benefit of the TAGP totaled $350 million at December 31, 2009. Free securities of $1.2 billion would meet incremental collateral needs and, along with surplus cash of approximately $200 million at year-end, represent reserves to address liquidity needs in a crisis scenario.

During 2009 and early 2010, several rating agencies lowered the credit ratings for TSFG and/or Carolina First Bank. These ratings changes did not have a material impact on TSFG’s liquidity given that we have no debt for which a downgrade of our credit ratings would trigger early termination and a credit rating downgrade has not historically impacted access to our

 
59

primary funding sources. However, certain downgrade levels could require the Company to post additional collateral to secure certain transactions (derivatives and certain borrowings) or could enable certain counterparties to rescind the transaction at their option. Such requirements are not expected to materially impact the Company’s overall liquidity. In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations.

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

In managing its liquidity needs, TSFG focuses on its existing assets and liabilities, as well as its ability to enter into additional borrowings, and on the manner in which they combine to provide adequate liquidity to meet its needs. Table 26 summarizes future contractual obligations as of December 31, 2009. Table 26 does not include payments which may be required under employment and deferred compensation agreements (see Item 8, Note 28 of the Consolidated Financial Statements) or loan commitments (see Item 8, Note 21 of the Consolidated Financial Statements). In addition, Table 26 does not include payments required for interest and income taxes (see Item 8, Consolidated Statements of Cash Flows for details on interest and income taxes paid for 2009).

Table 26
  
Contractual Obligations
  
(dollars in thousands)
  
   
Payments Due by Period
  
         
Less
                    
         
than 1
     1-3     4-5    
After 5
  
   
Total
    
Year
    
Years
    
Years
    
Years
  
Customer time deposits
   $ 2,769,649     $ 1,966,125     $ 780,762     $ 18,726     $ 4,036  
Brokered deposits
     1,946,101       805,778       1,039,542       66,994       33,787  
Total time deposits
     4,715,750       2,771,903       1,820,304       85,720       37,823  
Short-term borrowings
     322,702       322,702       -       -       -  
Long-term debt - parent company
     206,704       -       -       -       206,704  
Long-term debt - Carolina First Bank
     910,896       179       681,416       200,267       29,034  
Total long-term debt
     1,117,600       179       681,416       200,267       235,738  
Operating leases
     176,044       17,490       34,141       29,879       94,534  
Total contractual cash obligations
   $ 6,332,096     $ 3,112,274     $ 2,535,861     $ 315,866     $ 368,095  

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 December 31, 2009, 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 paid 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 27 presents average balance sheets and a net interest income analysis on a tax equivalent basis for each of the years in the three-year period ended December 31, 2009. Table 28 provides additional analysis of the effects of volume and rate on net interest income.

 
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Table 27
  
Comparative Average Balances - Yields and Costs
  
(dollars in thousands)
  
   
Years Ended December 31,
  
   
2009
    
2008
    
2007
  
   
Average
    
Income/
    
Yield/
    
Average
    
Income/
    
Yield/
    
Average
    
Income/
    
Yield/
  
   
Balance
    
Expense
    
Rate
    
Balance
    
Expense
    
Rate
    
Balance
    
Expense
    
Rate
  
Assets
                                                      
Earning assets
                                                      
Loans (1)
   $ 9,478,536     $ 466,493       4.92 %   $ 10,374,423     $ 629,966       6.07 %   $ 10,013,387     $ 764,828       7.64 %
Investment securities, taxable (2)
     1,786,429       73,527       4.12       1,788,333       81,744       4.57       2,165,589       103,525       4.78  
Investment securities, nontaxable (2) (3)
     232,416       12,131       5.22       299,412       15,299       5.11       359,728       17,847       4.96  
Total investment securities
     2,018,845       85,658       4.24       2,087,745       97,043       4.65       2,525,317       121,372       4.81  
Federal funds sold and interest-bearing bank balances
     227       1       0.44       16,825       385       2.29       6,519       402       6.17  
Total earning assets
     11,497,608     $ 552,152       4.80       12,478,993     $ 727,394       5.83       12,545,223     $ 886,602       7.07  
Non-earning assets
     1,322,089                       1,354,362                       1,499,342                  
Total assets
   $ 12,819,697                     $ 13,833,355                     $ 14,044,565                  
                                                                         
Liabilities and Shareholders' Equity
                                                                        
Liabilities
                                                                        
Interest-bearing liabilities
                                                                        
Interest-bearing deposits
                                                                        
Interest-bearing checking
   $ 1,054,372     $ 3,012       0.29     $ 1,104,088     $ 11,127       1.01     $ 1,140,753     $ 22,141       1.94  
Savings
     236,369       2,363       1.00       156,464       1,504       0.96       174,100       2,756       1.58  
Money market
     2,013,132       28,033       1.39       2,014,702       49,557       2.46       2,275,380       89,338       3.93  
Time deposits, excluding brokered deposits
     2,985,683       96,160       3.22       3,153,991       125,475       3.98       2,900,260       144,299       4.98  
Brokered deposits
     1,972,847       61,018       3.09       2,205,481       87,340       3.96       2,114,211       109,761       5.19  
Total interest-bearing deposits
     8,262,403       190,586       2.31       8,634,726       275,003       3.18       8,604,704       368,295       4.28  
Customer sweep accounts
     353,830       1,011       0.29       580,882       11,519       1.98       525,606       22,723       4.32  
Other borrowings (4)
     1,459,355       24,777       1.70       1,814,120       55,355       3.05       1,938,851       106,557       5.50  
Total interest-bearing liabilities
     10,075,588     $ 216,374       2.15       11,029,728     $ 341,877       3.10       11,069,161     $ 497,575       4.50  
Noninterest-bearing liabilities
                                                                        
Noninterest-bearing deposits
     1,080,503                       1,055,855                       1,200,663                  
Other noninterest-bearing liabilities
     213,333                       189,691                       231,189                  
Total liabilities
     11,369,424                       12,275,274                       12,501,013                  
Shareholders' equity
     1,450,273                       1,558,081                       1,543,552                  
Total liabilities and shareholders'  equity
   $ 12,819,697                     $ 13,833,355                     $ 14,044,565                  
Net interest income (tax-equivalent)
           $ 335,778       2.92 %           $ 385,517       3.09 %           $ 389,027       3.10 %
Less: tax-equivalent adjustment (3)
             4,246                       5,354                       6,246          
Net interest income
           $ 331,532                     $ 380,163                     $ 382,781          
                                                                         
Supplemental data:
                                                                        
Customer funding(5)
   $ 7,723,889     $ 130,579       1.69 %   $ 8,065,982     $ 199,182       2.47 %   $ 8,216,762     $ 281,257       3.42 %
Wholesale borrowings (6)
     3,432,202       85,795       2.50       4,019,601       142,695       3.55       4,053,062       216,318       5.34  
Total funding (7)
   $ 11,156,091     $ 216,374       1.94 %   $ 12,085,583     $ 341,877       2.83 %   $ 12,269,824     $ 497,575       4.06 %
 
(1)
Nonaccrual loans are included in average balances for yield computations.
(2)
The average balances for investment securities exclude the unrealized loss recorded for available for sale securities.
(3)
The tax-equivalent adjustment to net interest income adjusts the yield for assets earning tax-exempt income to a comparable yield on a taxable basis.
(4)
During the years ended December 31, 2009, 2008, and 2007 TSFG capitalized $738,000, $1.6 million, and $505,000, respectively, of interest in conjunction with its planned corporate campus.
(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.

 
61
 
Table 28
  
Rate/Volume Variance Analysis
  
(dollars in thousands)
                                      
   
2009 Compared to 2008
    
2008 Compared to 2007
  
   
Total
    
Change in
    
Change in
    
Total
    
Change in
    
Change in
  
   
Change
    
Volume
    
Rate
    
Change
    
Volume
    
Rate
  
Earning assets
                                      
Loans
   $ (163,473 )   $ (51,174 )   $ (112,299 )   $ (134,862 )   $ 26,731     $ (161,593 )
Investment securites, taxable
     (8,217 )     (87 )     (8,130 )     (21,781 )     (17,403 )     (4,378 )
Investment securites, nontaxable
     (3,168 )     (3,490 )     322       (2,548 )     (3,068 )     520  
Federal funds sold and interest-bearing bank balances
     (384 )     (211 )     (173 )     (17 )     350       (367 )
Total interest income
     (175,242 )     (54,962 )     (120,280 )     (159,208 )     6,610       (165,818 )
                                                 
Interest-bearing liabilities
                                                
Interest-bearing deposits
                                                
Interest-bearing checking
     (8,115 )     (480 )     (7,635 )     (11,014 )     (690 )     (10,324 )
Savings
     859       797       62       (1,252 )     (257 )     (995 )
Money market
     (21,524 )     (39 )     (21,485 )     (39,781 )     (9,338 )     (30,443 )
Time deposits
     (29,315 )     (6,417 )     (22,898 )     (18,824 )     11,855       (30,679 )
Brokered deposits
     (26,322 )     (8,557 )     (17,765 )     (22,421 )     4,565       (26,986 )
Total interest-bearing deposits
     (84,417 )     (14,696 )     (69,721 )     (93,292 )     6,135       (99,427 )
Customer sweep accounts
     (10,508 )     (3,817 )     (6,691 )     (11,204 )     2,315       (13,519 )
Other borrowings
     (30,578 )     (9,356 )     (21,222 )     (51,202 )     (6,470 )     (44,732 )
Total interest expense
     (125,503 )     (27,869 )     (97,634 )     (155,698 )     1,980       (157,678 )
Net interest income
   $ (49,739 )   $ (27,093 )   $ (22,646 )   $ (3,510 )   $ 4,630     $ (8,140 )

Note: Changes that are not solely attributable to volume or rate have been allocated to volume and rate on a pro-rata basis.

Fully tax-equivalent net interest income decreased to $335.8 million in 2009 from $385.5 million in 2008 and $389.0 million in 2007 primarily due to the decline in average earning assets and the impact of higher levels of nonperforming assets. TSFG’s average earning assets decreased to $11.5 billion in 2009 compared to $12.5 billion in 2008, primarily due to sales and liquidations of problem loans, net loan charge-offs, and reductions of loans with limited relationship opportunity. Average loans as a percentage of average earning assets was 82.4% for 2009, compared to 83.1% for 2008. At December 31, 2009, approximately 56% of TSFG’s accruing loans were variable rate loans, the majority of which are tied to the prime rate. TSFG has entered into receive-fixed interest rate swaps to hedge the forecasted interest income from certain prime-based and LIBOR-based loans as part of its overall interest rate risk management. Certain of these swaps with a notional amount of $265.0 million were terminated or dedesignated in early 2010, which locked in a gain of approximately $12 million that will be amortized to the statement of operations as the hedged cash flows impact earnings. At December 31, 2009, loans with floating rates, primarily limited to prime or LIBOR, included loans with floors totaling $1.3 billion with an average floor of 5.10%.

The net interest margin for 2009 was 2.92%, compared with 3.09% for 2008 and 3.10% for 2007. Net interest income and the net interest margin have been negatively impacted in 2009 and 2008 by elevated levels of nonperforming assets and the reversal of accrued interest income as loans have been moved to nonaccrual status. In 2009 and 2008, credit had an approximate adverse impact of 34 basis points and 29 basis points, respectively, on the net interest margin from interest reversals on nonaccrual loans, which totaled $15.5 million and $12.6 million, respectively, as well as the carrying amount associated with nonperforming assets. During 2009, in order to manage liquidity, TSFG increased the level of excess cash it maintains, as well as shifted into funding with longer maturities (see Table 23 Types of Borrowed Funds), which is generally more expensive than overnight borrowings. These actions had an adverse impact on TSFG’s net interest margin during 2009.

Comparing 2008 to 2007, the adverse effects attributable to credit were partially offset by the issuance of preferred stock.

 
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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 $668.9 million, $344.6 million, and $68.6 million in 2009, 2008, and 2007, respectively. In 2009 and 2008, the higher provision largely reflected credit deterioration due to continued weakness in housing markets, migration of loans to higher risk categories, and additional reserves for nonperforming loans and land loans. The allowance for credit losses equaled 4.45% and 2.45% of loans held for investment at December 31, 2009 and 2008, respectively.

Net loan charge-offs were $541.2 million, or 5.72% of average loans held for investment in 2009, compared with $223.4 million, or 2.16% of average loans held for investment in 2008. Management expects the level of charge-offs and provision expense to remain elevated relative to historical trends due to the current credit environment. See “Loans,” “Credit Quality,” and “Allowance for Loan Losses and Reserve for Unfunded Lending Commitments.”

Noninterest Income

Table 29 shows the components of noninterest income during the three years ended December 31, 2009.

Table 29
  
Components of Noninterest Income
  
(dollars in thousands)
  
   
Years Ended December 31,
  
   
2009
       2008       2007  
Service charges on deposit accounts
   $ 39,659     $ 42,940     $ 44,519  
Debit card income, net
     8,305       7,805       7,182  
Customer service fee income
     4,839       5,335       5,648  
Total customer fee income
     52,803       56,080       57,349  
                         
Insurance income
     7,800       10,082       12,029  
Retail investment services, net
     7,703       7,711       7,902  
Trust and investment management income
     5,135       6,688       6,595  
Benefits administration fees
     1,213       3,136       3,261  
Total wealth management income
     21,851       27,617       29,787  
                         
Bank-owned life insurance income
     9,515       12,877       13,344  
Gain (loss) on securities
     8,034       3,108       (4,623 )
Gain on sale of ancillary businesses
     7,234       -       -  
Mortgage banking income
     5,694       5,260       6,053  
Gain (loss) on trading and certain derivative activities
     3,849       (207 )     (1,197 )
Merchant processing income, net
     2,018       3,279       3,263  
Gain on Visa IPO share redemption
     -       1,904       -  
Other
     7,035       12,049       9,736  
Total noninterest income
   $ 118,033     $ 121,967     $ 113,712  

Noninterest income decreased to $118.0 million in 2009 from $122.0 million in 2008, reflecting decreases in most categories. Total customer fee income and wealth management income continued to decrease partially due to the effects of the economic downturn, such as fewer customer transactions and lower asset valuations. Net debit card income was an exception, as increased transactions led to an overall increase in this line item. During third quarter 2009, TSFG sold three ancillary businesses: its merchant processing portfolio, a financial planning group, and a retirement plan administrator. Although these sales resulted in a $7.2 million gain, they reduced the respective line items in which the businesses were previously included. For the period in 2009 prior to the sales, these businesses reported $5.1 million in noninterest income ($2.0 million merchant processing income, $1.2 million benefits administration fees, and $1.9 million included in insurance, retail investment services, and trust and investment management income). An additional deferred gain of approximately $6 million related to the sale of the merchant processing portfolio may be recognized over the next two years.

 
63

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.

Bank-owned life insurance income decreased to $9.5 million in 2009, partly due to a $1.0 million adjustment to the cash surrender value due to various provisions of stable value contracts and fluctuations in the amounts of life insurance proceeds received during the year. Mortgage banking income increased 8.3% for the year ended 2009 compared to 2008. Mortgage loans originated by TSFG originators totaled $320.7 million and $278.3 million for the years ended 2009 and 2008, respectively. Gain on certain derivative activities increased $4.1 million, primarily due to recording changes in the value of interest rate swaps no longer qualifying for hedge accounting and the ineffectiveness of other hedging relationships. For the year ended 2009, gain on securities included gains on the sale of municipal securities and U.S. government agency securities (see “Securities”), partially offset by $4.3 million in other-than-temporary impairment on certain community bank-related equity securities and privately held investments included in other assets.

Comparing 2008 to 2007, noninterest income increased $8.3 million to $122.0 million due primarily to a gain on mandatory partial redemption of shares received in the Visa IPO of $1.9 million and a net gain on securities of $3.1 million in 2008 compared to a $4.6 million net loss on securities in 2007. The 2008 gain included other-than-temporary impairment recorded on corporate bonds, community bank-related equity investments, and other investments, which was more than offset by realized gains. The 2007 loss included other-than-temporary impairment of $2.9 million on corporate bonds and $2.0 million on non-marketable equity investments. Noninterest income also included a loss on certain derivative activities of $207,000 in 2008, compared with a loss of $1.2 million in 2007. These increases more than offset decreases in customer fee income and wealth management income, which were partially due to the effects of the economic downturn. NSF fees, which are included in service charges on deposit accounts, continued their downward trend based on fewer opportunities to collect. Net debit card income was an exception, as increased transactions led to an 8.7% increase in this line item in 2008 relative to 2007. In addition, bank-owned life insurance income fluctuated based on the amount of life insurance proceeds received during the year, and mortgage banking income decreased principally as a result of lower origination volumes in response to industry conditions.

Other noninterest income also includes income related to international banking services, wire transfer fees, overdraft protection fee income, internet banking fees, swap fee income, and gains/losses on disposition of fixed assets.

Noninterest Expenses

Table 30 shows the components of noninterest expenses for the three years ended December 31, 2009.
 
 
64
 
Table 30
  
Components of Noninterest Expense
  
(dollars in thousands)
  
   
Years Ended December 31,
  
   
2009
     2008     2007  
Salaries and wages, excluding employment contracts and severance
   $ 133,548     $ 144,037     $ 137,085  
Employment contracts and severance
     829       16,519       2,306  
Total salaries and wages
     134,377       160,556       139,391  
                         
Occupancy
     38,200       37,311       34,659  
Employee benefits
     32,893       38,200       37,098  
Loss on other real estate owned
     32,435       633       -  
Regulatory assessments
     29,293       10,923       2,628  
Furniture and equipment
     27,758       27,561       26,081  
Loan collection and foreclosed asset expense
     27,090       12,431       3,665  
Impairment of long-lived assets
     21,600       -       -  
Professional services
     16,768       16,212       17,062  
Project NOW expense
     1,693       271       -  
Loss on non-mortgage loans held for sale
     11,776       283       -  
Telecommunications
     6,197       6,140       5,668  
Advertising and business development
     5,947       9,927       7,401  
Amortization of intangibles
     4,917       6,138       7,897  
(Gain) loss on early extinguishment of debt
     (3,043 )     2,086       2,029  
Goodwill impairment
     2,511       426,049       -  
Loss on repurchase of auction rate securities
     676       -       -  
Loss on derivative collateral
     -       1,061       -  
Branch acquisition and conversion costs
     -       731       -  
Visa-related litigation
     -       (863 )     881  
Other
     28,033       36,583       36,789  
Total noninterest expenses
   $ 419,121     $ 792,233     $ 321,249  

Noninterest expenses decreased to $419.1 million in 2009 from $792.2 million in 2008. The acceleration of credit deterioration in Florida and overall adverse changes in the banking industry prompted TSFG to perform an interim impairment evaluation of the goodwill associated with its Mercantile banking segment at each quarter-end during 2008. The evaluations reflected decreases in projected cash flows for the Mercantile banking segment and increases in the discount rate used to value the cash flows, and accordingly the estimated fair value of the segment declined. This decline resulted in the recognition of goodwill impairment charges of $426.0 million in 2008.

Late in 2008, TSFG launched an internal efficiency and expense control project (“Project NOW”), the goal of which was to improve revenue and reduce annual operating expenses. As a result, salaries and wages (excluding employment contracts and severance) and employee benefits decreased $15.8 million in 2009 compared to 2008, as full-time equivalent employees declined to 2,214 at December 31, 2009, compared to 2,505 and 2,474 at December 31, 2008 and 2007, respectively.

Credit-related expenses (including loan collection and foreclosed asset expense, loss on non-mortgage loans held for sale, and loss on other real estate owned) increased $58.0 million in 2009 compared to 2008 due to the current credit environment, and may continue to be volatile in future periods.

Regulatory assessments increased $18.4 million in 2009 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. TSFG also recorded an FDIC special assessment charge of $5.7 million in second quarter 2009. 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, which resulted in TSFG paying $89.4 million in prepaid assessments to the FDIC in fourth quarter 2009, the cost of which will be recognized through 2012. FDIC insurance premiums are expected to increase based in part on the adoption of a uniform three-basis point increase to assessment rates effective January 1, 2011,
 
 
65
 
partially offset by the decrease in premiums associated with the expiration of the TAGP. Actions by regulatory agencies could also cause our assessments to increase.
 
During 2009, TSFG recognized impairment charges of $21.6 million on its campus facility ($19.4 million), corporate jet ($612,000), and vacated branches and office locations ($1.6 million) (see “Impairment of Long-Lived Assets”), as well as a $2.5 million goodwill impairment charge related to non-banking subsidiaries (see “Goodwill”). During 2009, TSFG recognized a net gain on early extinguishment of debt of $3.0 million, primarily due to gain on the repurchase of $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary, partially offset by a loss on termination of $75.0 million of long-term repurchase agreements (see “Borrowed Funds”). Also during 2009, TSFG repurchased various auction rate preferred securities from brokerage customers who purchased the securities during 2007. TSFG recorded a loss of $676,000 during 2009 to adjust these securities to estimated fair value based on illiquidity in the market (see “Securities”).

Professional services increased in 2009, partially due to legal expenses associated with a shareholder lawsuit. Project NOW expenses increased due to costs associated with TSFG’s revenue and expense initiative.

Comparing 2008 to 2007, noninterest expenses increased $471.0 million, primarily due to the goodwill impairment charge mentioned above. Salaries, wages, and employee benefits (excluding contracts and severance) increased $8.1 million in 2008, partially due to normal salary increases and lower loan origination salary deferrals. The 2008 increase in FTEs relative to 2007 was partly due to the acquisition of five branch offices in Orlando and three de novo branch openings. Employment contracts and severance increased primarily as a result of expenses related to the retirement of former CEO Mack Whittle. The incremental expense related to Whittle’s retirement benefits was approximately $12 million, all of which was recorded in 2008. Professional services decreased 3.4% for 2008, primarily due to a decrease in legal fees.

Advertising and business development increased 34.1% in 2008 relative to 2007, primarily due to costs related to customer funding initiatives. In addition, regulatory assessments increased, primarily due to the fact that the credit which had been offsetting FDIC premiums for all of 2006 and the first three quarters of 2007 was fully utilized in fourth quarter 2007. Loan collection and foreclosed asset expense increased $8.8 million in 2008 due to the credit environment.

During 2008, TSFG recognized a loss on early extinguishment of debt of $2.1 million, which reflects prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related interest rate swaps were called. During 2007, TSFG recognized a loss on early extinguishment of debt of $2.0 million, primarily from the write-off of unamortized debt issuance costs associated with the redemption of subordinated notes and mandatorily redeemable preferred stock.

In 2008, TSFG recognized a loss related to derivative collateral of $1.1 million, representing the excess of the value of securities collateral held by a counterparty who declared bankruptcy during the year above the amounts owed by TSFG under the swap agreement. TSFG incurred branch acquisition and conversion costs during the first half of 2008 related to the June 6, 2008 purchase of five retail branch offices in the Orlando area. This transaction also contributed to higher occupancy expense. During 2008, TSFG reversed $863,000 of an $881,000 reserve for losses for Visa-related litigation (shared among Visa and Visa member banks) recorded in 2007.

Income Taxes

Income tax expense as a percentage of pretax loss was (5.9)% for 2009. 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 2009 primarily due to the deferred tax asset valuation allowance recorded during third quarter 2009 (see “Critical Accounting Policies and Estimates – Income Taxes”). Income tax benefit as a percentage of pretax loss was 13.8% for 2008, which differed from the U.S federal statutory rate primarily due to the impact of the nondeductible goodwill impairment that was recorded in 2008.

The accounting complexities of evaluating and recording a valuation allowance on deferred tax assets make the projection of the effective tax rate on future pretax net income or loss difficult. Based on current projections and assuming no change in pretax other comprehensive income (gains on investment securities available for sale and cash flow hedges), the tax expense or benefit for 2010 should be at or near zero except for any change in reserves for uncertain tax positions. Volatility in other comprehensive income could materially impact the tax expense or benefit charged to operations with little or no impact to equity.

For further information concerning income tax expense, refer to Item 8, Note 17 to the Consolidated Financial Statements.

 
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Fourth Quarter Summary

TSFG reported a net loss available to common shareholders of $193.9 million or $(0.90) per diluted share for fourth quarter 2009, compared to a net loss available to common shareholders of $340.8 million, or $(1.95) per diluted share for third quarter 2009 and $319.4 million, or $(4.29) per diluted share for fourth quarter 2008. The third quarter 2009 net loss was partly due to a $200.1 million increase to the deferred tax asset valuation allowance, while the fourth quarter 2008 net loss was partly due to a $237.6 million goodwill impairment charge resulting from a decrease in value of the Mercantile banking segment. The following is a summary of the consolidated statements of operations (in thousands, except per share data):

   
Three Months Ended
  
   
December 31,
    
September 30,
    
December 31,
  
   
2009
    
2009
    
2008
  
Net interest income
   $ 80,546     $ 80,038     $ 91,633  
Provision for credit losses
     170,761       224,179       122,926  
Noninterest income
     28,550       33,470       30,012  
Noninterest expenses
     103,163       89,529       342,093  
Income tax expense (benefit)
     23,843       123,304       (33,435 )
Net loss
     (188,671 )     (323,504 )     (309,939 )
Preferred stock dividends and other
     (5,221 )     (17,251 )     (9,424 )
Net loss available to common shareholders
   $ (193,892 )   $ (340,755 )   $ (319,363 )
                         
Loss per common share, diluted
   $ (0.90 )   $ (1.95 )   $ (4.29 )

Nonperforming assets declined to $522.4 million at December 31, 2009, from $544.6 million at September 30, 2009. However, at December 31, 2009, nonperforming assets as a percentage of loans and foreclosed property increased to 6.13% from 6.05% at September 30, 2009 due to a decrease in loans held for investment. TSFG’s provision for credit losses totaled $170.8 million for fourth quarter 2009, compared to $224.2 million for third quarter 2009 and $122.9 million for fourth quarter 2008.

Fully tax-equivalent net interest income totaled $81.4 million for fourth quarter 2009, compared with $81.1 million for third quarter 2009 and $92.9 million for fourth quarter 2008. The net interest margin for fourth quarter 2009 was 2.97%, compared to 2.93% for third quarter 2009 and 2.97% for fourth quarter 2008. Comparing fourth quarter 2009 to third quarter 2009, the yield on average earning assets declined 10 basis points, primarily due to the sale of higher-yielding mortgage-backed securities and municipal securities (the yield on which is calculated on a tax-equivalent basis) during fourth quarter 2009 (the proceeds from which were reinvested into lower-yielding mortgage-backed securities), while average funding costs decreased 19 basis points, driven by an enhanced deposit mix, disciplined pricing, and downward pricing of certificates of deposit upon renewal.

Noninterest income totaled $28.6 million for fourth quarter 2009, compared to $33.5 million for third quarter 2009 and $30.0 million for fourth quarter 2008. Fourth quarter 2009 noninterest income included a gain on securities of $6.7 million (primarily due to the sale of municipal securities mentioned in the previous paragraph) compared with a loss of $286,000 and a gain of $1.6 million, respectively, in third quarter 2009 and fourth quarter 2008. However, third quarter 2009 included a $7.2 million gain on sale of ancillary businesses. Excluding these items, the decrease in fourth quarter 2009 relative to third quarter 2009 was largely due to a $1.6 million decline in the gain on certain derivative activities, a $1.0 million adjustment to bank-owned life insurance cash surrender value due to various provisions of stable value contracts, and an $854,000 decline in customer fee income. In addition, merchant processing income and wealth management income declined from the third quarter sales of ancillary businesses (which also reduced noninterest expenses).
 
Noninterest expenses totaled $103.2 million in fourth quarter 2009, compared to $89.5 million in third quarter 2009 and $342.1 million in fourth quarter 2008. Comparing fourth quarter 2009 to third quarter 2009, this increase was primarily due to a $12.5 million increase in credit-related expenses and a $3.5 million impairment charge related to the corporate campus, partially offset by expense reductions in many other categories. Fourth quarter 2008 included a $237.6 million goodwill impairment charge, as well as higher employment contract and severance expense related to the retirement of TSFG’s CEO. In addition, TSFG recorded a $1.7 million loss on early extinguishment of debt and a $1.1 million loss on derivative collateral during fourth quarter 2008.

 
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In fourth quarter 2009, income tax expense/benefit as a percentage of pretax loss was (14.5)%, compared with (61.6)% in third quarter 2009 and 9.7% in fourth quarter 2008. Income tax expense differed from the amount computed by applying TSFG’s statutory U.S. federal income tax rate of 35% to pretax loss in fourth and third quarters 2009 due to the deferred tax asset valuation allowance recorded during those quarters. For fourth quarter 2008, income tax expense was affected by the nondeductible goodwill impairment.

Enterprise Risk Management
 
Risk, to varying degrees and in different forms, is present in virtually all business activities of a financial services organization. In certain activities, the bank proactively assumes risk as a means of generating revenue, while in other activities risk arises by virtue of engaging in that activity. The primary goals of risk management are to ensure that (1) the outcomes of risk-taking activities are within TSFG’s risk tolerance and (2) that there is an appropriate balance between risk and reward to maximize shareholder returns.
 
Several key principles guide our enterprise-wide risk management activities. The active participation of the Board and executive and business line management in the risk management process is designed to ensure consistency with risk-taking activities and integrity with these principles which, in varying forms, apply to all business and risk types:
 
 
·
Board oversight—The Board approves risk strategies, policies and associated limits; and the Board directly, or through its Risk Committee, receives regular updates on the key risks to TSFG.
 
·
Accountability—Business units are responsible for identifying and managing risks within their areas, as outlined in their policies and procedures.
 
·
Monitoring—The risk management functions within the Company seek to provide objective oversight of business unit activities and work with business units to ensure key risks are properly identified and controlled.
 
·
Independent review—The internal audit group reports directly to the Audit Committee of the Board of Directors and provides an independent assessment of our system of internal controls.

Market Risk and Asset/Liability Management

Market Risk Management. We refer to “market risk” as the risk of loss from adverse changes in market prices of fixed income securities, equity securities, other earning assets, interest-bearing liabilities, and derivative financial instruments as a result of changes in interest rates or other factors. TSFG's market risk arises principally from interest rate risk inherent in its core banking activities. Interest rate risk is the risk of a change in earnings or equity represented by the impact of potential changes in market interest rates, both short-term and long-term, and includes, but is not limited to, the following:

 
·
assets and liabilities (including derivative positions) may mature or reprice at different times;
 
·
assets and liabilities may reprice at the same time but by different amounts;
 
·
short-term and long-term interest rates may change by different amounts;
 
·
remaining maturities of assets or liabilities may shorten or lengthen as interest rates change;
 
·
the fair value of assets and liabilities may adjust by varying amounts; and
 
·
changes in interest rates may have an indirect impact on loan and deposit demand, credit quality, and other sources of earnings.

TSFG has risk management policies and systems which attempt to monitor and limit exposure to interest rate risk. Specifically, TSFG manages its exposure to fluctuations in interest rates through policies established by our Asset/Liability Committee ("ALCO"), reviewed by the Risk Committee of the Board, and approved by the Board of Directors. A primary goal of ALCO is to monitor and limit exposure to interest rate risk through implementation of various strategies. These strategies include positioning the balance sheet to minimize fluctuations in income associated with interest rate risk, while maintaining adequate liquidity and capital.

In evaluating interest rate risk, TSFG uses a simulation model to analyze various interest rate scenarios, which take into account potential changes in the shape of the yield curve, forward interest rates implied by current yield curves, and immediate and gradual interest rate shifts. ALCO assesses interest rate risk by comparing the base case scenario results to the various interest rate scenarios. The variations of net interest income and economic value of equity (“EVE”), as compared with our base case, provide insight into our interest rate risk exposures.

 
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The assumptions used in this process possess an inherent uncertainty. As a result, we cannot precisely predict the impact of changes in interest rates on net interest income or the fair value of net assets. Actual results may differ significantly from our projections, due to, but not limited to the following:

 
·
the timing, magnitude and frequency of interest rate changes;
 
·
changes in market conditions;
 
·
differences in the yields on earning assets and costs of interest-bearing liabilities; and
 
·
actions taken by TSFG to counter such changing market conditions.

Interest Sensitivity Analysis. The information presented in Tables 31 and 32 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 31 and 32. Primary assumptions 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 31 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 December 31, 2009 and 2008 levels, respectively. As of December 31, 2009, net interest income over the next year is asset sensitive, meaning that interest rate increases would have a positive impact on net interest income. The increase in interest rate sensitivity from December 31, 2008 is primarily due to lengthening of wholesale funding maturities coupled with continued generation of variable rate loans.

Table 31
Net Interest Income at Risk Analysis
     
Annualized Hypothetical Percentage Change in
     
Net Interest Income
Interest Rate Scenario (1)
    
December 31,
     
2009
    
2008
  
  2.00 %     1.8 %     (0.2 ) %
  1.00       1.0       -  
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 rate environment, downward rate shifts were not run.

Table 32 reflects the sensitivity of the EVE to changes in interest rates. EVE is a measurement of the inherent, long-term 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 32 shows the effect that the indicated changes in interest rates would have on the fair value of net assets at December 31, 2009 and 2008, respectively, compared with the base case or flat interest rate scenario. The base case scenario assumes interest rates stay at December 31, 2009 and 2008 levels, respectively. The increase in the change in EVE to increases in interest rates in the +100 basis point change scenario is primarily driven by an increase in loans with embedded floors which effectively increased the amount of fixed rate assets. The lower decline in EVE in the +200 basis point change scenario is due

 
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to changes in the composition of the mortgage-backed and municipal securities portfolio, partially offset by the increase in loans with embedded floors.

Table 32
  
Economic Value of Equity Risk Analysis
  
(dollars in thousands)
Annualized Hypothetical Dollar Change in
  
     
Economic Value of Equity
  
Interest Rate Scenario (1)
    
December 31,
  
     
2009
    
2008
  
  2.00 %   $ (63,227 )   $ (82,307 )
  1.00       (35,430 )     (12,270 )
Flat
       -       -  
  (1.00 )(2)     n/a       n/a  
  (2.00 )(2)     n/a       n/a  

(1)
The rising 100 and 200 basis points and falling 100 and 200 basis point interest rate scenarios assume an immediate and parallel change in interest rates along the entire yield curve.
(2)
Due to the current rate environment, downward rate shifts were not run.

There are material limitations with TSFG’s models presented in Tables 31 and 32, 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 (i.e., 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.

The expected duration of the debt securities portfolio was approximately 3.2 years at December 31, 2009, an increase from approximately 2.9 years at December 31, 2008. If interest rates rise, the duration of the debt securities portfolio may extend. Conversely, if interest rates fall, the duration of the debt securities portfolio may decline. Since total securities include callable bonds and mortgage-backed securities, security paydowns are likely to accelerate if interest rates fall or decline if interest rates rise. Changes in interest rates and related prepayment activity impact yields and fair values of TSFG’s securities. For additional information related to interest rate risk, see Table 2 in “Loans” for selected loan maturity and interest sensitivity, Table 16 in “Securities” for investment securities maturity and related yields, Table 21 in “Deposits” for maturity distribution of time deposits and related yields, and Table 26 in “Liquidity” for maturities of long-term debt.

Derivatives and Hedging Activities. TSFG uses derivative instruments as part of its interest rate risk management activities to reduce risks associated with its lending, investment, deposit taking, and borrowing activities. Derivatives used for interest rate risk management may include interest rate swaps, interest rate floors, options, and futures contracts.

By using derivative instruments, TSFG is exposed to credit and market risk. Derivative credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, is equal to the extent of the fair value gain in a derivative, or the excess of the fair value of collateral posted against the fair value loss in a derivative. Derivative credit risk is created when the fair value of a derivative contract is positive, since this generally indicates that the counterparty owes us. When the fair value of a derivative is negative, credit risk exists to the extent that TSFG has posted collateral in excess of the fair value of the derivative. Derivative credit risk related to existing bank customers (in the case of “customer loan swaps” and foreign exchange contracts) is monitored through existing credit policies and procedures. Due to the current credit environment, TSFG has seen an increase in credit losses related to customer loan swaps. The effects of changes in interest rates or foreign exchange rates are evaluated across a range of possible options to limit the maximum exposures to individual customers. Customer loan swaps are generally cross-collateralized with the related loan.
 
 
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Counterparty credit risk with other derivative counterparties (generally money-center and super-regional financial institutions) is evaluated through existing policies and procedures. This evaluation considers the total relationship between TSFG and each of the counterparties. Individual limits are established by management and approved by the credit department. Institutional counterparties must have an investment grade credit rating and be approved by TSFG’s Asset/Liability Management Committee and Executive Credit Committee. A deterioration of the credit standing of one or more of the counterparties to these contracts may result in the related hedging relationships being deemed ineffective or in TSFG not achieving its desired economic hedging outcome.

Market risk is the adverse effect on the value of a financial instrument from a change in interest rates, or implied volatility of rates. TSFG manages the market risk associated with derivative contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The market risk associated with derivatives used for interest rate risk management activity is fully incorporated into our market risk sensitivity analysis.

TSFG records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheet, included in other assets or other liabilities. See Item 8, Note 15 to the Consolidated Financial Statements for the fair value of TSFG’s derivative assets and liabilities and their related notional amounts. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet 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.

Economic Risk

TSFG’s performance is impacted by U.S. and particularly Southeastern economic conditions, and as non-U.S. companies continue to move into TSFG’s footprint, by international economic circumstances. This includes the level of interest rates, price compression, competition, bankruptcy filings and unemployment rates, as well as political and international policies, regulatory guidelines and general developments. TSFG continues to monitor the economic situations in all areas of operations to achieve growth and limit risk.

Credit Risk

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

For 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. Deterioration in customers’ credit and in TSFG’s ability to collect on the derivative assets associated with customer swaps could negatively impact TSFG’s consolidated financial statements. If we are in a receivable position with respect to our interest rate swaps with customers, the fair value of the derivative asset represents additional credit exposure to the customer. At December 31, 2009, the total fair value of TSFG’s customer swap derivative assets was $25.7 million.

Liquidity Risks

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

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems, or external events. It includes reputation and franchise risks associated with business practices or market conduct that TSFG may undertake. TSFG has an operational risk management system with policies and procedures designed to help limit our operational risks.

 
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Compliance and Litigation Risks

TSFG is a public company in a heavily regulated industry. Failure to comply with applicable laws and regulations can result in monetary penalties and/or prohibition from conducting certain types of activities. Furthermore, TSFG’s conduct of business may result in litigation associated with contractual disputes or other alleged liability to third parties.

TSFG’s regulatory compliance risk is managed by our compliance group. This group works with our business lines regularly monitoring activities and evaluating policies and procedures. See Item 1, “Supervision and Regulation” for some of the laws and regulations which impact TSFG and its subsidiaries. TSFG has policies and control processes that are designed to help ensure compliance with applicable laws and regulations and limit litigation. These policies and control processes comply with the Gramm-Leach-Bliley Act, the Sarbanes-Oxley Act, and other regulatory guidance.

TSFG’s Audit Committee helps to ensure compliance with financial reporting matters. TSFG’s Audit Committee is involved in the following: selecting the independent auditor, communicating with the independent auditor, reviewing the financial statements and the results of the financial statement audit, monitoring the performance of the independent auditor, and monitoring the work of the internal audit function. The Audit Committee has chartered a Disclosure Committee to help ensure that TSFG's internal controls and reporting systems are sufficient to satisfy compliance with disclosure requirements related to TSFG’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

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.

For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. For retail customers, loan commitments are generally lines of credit secured by residential property. At December 31, 2009, commercial and retail loan commitments totaled $1.6 billion. Documentary letters of credit are typically issued in connection with customers’ trade financing requirements and totaled $2.1 million at December 31, 2009. Unused business credit card lines, which totaled $31.7 million at December 31, 2009, are generally for short-term borrowings.

Standby letters of credit represent an obligation of TSFG to a third party contingent upon the failure of TSFG’s customer to perform under the terms of an underlying contract with the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will be generally drawn only when the underlying event fails to occur as intended. TSFG has legal recourse to its customers for amounts paid, and these obligations are secured or unsecured, depending on the customers’ creditworthiness. Commitments under standby letters of credit are usually for one year or less. TSFG evaluates its obligation to perform as a guarantor and records reserves as deemed necessary. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2009 was $199.2 million.

TSFG applies essentially the same credit policies and standards as it does in the lending process when making these commitments. See Item 8, Note 21 to the Consolidated Financial Statements for additional information regarding lending commitments.

Derivatives. TSFG records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheet. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when

 
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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 Item 8, Note 15 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.

Quantitative and Qualitative Disclosures about Market Risk

See “Enterprise Risk Management” in Item 7, and Item 8, Notes 7, 15, and 31, for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.

 
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Financial Statements and Supplementary Data

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of The South Financial Group, Inc. (“TSFG”) and subsidiaries is committed to enhanced shareholder value, financial stability, and integrity in all dealings. Management has prepared the accompanying Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. The statements include amounts that are based on management's best estimates and judgments. Other financial information in this report is consistent with the Consolidated Financial Statements.

TSFG’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. TSFG’s internal control system is designed to provide reasonable assurance to TSFG’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. In meeting its responsibility, management relies on its internal control structure that is supplemented by a program of internal audits.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

TSFG’s management assessed the effectiveness of TSFG’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we believe that, as of December 31, 2009, TSFG’s internal control over financial reporting was effective.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited TSFG’s Consolidated Financial Statements and the effectiveness of TSFG’s internal control over financial reporting in accordance with standards of the Public Company Accounting Oversight Board (United States). PricewaterhouseCoopers LLP reviews the results of its audit with both management and the Audit Committee of the Board of Directors of TSFG. In connection with its audit, PricewaterhouseCoopers LLP has issued an attestation report on our internal control over financial reporting as of December 31, 2009. This attestation report “Report of Independent Registered Public Accounting Firm” appears on page 75.

The Audit Committee, composed entirely of independent directors, meets periodically with management, TSFG’s internal auditors and PricewaterhouseCoopers LLP (separately and jointly) to discuss audit, financial reporting and related matters. PricewaterhouseCoopers LLP and the internal auditors have direct access to the Audit Committee.

/s/ H. Lynn Harton
/s/ James R. Gordon
H. Lynn Harton
James R. Gordon
President and
Senior Executive Vice President
Chief Executive Officer
and Chief Financial Officer
March 16, 2010
March 16, 2010

 
74

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
The South Financial Group, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of shareholders' equity and comprehensive (loss) income and of cash flows present fairly, in all material respects, the financial position of The South Financial Group, Inc. and its subsidiaries at December 31, 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 16, 2010

 
75

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

   
December 31,
  
   
2009
    
2008
  
Assets
            
Cash and due from banks
   $ 383,184     $ 292,219  
Interest-bearing bank balances
     124       166  
Securities
                
Available for sale, at fair value
     2,095,401       2,071,658  
Held to maturity (fair value $129,496 in 2009 and $23,048 in 2008)
     127,516       22,709  
Total securities
     2,222,917       2,094,367  
Loans held for sale (includes $0 in 2009 and $14,681 in 2008 measured at fair value)
     15,758       30,963  
Loans held for investment
     8,386,127       10,192,072  
Less:  Allowance for loan losses
     (365,642 )     (247,086 )
Net loans held for investment
     8,020,485       9,944,986  
Bank-owned life insurance
     302,830       294,843  
Premises and equipment, net
     261,523       282,472  
Accrued interest receivable
     37,304       50,388  
Goodwill
     214,118       224,161  
Other intangible assets, net
     15,707       21,859  
Other assets
     421,032       365,902  
Total assets
   $ 11,894,982     $ 13,602,326  
                 
Liabilities and Shareholders' Equity
                
Liabilities
                
Deposits
                
Noninterest-bearing retail and commercial deposits
   $ 1,124,404     $ 1,041,140  
Interest-bearing retail and commercial deposits
     6,225,707       6,455,810  
Total retail and commercial deposits
     7,350,111       7,496,950  
Brokered deposits
     1,946,101       1,908,767  
Total deposits
     9,296,212       9,405,717  
Short-term borrowings
     322,702       1,626,374  
Long-term debt
     1,116,869       707,769  
Accrued interest payable
     36,658       71,465  
Other liabilities
     129,367       170,470  
Total liabilities
     10,901,808       11,981,795  
                 
Commitments and contingencies (Note 21)
                
                 
Shareholders' equity
                
Preferred stock-no par value; authorized 10,000,000 shares; issued and outstanding 351,650 shares in 2009 and 585,700 shares in 2008
     335,783       566,379  
Common stock-par value $1 per share; authorized 325,000,000 shares; issued and outstanding 215,455,541 shares in 2009 and 74,643,649 shares in 2008
     215,456       74,644  
Surplus
     1,344,984       1,135,920  
Retained deficit
     (934,598 )     (199,540 )
Accumulated other comprehensive income, net of tax
     30,938       42,558  
Other, net
     611       570  
Total shareholders' equity
     993,174       1,620,531  
Total liabilities and shareholders' equity
   $ 11,894,982     $ 13,602,326  

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

 
76

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

   
Year Ended December 31,
  
   
2009
    
2008
    
2007
  
                   
Interest Income
                  
Interest and fees on loans
   $ 466,493     $ 629,966     $ 764,828  
Interest and dividends on securities:
                        
Taxable
     73,527       81,744       103,525  
Exempt from federal income taxes
     7,885       9,945       11,601  
Total interest and dividends on securities
     81,412       91,689       115,126  
Interest on short-term investments
     1       385       402  
Total interest income
     547,906       722,040       880,356  
Interest Expense
                        
Interest on deposits
     190,586       275,003       368,295  
Interest on short-term borrowings
     2,259       34,775       79,853  
Interest on long-term debt
     23,529       32,099       49,427  
Total interest expense
     216,374       341,877       497,575  
Net Interest Income
     331,532       380,163       382,781  
Provision for Credit Losses
     668,904       344,589       68,568  
Net interest income after provision for credit losses
     (337,372 )     35,574       314,213  
Noninterest Income
     118,033       121,967       113,712  
Noninterest Expenses
     419,121       792,233       321,249  
(Loss) income before income taxes
     (638,460 )     (634,692 )     106,676  
Income tax expense (benefit)
     37,794       (87,574 )     33,400  
Net (Loss) Income
     (676,254 )     (547,118 )     73,276  
Preferred stock dividends
     (24,606 )     (21,261 )     -  
Deemed dividend resulting from induced conversion
     (32,388 )     -       -  
Deemed dividend resulting from accretion of discount
     (3,454 )     (243 )     -  
Amounts allocated to participating security holders
     (241 )     (154 )     (665 )
Net (Loss) Income Available to Common Shareholders
   $ (736,943 )   $ (568,776 )   $ 72,611  
                         
Average Common Shares Outstanding, Basic
     141,208       73,137       73,618  
Average Common Shares Outstanding, Diluted
     141,208       73,137       74,085  
(Loss) Earnings Per Common Share, Basic
   $ (5.22 )   $ (7.78 )   $ 0.99  
(Loss) Earnings Per Common Share, Diluted
     (5.22 )     (7.78 )     0.98  

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

 
77

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

                           
Retained
              
                           
Earnings
    
Accumulated
        
   
Shares of
                      
(Deficit)
    
Other
        
   
Common
    
Common
    
Preferred
          
and
    
Comprehensive
        
   
Stock
    
Stock
    
Stock
    
Surplus
    
Other
    
Income (Loss)
    
Total
  
Balance, December 31, 2006
     75,341,276     $ 75,341     $ -     $ 1,167,685     $ 367,110     $ (48,104 )   $ 1,562,032  
Net income
     -       -       -       -       73,276       -       73,276  
Other comprehensive income, net of tax of $18,292
     -       -       -       -       -       32,295       32,295  
Comprehensive income
     -       -       -       -       -       -       105,571  
Common dividends declared ($0.73 per share)
     -       -       -       -       (53,695 )     -       (53,695 )
Common stock activity:
                                                        
Stock repurchase
     (3,600,000 )     (3,600 )     -       (79,691 )     -       -       (83,291 )
Acquisitions
     7,918       8       -       183       -       -       191  
Exercise of options, including tax benefit of $1,067
     476,386       476       -       8,675       -       -       9,151  
Dividend reinvestment plan
     149,021       149       -       3,057       -       -       3,206  
Restricted stock plan
     39,617       40       -       3,078       (293 )     -       2,825  
Employee stock purchase plan
     19,378       19       -       402       -       -       421  
Director compensation
     22,098       22       -       512       -       -       534  
Cumulative effect of initial application of guidance related to uncertain tax positions
     -       -       -       -       (488 )     -       (488 )
Stock option expense
     -       -       -       3,657       -       -       3,657  
Other, net
     (489 )     -       -       43       151       -       194  
Balance, December 31, 2007
     72,455,205       72,455       -       1,107,601       386,061       (15,809 )     1,550,308  
Net loss
     -       -       -       -       (547,118 )     -       (547,118 )
Other comprehensive income, net of tax of $33,288
     -       -       -       -       -       58,367       58,367  
Comprehensive loss
     -       -       -       -       -       -       (488,751 )
Issuance of preferred stock
     -       -       577,436       (12,030 )     -       -       565,406  
Issuance of warrant to U. S. Treasury Department
     -       -       -       19,564       -       -       19,564  
Common dividends declared ($0.22 per share)
     -       -       -       -       (16,089 )     -       (16,089 )
Preferred dividends declared
     -       -       -       -       (21,261 )     -       (21,261 )
Accretion of discount on preferred stock
     -       -       243       -       (243 )     -       -  
Common stock activity:
                                                        
Conversion of preferred stock
     1,738,454       1,739       (11,300 )     9,561       -       -       -  
Dividend reinvestment plan
     225,805       226       -       1,707       -       -       1,933  
Restricted stock plan
     96,635       97       -       5,604       (163 )     -       5,538  
Director compensation
     70,422       70       -       460       -       -       530  
Employee stock purchase plan
     49,123       49       -       276       -       -       325  
Acquisitions
     4,403       4       -       20       -       -       24  
Exercise of options, including tax benefit of $6
     3,602       4       -       37       -       -       41  
Cumulative effect of initial application of guidance related to:
                                                        
Fair value option, net of tax of $32
     -       -       -       -       60       -       60  
Endorsement split-dollar life insurance
     -       -       -       -       (737 )     -       (737 )
Stock option expense
     -       -       -       3,179       -       -       3,179  
Other, net
     -       -       -       (59 )     520       -       461  
Balance, December 31, 2008
     74,643,649       74,644       566,379       1,135,920       (198,970 )     42,558       1,620,531  
Net loss
     -       -       -       -       (676,254 )     -       (676,254 )
Other comprehensive loss, net of tax of $6,606
     -       -       -       -       -       (11,620 )     (11,620 )
Comprehensive loss
     -       -       -       -       -       -       (687,874 )
Common dividends declared ($0.02 per share)
     -       -       -       -       (2,694 )     -       (2,694 )
Preferred dividends
     -       -       -       -       (20,268 )     -       (20,268 )
Accretion of discount on preferred stock
     -       -       3,454       -       (3,454 )     -       -  
Common stock activity:
                                                        
Issuance of common stock
     85,000,000       85,000       -       (5,275 )     -       -       79,725  
Conversion of preferred stock
     54,892,158       54,892       (234,050 )     210,180       (32,388 )     -       (1,366 )
Restricted stock plan
     348,561       349       -       1,233       -       -       1,582  
Director compensation
     144,763       145       -       102       -       -       247  
Dividend reinvestment plan
     150,627       151       -       78       -       -       229  
Employee stock purchase plan
     185,400       185       -       68       -       -       253  
Settlement of shareholder lawsuit
     91,033       91       -       15       -       -       106  
Stock option expense
     -       -       -       2,653       -       -       2,653  
Other, net
     (650 )     (1 )     -       10       41       -       50  
Balance, December 31, 2009
     215,455,541     $ 215,456     $ 335,783     $ 1,344,984     $ (933,987 )   $ 30,938     $ 993,174  

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

 
78

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

   
Year Ended December 31,
  
   
2009
    
2008
    
2007
  
                   
Cash Flows from Operating Activities
                  
Net (loss) income
   $ (676,254 )   $ (547,118 )   $ 73,276  
Adjustments to reconcile net (loss) income to net cash provided by operating activities
                        
Provision for credit losses
     668,904       344,589       68,568  
Deferred income tax expense (benefit)
     57,699       (47,206 )     7,426  
Depreciation, amortization, and accretion, net
     39,258       38,691       33,963  
Loss on other real estate owned
     32,435       633       401  
Impairment of long-lived assets
     21,600       -       -  
Loss on non-mortgage loans held for sale
     11,776       283       -  
(Gain) loss on securities
     (8,034 )     (3,108 )     4,623  
Gain on sale of ancillary businesses
     (7,234 )     -       -  
Share-based compensation expense
     4,890       9,936       7,469  
(Gain) loss on certain derivative activities
     (3,849 )     207       1,197  
(Gain) loss on early extinguishment of debt
     (3,043 )     2,086       2,029  
Gain on sale of mortgage loans
     (2,737 )     (3,314 )     (5,179 )
Goodwill impairment
     2,511       426,049       -  
Loss on disposition of premises and equipment
     279       342       70  
Gain on Visa IPO share redemption
     -       (1,904 )     -  
Excess tax benefits from share-based compensation
     -       (6 )     (1,067 )
Loss on derivative collateral
     -       1,061       -  
Origination of loans held for sale
     (320,535 )     (251,144 )     (411,539 )
Sale of loans held for sale and principal repayments
     346,035       278,840       454,948  
Increase in other assets
     (88,599 )     (17,732 )     (6,364 )
(Decrease) increase in other liabilities
     (39,052 )     12,861       (12,894 )
Net cash provided by operating activities
     36,050       244,046       216,927  
                         
Cash Flows from Investing Activities
                        
Sale of securities available for sale
     464,368       257,483       309,110  
Maturity, redemption, call, or principal repayments of securities available for sale
     635,835       490,181       483,630  
Maturity, redemption, call, or principal repayments of securities held to maturity
     25,190       16,983       12,655  
Purchase of securities available for sale
     (1,101,469 )     (813,272 )     (12,616 )
Purchase of securities held to maturity
     (131,435 )     -       (140 )
Net repayments (originations) of loans held for investment
     618,048       (328,088 )     (601,055 )
Sale of loans held for investment
     461,422       41,163       -  
Sale of other real estate owned
     55,208       12,324       4,746  
Sale of premises and equipment
     123       9       445  
Purchase of premises and equipment
     (37,332 )     (57,917 )     (35,658 )
Sale of long lived assets held for sale
     6,745       -       -  
Proceeds from sale of ancillary businesses
     16,584       -       -  
Cash equivalents acquired, net of payment for purchase acquisitions
     (321 )     3,332       (363 )
Net cash provided by (used for) investing activities
     1,012,966       (377,802 )     160,754  

See Notes to Consolidated Financial Statements, which are an integral part of these statements.

 
79

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

   
Year Ended December 31,
  
   
2009
    
2008
    
2007
  
                   
Cash Flows from Financing Activities
                  
(Decrease) increase in deposits
   $ (112,370 )   $ (407,440 )   $ 249,876  
Decrease in short-term borrowings
     (1,303,699 )     (12,140 )     (132,959 )
Issuance of long-term debt
     550,000       203,320       126,290  
Payment of long-term debt
     (137,866 )     (200,169 )     (557,726 )
Cash dividends paid on common stock
     (3,440 )     (29,106 )     (53,493 )
Cash dividends paid on preferred stock
     (29,609 )     (11,920 )     -  
Issuance of common stock, net
     79,725       -       -  
Repurchase of common stock
     -       -       (83,291 )
Conversion of preferred stock
     (1,366 )     -       -  
Issuance of preferred stock and warrant, net
     -       584,970       -  
Excess tax benefits from share-based compensation
     -       6       1,067  
Other common stock activity
     532       2,095       11,249  
    Net cash (used for) provided by financing activities
     (958,093 )     129,616       (438,987 )
Net change in cash and cash equivalents
     90,923       (4,140 )     (61,306 )
Cash and cash equivalents at beginning of year
     292,385       296,525       357,831  
Cash and cash equivalents at end of year
   $ 383,308     $ 292,385     $ 296,525  
                         
Supplemental Cash Flow Data
                        
Interest paid, net of amounts capitalized
   $ 244,169     $ 355,460     $ 492,913  
Income tax (refunds) payments, net
     (47,023 )     (5,927 )     30,313  
Significant non-cash investing and financing transactions:
                        
   Unrealized gain on available for sale securities
     17,493       59,790       26,461  
   Conversion of preferred stock into common stock
     234,050       11,300       -  
   Loans transferred from held for investment to held for sale
     557,019       63,929       -  
   Loans transferred from held for sale to held for investment
     -       3,060       59  
   Loans transferred to other real estate owned
     165,061       51,158       8,173  
                         
           
See Notes to Consolidated Financial Statements, which are an integral part of these statements.

 
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THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.
Summary of Significant Accounting Policies

The accounting and reporting policies followed by The South Financial Group, Inc. and all its subsidiaries and the methods of applying these policies conform with U.S. generally accepted accounting principles and with general practices within the banking industry. Certain policies, which significantly affect the determination of financial position, results of operations and cash flows, are summarized below. “TSFG” refers to The South Financial Group, Inc. and its subsidiaries, except where the context requires otherwise.

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 December 31, 2009, TSFG operated through 83 branch offices in South Carolina, 67 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.

The substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected TSFG’s 2009 results and capital levels. The significant loss in 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced TSFG’s and Carolina First Bank’s capital levels. In order to remain well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to absorb the potential future credit losses associated with the disposition of its nonperforming assets. While regulatory ratios were not impacted by the valuation allowance, the tangible common equity ratio, which is an important measure to investors, debt rating agencies, and others, was significantly impacted by the valuation allowance. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the conversion of certain debt and non-common equity instruments into common stock and/or cash and/or the issuance of additional equity in public or private offerings. TSFG is actively evaluating a number of capital sources, asset reductions, and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. TSFG is currently reducing its balance sheet to improve capital ratios.

Current market conditions for banking institutions, the overall uncertainty in financial markets, and TSFG’s credit rating downgrades and depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments between Carolina First Bank and TSFG, TSFG may be unable to discharge its liabilities in the normal course of business. There can be no assurance that TSFG will be successful in any efforts to raise additional capital during 2010.

Both the parent company and the banking subsidiary actively manage liquidity and cash flow needs. The parent company does not have any debt maturing during 2010 or 2011. TSFG has suspended its common and preferred dividends to shareholders until such time as the Company returns to profitability. At December 31, 2009, the parent company had $56.2

 
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million of cash and cash equivalents. (See Note 33, Parent Company Financial Information.) TSFG expects to use a portion of this cash to capitalize the banking subsidiary.

Cash and cash equivalents at the banking subsidiary at December 31, 2009 were approximately $383 million. Carolina First Bank has $179,000 of long-term debt maturing in 2010. Liquidity at the bank level is dependent upon the deposit franchise which funds 78.2% of the Company’s assets (or 61.8% excluding brokered CDs). The FDIC’s temporary changes to increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts have contributed to the stable deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $625 million currently, and would increase to approximately $1.5 billion without the benefit of the FDIC’s TAGP, currently scheduled to expire at June 30, 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 $265 million currently, and would increase to approximately $750 million without the benefit of the TAGP. Public deposits which are currently insured but which would be uninsured and would therefore require collateralization without the benefit of the TAGP totaled $350 million at December 31, 2009. Free securities of $1.2 billion would meet incremental collateral needs and, along with surplus cash of approximately $200 million at year-end, represent reserves to address liquidity needs in a crisis scenario. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on recently approved limitations on maximum interest rates offered by institutions that are not well capitalized.
 
During 2009 and early 2010, several rating agencies lowered their credit ratings for TSFG and/or Carolina First Bank. These ratings changes did not have a material impact on TSFG’s liquidity given that we have no debt for which a downgrade of our credit ratings would trigger early termination and a credit rating downgrade has not historically impacted access to our primary funding sources. However, certain downgrade levels could require the Company to post additional collateral to secure certain transactions (such as derivatives and certain borrowings) or could enable certain counterparties to rescind transactions at their option. Such requirements are not expected to materially impact the Company’s overall liquidity. In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations. Given the weakened economy, current market conditions, and our recent credit ratings downgrades, there is no assurance that TSFG will, if it chooses to do so, be able to obtain new borrowings or issue additional equity on terms that are satisfactory.

Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. A consent order would, among other things, result in Carolina First Bank being deemed “adequately capitalized” (irrespective of the fact that it may be “well capitalized”) and could require that the Company raise additional capital within a specified timeframe and limit TSFG's  access to the brokered CD market and restrict the rates it can offer on customer deposits. In addition, a consent order would likely impose higher capital ratios on Carolina First Bank than would otherwise be required. If the Company is unable to raise the capital required or otherwise comply with the terms of any such consent order, further regulatory actions could be taken, and its ability to operate as a going concern could be negatively impacted. Furthermore, because such consent orders are public, there could be an adverse customer or market reaction to such announcement.

Based on current and expected liquidity needs and sources, management expects TSFG to be able to meet its obligations at least through December 31, 2010. If unanticipated market factors emerge, or if the Company is unable to raise additional capital, successfully execute its plans, or comply with regulatory requirements, then its banking regulators could take further action, which could include actions that may have a material adverse effect on the Company’s business, results of operations and financial position.

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

 
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(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.

TSFG determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under U.S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns, and the right to make decisions about the entity's activities. TSFG consolidates voting interest entities in which it has all, or at least majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (“VIEs”) are entities that lack one or more of the characteristics of a voting interest entity described above. A controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. At December 31, 2009, TSFG had six subsidiaries that were VIEs for which TSFG was not the primary beneficiary. Accordingly, the accounts of these statutory business trusts (“Trusts”) were not included in TSFG’s Consolidated Financial Statements. At December 31, 2009 and 2008, the Trusts had outstanding trust preferred securities with an aggregate par value of $200.5 million. At December 31, 2009 and 2008, the principal assets of the Trusts are $206.7 million of the Company’s subordinated notes with identical rates of interest and maturities as the trust preferred securities (see Note 20). At December 31, 2009 and 2008, the Trusts have issued $6.2 million of common securities to the Company. The Company records interest expense on the subordinated debt and recognizes the dividend income on the common stock of the trust entities.

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2009 presentation.

Accounting Standards Codification

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles (“GAAP”) applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

Business Combinations

For all business combination transactions initiated after June 30, 2001, the purchase method of accounting has been used, and accordingly, the assets and liabilities of the acquired company have been recorded at their estimated fair values as of the merger date. The fair values are subject to adjustment as information relative to the fair values as of the acquisition date becomes available. The Consolidated Financial Statements include the results of operations of any acquired company since the acquisition date.

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.

 
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Securities

TSFG classifies its investment securities in one of three categories: trading, available for sale or held to maturity. Trading securities are bought and held principally for the purpose of selling in the near term. Securities held to maturity are debt securities in which TSFG has the ability and intent to hold until maturity. All securities not included in trading or held to maturity are classified as available for sale. TSFG classifies its investment securities at the date of commitment or purchase.

Trading securities are carried at fair value. Adjustments for realized and unrealized gains or losses from trading securities are included in noninterest income.

Securities available for sale are carried at fair value. Such securities are used to execute asset/liability management strategy, manage liquidity, collateralize public deposits, borrowings, and derivatives, and leverage capital. Adjustments for unrealized gains or losses, net of the income tax effect, are made to accumulated other comprehensive income (loss), a separate component of shareholders' equity.

Securities held to maturity are stated at cost, net of unamortized balances of premiums and discounts.

TSFG generally determines the fair value of its securities based on quoted market prices and/or observable market data. On a quarterly basis, TSFG evaluates declines in the market value below cost of any available for sale or held to maturity security for other-than-temporary impairment and, if necessary, charges the unrealized loss to operations (or, in certain cases, charges the unrealized loss attributable to credit to operations) and establishes a new cost basis. To determine whether impairment is other-than-temporary, TSFG considers the reasons for the impairment, recent events specific to the issuer or industry, the severity and duration of the impairment, volatility of fair value, changes in value subsequent to period-end, external credit ratings, and forecasted performance of the investee. In addition, TSFG considers whether it intends to sell the security, whether it more likely than not will be required to sell the security, and whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. As the forecasted market price recovery period lengthens, the uncertainties inherent in the estimate increase, impacting the reliability of that estimate. To be included in assessment of recoverability, market price recoveries must reasonably be expected to occur within an acceptable forecast period. Ultimately, a lack of objective evidence to support recovery of a security’s cost over a reasonable period of time will result in an other-than-temporary impairment charge.

Dividend and interest income are recognized when earned. Premiums and discounts are amortized or accreted over the expected life of the related held to maturity or available for sale security as an adjustment to yield. Gains or losses on the sale of securities are recognized on a specific identification, trade date basis.

Loans Held for Sale

Loans held for sale include residential mortgage loans intended to be sold in the secondary market and other loans that management has an active plan to sell. Effective January 1, 2008, TSFG elected to carry its portfolio of mortgage loans held for sale at fair value. However, effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis. 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 of sale and are determined by the difference between net sales proceeds and the carrying value of the loans sold.

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.

 
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Loans Held for Investment

Loans held for investment are reported at their outstanding principal balances, adjusted for any deferred fees (net of associated direct costs) and unamortized premiums or unearned discounts. TSFG recognizes interest on the unpaid balance of the loans when earned. The net amount of the nonrefundable loan origination fees, commitment fees, and certain direct costs associated with the lending process are deferred and amortized to interest income over the term of the loan. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on 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. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Loans are charged-off (if unsecured) or written-down (if secured) when losses are reasonably quantifiable. Commercial loans are generally placed in nonaccrual status (if secured) or charged-off (if unsecured) when full collection of principal and interest becomes doubtful or when they become 90-days delinquent. Consumer loans are generally placed in nonaccrual status (if secured) or charged-off (if unsecured) when they become greater than 120 days past due or upon determination that full collection of principal and interest is doubtful. Mortgage loans are generally placed in nonaccrual status when they become greater than 150 days past due or upon determination that full collection of principal and interest is doubtful. Once placed in nonaccrual, in the event the net realizable liquidation value of the collateral is less than the principal balance of the mortgage loan, the anticipated deficiency balance is charged off.

When loans are placed in nonaccrual status, accrued but unpaid interest is charged against accrued interest income. Interest payments received on nonaccrual loans are applied as a reduction of principal. Generally, loans are returned to accrual status when the loan is brought current and ultimate collectibility of principal and interest is no longer in doubt. TSFG defines past due loans based upon contractual maturity.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring. TSFG designates loan modifications as troubled debt restructurings (TDRs) when, for economic or legal reasons related to the borrower’s financial difficulties, it grants a concession to the borrower that it would not otherwise consider. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of modification are initially classified as accruing TDRs at the date of modification, if the note is reasonably assured of repayment and performance in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the modification date if reasonable doubt exists as to the collection of interest or principal under the restructure agreement. TDRs are returned to accruing status when there is economic substance to the restructuring, any portion of the debt not expected to be repaid has been charged off, the remaining note is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally six months). At December 31, 2009, total TDRs were $33.8 million of which $26.1 million were accruing restructured loans. TSFG does not have significant commitments to lend additional funds to borrowers whose loans have been modified as a TDR.
 
Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses and reserve for unfunded lending commitments are based on management's ongoing evaluation of the loan portfolio and unfunded lending commitments and reflect an amount that, in management's opinion, is adequate to absorb probable incurred losses in these items. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the loan portfolio, and management's estimate of credit losses. Loans are charged against the allowance at such time as they are determined to be losses. Subsequent recoveries are credited to the allowance.

Management considers the year-end allowance appropriate and adequate to cover probable incurred losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about current events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. In addition, various regulatory agencies periodically review TSFG's allowance for loan losses as part of their examination process and could require TSFG to adjust its allowance for loan losses based on information available to them at the time of their examination.

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

Concentrations of Credit Risk

TSFG’s loans are concentrated predominantly in South Carolina, western North Carolina and larger markets in Florida. In addition, commercial real estate loans in South Carolina, North Carolina and Florida represented 41.8% of the total loan portfolio as of December 31, 2009. Because of the concentration of real estate and other loans in the same geographic regions, adverse economic conditions in these areas have contributed to higher rates of loss and delinquency on TSFG’s loans than if the loans had been more diversified on a geographic or product basis.

Premises and Equipment

Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets. Leasehold improvements and capital leases are amortized over the terms of the respective lease or the estimated useful lives of the improvements, whichever is shorter. Depreciation and amortization are computed primarily using the straight-line method. Estimated useful lives generally range from 30 to 40 years for buildings, 3 to 12 years for furniture, fixtures, and equipment, 5 to 7 years for capitalized software, and 3 to 30 years for leasehold improvements.

Additions to premises and equipment and major replacements or improvements are capitalized at cost. Maintenance, repairs, and minor replacements are expensed when incurred.

Impairment of Long-Lived Assets

TSFG periodically reviews the carrying value of its long-lived assets including premises and equipment for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be fully recoverable. For long-lived assets to be held and used, impairments are recognized when the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

Long-lived assets to be disposed of by abandonment or in an exchange for a similar productive long-lived asset are classified as held and used until disposed of.

Long-lived assets to be sold are classified as held for sale and are no longer depreciated. Certain criteria have to be met in order for the long-lived asset to be classified as held for sale, including that a sale is probable and expected to occur within one year. Long-lived assets classified as held for sale are recorded at the lower of their carrying amount or fair value less the cost to sell.

Goodwill and Intangible Assets

Intangible assets include goodwill and other identifiable assets, such as core deposit intangibles, customer list intangibles, and non-compete agreement intangibles, resulting from TSFG acquisitions. Core deposit intangibles are amortized over 5 to 15 years using the straight-line or the sum-of-the-years' digits method based upon historical studies of core deposits. The non-compete agreement intangibles are amortized on a straight-line basis over the non-compete period, which is generally seven years or less. Customer list intangibles are amortized on a straight-line or accelerated basis over their estimated useful life of 10 to 17 years. Goodwill is not amortized but tested annually for impairment or at any time an event occurs or circumstances change that may trigger a decline in the value of the reporting unit. Examples of such events or circumstances include adverse changes in results of operations, legal factors, business climate, unanticipated competition, change in regulatory environment, or loss of key personnel.

TSFG’s other intangible assets have an estimated finite useful life and are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset. TSFG periodically reviews its other intangible assets for impairment.

 
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Derivative Financial Instruments and Hedging Activities

TSFG’s derivative activities, along with its other exposures to market risk, are monitored by its Asset/Liability Committee (“ALCO”) based upon the interest rate risk guidelines TSFG has established. Market risk is the adverse effect on the value of a financial instrument from a change in interest rates, implied volatility of rates, counterparty credit risk and other market-driven factors. TSFG manages the market risk associated with derivative contracts by establishing and monitoring limits as to the types and degree of risk that may be undertaken. The market risk associated with trading and derivative activities used for risk management activities is fully incorporated into its market risk sensitivity analysis.

TSFG uses derivatives to manage exposure to interest rate risk and offers derivatives to its customers which they use to meet their risk management objectives. TSFG manages risks associated with its lending, investment, deposit taking, and borrowing activities. Derivatives for interest rate risk management include interest rate swaps, floors, options, and futures contracts. Interest rate swaps used by TSFG effectively convert specific fixed rate borrowings to a floating rate index, or vice versa, or serve to convert prime-based or LIBOR-based variable loan cash flows to fixed rate income streams. TSFG has also entered into swap contracts that effectively convert exposure taken on through the issuance of equity-linked and inflation-indexed certificates of deposit to LIBOR-based funding.

TSFG enters into forward sales commitments to hedge the interest rate risk arising from its mortgage banking activities. The Company may also, from time to time, enter into certain option and futures contracts that are not designated as hedging a specific asset, liability or forecasted transaction and are therefore considered trading positions. Such options and futures contracts typically have indices that relate to the pricing of specific on-balance sheet instruments and forecasted transactions and may be more speculative in nature. TSFG has policies that limit the amount of outstanding trading positions.
 
TSFG also offers various derivatives, including interest rate, commodity, equity, credit, and foreign exchange contracts, to its customers; however TSFG attempts to neutralize its market risk exposure with offsetting financial contracts from third party dealers. All derivative contracts associated with these programs are carried at fair value and are not considered hedges.
 
TSFG uses derivatives to effectively modify the repricing characteristics of certain assets and liabilities so that any significant adverse effect on net interest income and cash flows from changes in interest rates is mitigated, and to better match the repricing profile of our interest bearing assets and liabilities. As a result of interest rate fluctuations, certain interest-sensitive assets and liabilities will gain or lose market value. In an effective fair value hedging strategy, the effect of this change in value will generally be offset by a corresponding change in value on the derivatives linked to the hedged assets and liabilities. In an effective cash flow hedging strategy, the variability of cash flows due to interest rate fluctuations on floating rate instruments is managed by derivatives that effectively lock-in the amount of cash payments or receipts.
 
By using derivative instruments, TSFG is also exposed to credit risk. Credit risk, which is the risk that a counterparty to a derivative instrument will fail to perform, equals the fair value gain in a derivative or the excess of the fair value of collateral posted against the fair value loss in a derivative. Credit risk is created when the fair value of a derivative contract is positive, since this generally indicates that the counterparty owes TSFG. When the fair value of a derivative is negative, credit risk exists to the extent that TSFG has posted collateral in excess of the fair value of the derivative. Derivative credit risk related to existing bank customers (in the case of “customer loan swaps” and foreign exchange contracts) is monitored through existing credit policies and procedures. The effects of changes in interest rates or foreign exchange rates are evaluated across a range of possible options to limit the maximum exposures to individual customers. Customer loan swaps are generally cross-collateralized with the related loan. TSFG evaluates the credit risk of its bank customer counterparties for purposes of potential adjustments to the value of its customer swaps.

Counterparty credit risk with other derivative counterparties (generally money-center and super-regional financial institutions) is evaluated through existing policies and procedures. This evaluation considers the total relationship between TSFG and each of the counterparties. Individual limits are established by management and approved by the credit department. Institutional counterparties must have an investment grade credit rating and be approved by TSFG’s ALCO and Executive Credit Committee.

A deterioration of the credit standing of one or more of the counterparties to these contracts may result in the related hedging relationships being deemed ineffective or in TSFG not achieving its desired economic hedging outcome.

 
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At the inception of a hedge transaction, TSFG formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking the hedge. This process includes identification of the hedging instrument, hedged item, risk being hedged and the method for assessing effectiveness and measuring ineffectiveness. In addition, on a quarterly basis, TSFG assesses whether the derivative used in the hedging transaction is highly effective in offsetting changes in fair value or cash flows of the hedged item, and measures and records any ineffectiveness.

All derivatives are recognized on the consolidated balance sheet in either other assets or other liabilities at their fair value. On the trade date, TSFG designates the derivative as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation. Changes in fair value for derivatives that qualify as fair value hedges are recorded along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk as noninterest income in the consolidated statements of operations. Changes in fair value for derivatives that qualify as cash flow hedges are recorded through other comprehensive income (net of tax) in shareholders' equity to the extent that the hedge is effective. The net cash settlement on derivatives qualifying for hedge accounting is recorded in interest income or interest expense, as appropriate, based on the item being hedged. The net cash settlement on derivatives not qualifying for hedge accounting is included in noninterest income. Changes in the fair value of derivative instruments that fail to meet the criteria for hedge designation are recorded as noninterest income in the consolidated statements of income. TSFG has elected not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral.

TSFG discontinues hedge accounting when the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; the derivative expires or is sold, terminated or exercised; the derivative is dedesignated as a hedge instrument because it is unlikely that the forecasted transaction will occur; or management determines that designation of the derivative as a hedge instrument is no longer appropriate.

When hedge accounting is discontinued, the future gains and losses on derivatives are recognized as noninterest income in the consolidated statements of operations. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transaction are still expected to occur, gains and losses that were accumulated in other comprehensive income are amortized or accreted into earnings as the hedged cash flows impact earnings. They are recognized in earnings immediately if the cash flow hedge was discontinued because a forecasted transaction is no longer probable of occurring.

TSFG may occasionally enter into a contract (the host contract) that contains an embedded derivative. If applicable, an embedded derivative is separated from the host contract, recorded at fair value and can be designated as a hedge that qualifies for hedge accounting; otherwise, the derivative is recorded at fair value with gains and losses recognized in the consolidated statements of operations. TSFG’s equity-linked certificates of deposit contain embedded derivatives that require separation from the host contract.

Other Investments

TSFG accounts for its investments in limited partnerships, limited liability companies (“LLCs”), and other privately held companies using either the cost or the equity method of accounting. The accounting treatment depends upon TSFG’s percentage ownership and degree of management influence.

Under the cost method of accounting, TSFG records an investment in stock at cost and generally recognizes cash dividends received as income. If cash dividends received exceed the investee’s earnings since the investment date, these payments are considered a return of investment and reduce the cost of the investment.

Under the equity method of accounting, TSFG records its initial investment at cost. Subsequently, the carrying amount of the investment is increased or decreased to reflect TSFG’s share of income or loss of the investee. TSFG’s recognition of earnings or losses from an equity method investment is based on TSFG’s ownership percentage in the limited partnership or LLC and the investee’s earnings. The limited partnerships and LLCs generally provide their financial information during the quarter following the end of a given period. TSFG’s policy is to record its share of earnings or losses on equity method investments in the quarter the financial information is received.

 
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All of the limited partnerships and LLCs in which TSFG invests are privately held, and their market values are not readily available. TSFG’s management evaluates its investments in limited partnerships and LLCs for impairment based on the investee’s ability to generate cash through its operations or obtain alternative financing, and other subjective factors. There are inherent risks associated with TSFG’s investments in limited partnerships and LLCs, which may result in income statement volatility in future periods.

Federal Home Loan Bank Stock

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, as cost approximates fair value and there is no ready market for such investments. At December 31, 2009 and 2008, FHLB stock totaled $58.8 million and $35.5 million, respectively.

Bank-Owned Life Insurance

TSFG has purchased life insurance policies on certain key employees. These policies, both general and separate accounts, are recorded at their cash surrender value, or the amount that can be realized, inclusive of certain stable value contracts associated with the separate account policies. At December 31, 2009, bank-owned life insurance included approximately $153 million held in separate accounts and approximately $150 million held in general accounts. Income from these policies and changes in the net cash surrender value are recorded in noninterest income.

Foreclosed Property

Other real estate owned (“OREO”), included in other assets, is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The property is classified as held for sale when the sale is probable and is expected to occur within one year. The property is initially carried 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. Principal losses existing at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required to the carrying value of these properties and gains and losses realized from the sale of other real estate owned are included in noninterest expense. Costs related to the development and improvements of such property are capitalized, whereas the costs related to holding the property are charged to expense.

Personal property repossessions are acquired in partial or total satisfaction of problem loans and are included in other assets. These repossessions are initially carried at the lower of cost or estimated fair value. Principal losses existing at the time of acquisition of such personal properties are charged against the allowance for loan losses. Personal property repossessions totaled $1.2 million and $4.3 million at December 31, 2009 and 2008, respectively.

Debt Issuance Costs

TSFG amortizes debt issuance costs over the life of the related debt using a method that approximates the effective interest method.

Borrowed Funds

TSFG’s short-term borrowings are defined as borrowings with maturities of one year or less when made. Long-term borrowings have maturities greater than one year when made. Any premium or discount on borrowed funds is amortized over the term of the borrowing.

Commitments and Contingencies

Contingencies arising from environmental remediation costs, claims, assessments, guarantees, litigation, recourse reserves, fines, penalties and other sources are recorded when deemed probable and estimable.

 
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Deposit Accounts

TSFG recognizes service charges on deposit accounts when collected. Any premium or discount on fixed maturity deposits is amortized over the term of the deposits.

TSFG is charged a fee in connection with its acquisition of brokered certificates of deposit. The fee is included in other assets as a prepaid charge and is amortized into interest expense over the life of the brokered CD on a straight-line basis.

Fair Value

TSFG determines the fair market values of its financial instruments based on the fair value hierarchy established in FASB ASC 820, “Fair Value Measurements and Disclosures,” which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

TSFG carries securities available for sale and derivative assets and liabilities at fair value on a recurring basis.

Income Taxes

TSFG accounts for income taxes under the asset and liability method. The federal taxable operating results of TSFG and its eligible subsidiaries are included in its consolidated federal income tax return. Each subsidiary included in the consolidated federal income tax return receives an allocation of federal income taxes due to the Parent Company or is allocated a receivable from the Parent Company to the extent tax benefits are realized. Where federal and state tax laws do not permit consolidated or combined income tax returns, applicable separate subsidiary federal or state income tax returns are filed and payment, if any, is remitted directly to the federal or state governments from such subsidiary. In addition, TSFG periodically reviews the sustainability of its federal and state income tax positions and, if necessary, records contingent tax liabilities.

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis and operating loss and income tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Management regularly reviews deferred tax assets for recoverability, and in situations where it is “more likely than not” that a deferred tax asset is not realizable, a valuation allowance is recorded. At December 31, 2009, the Company had recorded a full valuation allowance against its net deferred tax asset.

Preferred Stock

Preferred stock ranks senior to common shares with respect to dividends and has preference in the event of liquidation. Preferred stock is reported in shareholders’ equity unless it is mandatorily redeemable or it embodies an unconditional obligation

 
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that the Company must or may settle in shares whose monetary value at inception is based solely or predominantly on any of the following: (1) a fixed amount known at inception, (2) variations in something other than the fair value of the Company’s equity shares, or (3) variations inversely related to changes in the fair value of the Company’s equity shares. Dividends declared on preferred stock are accounted for as a reduction in retained earnings. Issuance costs are charged against surplus. Any premium or discount on preferred stock is amortized over the expected term of the borrowing using the effective interest method.

Comprehensive Income (Loss)

Comprehensive income (loss) is the change in TSFG's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). TSFG's other comprehensive income (loss) and accumulated other comprehensive income (loss) are comprised of unrealized gains and losses on certain investments in debt securities, equity securities, and derivatives that qualify as cash flow hedges to the extent that the hedge is effective.

Share-Based Compensation

TSFG recognizes the grant-date fair value of stock options and other equity-based compensation issued to employees in the statement of operations. The way an award is classified will affect the measurement of compensation cost. Liability-classified awards are remeasured to fair value at each balance-sheet date until the award is settled. Equity-classified awards are measured at grant-date fair value, amortized over the subsequent vesting period, and are not subsequently remeasured. The fair value of non-vested stock awards for the purposes of recognizing stock-based compensation expense is the market price of the stock on the grant date. The fair value of options is estimated on the grant date using a Monte Carlo simulation method for market-based stock options and the Black-Scholes option pricing model for all other options.

Compensation cost is based on awards ultimately expected to vest; consequently, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. TSFG has elected to expense future grants of awards with graded vesting on a straight-line basis over the requisite service period of the entire award.

Cash flows resulting from tax deductions in excess of the grant-date fair value of share-based awards are included in cash flows from financing activities. Cash flows from financing activities for 2009, 2008, and 2007 included $0, $6,000, and $1.1 million, respectively, in cash inflows from excess tax benefits related to stock compensation. TSFG has elected the “short-cut method” to determine the pool of windfall tax benefits.

Per Share Data

Effective January 1, 2009, TSFG adopted new guidance which states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. TSFG has determined that certain of its outstanding nonvested restricted stock and restricted stock units are participating securities. Accordingly, effective January 1, 2009, earnings per common share is computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

Under the two-class method, basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the year, excluding outstanding participating securities. For diluted earnings per share, the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. In addition, if the denominator has been adjusted as per the prior sentence, then the numerator is adjusted to add back any convertible preferred dividends. If dilutive, common stock equivalents are calculated for options, warrants, restricted stock, and restricted stock units using the treasury stock method and for convertible securities using the if-converted method.

Business Segments

TSFG identifies operating segments as components of its business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assess performance. Public enterprises are required to report a measure of segment profit or loss, certain specific revenue and expense items, segment assets,

 
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information about the way that the operating segments were determined and other items. TSFG has two reportable operating segments: Carolina First and Mercantile.

Risk and Uncertainties

In the normal course of its business, TSFG encounters significant economic, liquidity, and regulatory risks. There are two main components of economic risk: credit risk and market risk. Credit risk is primarily the risk of default on TSFG's loan portfolio and other credit exposures that results from borrowers' failure to make contractually required payments. Market risk arises principally from interest rate risk inherent in TSFG's lending, investing, deposit, and borrowing activities.

Liquidity risk is the risk that TSFG will be unable to meet a financial commitment to a customer, creditor, or investor when due.

TSFG is subject to the regulations of various government agencies. These regulations may change significantly from period to period. TSFG also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination.

The global and U.S. economies are experiencing volatility, and a challenging business climate is forecast for the foreseeable future. A continued economic downturn and volatility in the financial markets could significantly affect the estimates, judgments and assumptions used in the preparation of the Consolidated Financial Statements, and could lead to increased levels of credit losses, impairment of goodwill and other intangible assets, investments, or other assets.

Subsequent Events

TSFG has evaluated subsequent events for potential recognition and/or disclosure through March 16, 2010, the date the Consolidated Financial Statements included in this Annual Report on Form 10-K were issued.

Recently Adopted Accounting Pronouncements

Fair Value Measurements

TSFG adopted new guidance affecting FASB ASC 820, “Fair Value Measurements and Disclosures,” on January 1, 2008 for financial assets and liabilities with no significant impact on its Consolidated Financial Statements. This guidance defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. This guidance does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. This guidance was effective for nonfinancial assets and liabilities measured at fair value on a nonrecurring basis in fiscal years beginning after November 15, 2008. As a result, TSFG adopted this guidance for nonfinancial assets and liabilities effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

Business Combinations

FASB ASC 805, “Business Combinations,” reflects new guidance which requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous standards whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. The new guidance requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case. Under the new guidance, the requirements of FASB ASC 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of FASB ASC 450, “Contingencies.”  TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements. However, TSFG expects the new guidance to have a significant effect on the accounting for future acquisitions, if any.

 
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Noncontrolling Interests in Consolidated Financial Statements

FASB ASC 810-10, “Consolidation,” reflects new guidance which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The new guidance clarifies that a non-controlling interest in a subsidiary, which was previously referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of operations, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. TSFG adopted this guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

Disclosures about Derivative Instruments and Hedging Activities

FASB ASC 815-10, "Derivatives and Hedging," reflects new guidance which amends and expands the disclosure requirements related to derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under FASB ASC 815-10, and (iii) how derivative instruments and related hedged items affect an entity's financial position, results of operations and cash flows. To meet those objectives, the new guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. TSFG adopted this guidance effective January 1, 2009 and has included the required disclosures in Note 15.

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

FASB ASC 260-10, “Earnings Per Share,” reflects new guidance that states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. TSFG adopted this guidance effective January 1, 2009 and has determined that certain of its outstanding nonvested restricted stock and restricted stock units are participating securities. Accordingly, earnings per common share has been computed using the two-class method. All previously reported earnings per common share data has been retrospectively adjusted to conform to the new computation method.

Determination of the Useful Life of Intangible Assets and Accounting for Defensive Intangible Assets

FASB ASC 350-30, “General Intangibles Other Than Goodwill,” reflects new guidance that amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This Subtopic also reflects new guidance that clarifies how to account for defensive intangible assets subsequent to initial measurement. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

Equity Method Investment Accounting Considerations

FASB ASC 323, “Investments - Equity Method and Joint Ventures,” reflects new guidance which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. TSFG adopted this new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.
 
 
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly

FASB ASC 820, “Fair Value Measurements and Disclosures,” reflects new guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and for determining when a transaction is an orderly one. TSFG adopted this new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.

 
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Interim Disclosures about Fair Value of Financial Instruments

FASB ASC 825, “Financial Instruments,” reflects new guidance which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. TSFG adopted this new guidance effective second quarter 2009 and has included the required disclosures in Note 31.

Recognition and Presentation of Other-Than-Temporary Impairments

FASB ASC 320-10, “Investments – Debt and Equity Securities,” reflects new guidance on other-than-temporary impairment for debt securities to make the standard more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. TSFG adopted the new guidance effective second quarter 2009 with no significant impact on its Consolidated Financial Statements.

Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies

FASB ASC 805, “Business Combinations,” reflects new guidance which requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with FASB ASC 450, “Contingencies.” The new guidance removes subsequent accounting guidance for assets and liabilities arising from contingencies from FASB ASC 805 and requires entities to develop a systematic and rational basis for subsequently measuring and accounting for assets and liabilities arising from contingencies. The new guidance eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, entities are required to include only the disclosure required by FASB ASC 450. The new guidance also requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value. TSFG adopted the new guidance effective January 1, 2009 with no significant impact on its Consolidated Financial Statements.

Subsequent Events

FASB ASC 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. TSFG adopted the new guidance effective second quarter 2009. However, Accounting Standards Update 2010-09 (“ASU 2010-09”) amends this guidance to remove the disclosure requirement regarding the date through which an SEC filer has evaluated subsequent events. TSFG adopted ASU 2010-09 in first quarter 2010.

Measuring Liabilities at Fair Value

Accounting Standards Update 2009-05 (“ASU 2009-05”), “Measuring Liabilities at Fair Value,” modifies existing fair value guidance to permit companies determining the fair value of a liability to use the perspective of an investor that holds the related obligation as an asset. ASU 2009-05 addresses practice difficulties caused by the tension between fair-value measurements based on the price that would be paid to transfer a liability to a new obligor and contractual or legal requirements that prevent such transfers from taking place. TSFG adopted this standard effective third quarter 2009 with no significant impact on its Consolidated Financial Statements.

Accounting for Transfers of Financial Assets

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

 
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Accounting for Variable Interest Entities

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

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

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

Accounting for Distributions to Shareholders with Components of Stock and Cash

Accounting Standards Update No. 2010-01 (“ASU 2010-01”), “Accounting for Distributions to Shareholders with Components of Stock and Cash, a Consensus of the FASB Emerging Issues Task Force,” requires that the stock portion of a dividend payment that is part cash and part stock be considered a share issuance in calculating per-share earnings. TSFG adopted this standard effective fourth quarter 2009 with no significant impact on its Consolidated Financial Statements.

Accounting and Reporting for Decreases in Ownership of a Subsidiary

Accounting Standards Update No. 2010-02 (“ASU 2010-02”), “Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification,” clarifies that the scope of the decrease in ownership provisions of FASB ASC 810-10, “Consolidation,” apply to a subsidiary or group of assets that is a business or nonprofit activity, a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. TSFG adopted this guidance effective January 1, 2009 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.

 
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Note 2. Accumulated Other Comprehensive Income (Loss)

The following summarizes accumulated other comprehensive income (loss), net of tax (in thousands) for the years ended December 31:

   
2009
    
2008
    
2007
  
Net Unrealized Gains (Losses) on Securities Available for Sale
                  
Balance at beginning of year
   $ 6,890     $ (30,765 )   $ (47,378 )
Other comprehensive income:
                        
Unrealized holding gains arising during the period
     28,765       59,236       23,129  
Income tax expense
     (9,841 )     (21,941 )     (8,682 )
Less: Reclassification adjustment for (gains) losses included in net (loss) income
     (11,272 )     554       3,332  
      Income tax expense (benefit)
     3,945       (194 )     (1,166 )
      11,597       37,655       16,613  
Balance at end of year
     18,487       6,890       (30,765 )
                         
Net Unrealized Gains (Losses) on Cash Flow Hedges
                        
Balance at beginning of year
     35,668       14,956       (726 )
Other comprehensive income (loss):
                        
Unrealized gain on change in fair values
     8,529       57,412       22,337  
Income tax expense
     (2,985 )     (20,094 )     (7,818 )
Less:  Reclassification adjustment for (gains) losses included in net (loss) income
     (44,248 )     (25,547 )     1,789  
       Income tax expense (benefit)
     15,487       8,941       (626 )
      (23,217 )     20,712       15,682  
Balance at end of year
     12,451       35,668       14,956  
    $ 30,938     $ 42,558     $ (15,809 )
                         
Total other comprehensive (loss) income
   $ (11,620 )   $ 58,367     $ 32,295  
Net (loss) income
     (676,254 )     (547,118 )     73,276  
Comprehensive (loss) income
   $ (687,874 )   $ (488,751 )   $ 105,571  
 
 
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Note 3. Noninterest Income and Noninterest Expenses

The following presents the details for noninterest income and noninterest expenses (in thousands) for the years ended December 31:

   
2009
    
2008
    
2007
  
Noninterest Income
                  
Service charges on deposit accounts
   $ 39,659     $ 42,940     $ 44,519  
Debit card income, net
     8,305       7,805       7,182  
Customer service fee income
     4,839       5,335       5,648  
Total customer fee income
     52,803       56,080       57,349  
                         
Insurance income
     7,800       10,082       12,029  
Retail investment services, net
     7,703       7,711       7,902  
Trust and investment management income
     5,135       6,688       6,595  
Benefits administration fees
     1,213       3,136       3,261  
Total wealth management income
     21,851       27,617       29,787  
                         
Bank-owned life insurance income
     9,515       12,877       13,344  
Gain (loss) on securities
     8,034       3,108       (4,623 )
Gain on sale of ancillary businesses
     7,234       -       -  
Mortgage banking income
     5,694       5,260       6,053  
Gain (loss) on trading and certain derivative activities
     3,849       (207 )     (1,197 )
Merchant processing income, net
     2,018       3,279       3,263  
Gain on Visa IPO share redemption
     -       1,904       -  
Other
     7,035       12,049       9,736  
Total noninterest income
   $ 118,033     $ 121,967     $ 113,712  
                         
Noninterest Expenses
                        
Salaries and wages, excluding employment contracts and severance
   $ 133,548     $ 144,037     $ 137,085  
Employment contracts and severance
     829       16,519       2,306  
Total salaries and wages
     134,377       160,556       139,391  
                         
Occupancy
     38,200       37,311       34,659  
Employee benefits
     32,893       38,200       37,098  
Loss on other real estate owned
     32,435       633       -  
Regulatory assessments
     29,293       10,923       2,628  
Furniture and equipment
     27,758       27,561       26,081  
Loan collection and foreclosed asset expense
     27,090       12,431       3,665  
Impairment of long-lived assets
     21,600       -       -  
Professional services
     16,768       16,212       17,062  
Project NOW expense
     1,693       271       -  
Loss on non-mortgage loans held for sale(1)
     11,776       283       -  
Telecommunications
     6,197       6,140       5,668  
Advertising and business development
     5,947       9,927       7,401  
Amortization of intangibles
     4,917       6,138       7,897  
(Gain) loss on early extinguishment of debt
     (3,043 )     2,086       2,029  
Goodwill impairment
     2,511       426,049       -  
Loss of repurchase of auction rate securities
     676       -       -  
Loss on derivative collateral
     -       1,061       -  
Branch acquisition and conversion costs
     -       731       -  
Visa-related litigation
     -       (863 )     881  
Other
     28,033       36,583       36,789  
Total noninterest expenses
   $ 419,121     $ 792,233     $ 321,249  

 
(1)
In 2009, TSFG reclassified loss on non-mortgage loans held for sale from noninterest income to noninterest expense. Amounts for prior periods have been reclassified to conform to the current presentation.

 
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Note 4. Sale of Ancillary Businesses

During 2009, TSFG completed the sale of three ancillary businesses for a net gain of $7.2 million, which was included in noninterest income. The businesses sold were: Carolina First Bank’s merchant processing portfolio; Koss Olinger, a financial planning group; and American Pensions, Inc., a retirement plan administrator.

The majority of the gain recognized in 2009 was related to the sale of the merchant processing portfolio; an additional deferred gain of approximately $6 million related to the sale may be recognized over the next two years. In connection with the sale of its merchant processing portfolio, TSFG entered into a marketing alliance with the acquirer for new merchant services referrals. Under this agreement, TSFG has agreed to refer its current and prospective merchant customers exclusively to the acquirer for all payment processing services. The agreement has an initial ten year term with recurring one year renewals thereafter, unless terminated by either party or notice of non-renewal is provided by either party.

Note 5.  Branch Acquisition

In June 2008, Carolina First Bank acquired five branch offices (including related loans and deposits) in Florida from an unrelated financial institution. In connection with this branch acquisition, the Company acquired loans of $6.4 million, premises and equipment of $13.4 million, and deposits totaling $24.5 million, and recorded a core deposit intangible asset of $655,000. The core deposit intangible asset is being amortized over 5 years using an accelerated method.

Note 6.  Restrictions on Cash and Due from Banks

TSFG is required to maintain average reserve balances with the Federal Reserve Bank based upon a percentage of deposits. The average amounts of these reserve balances for the years ended December 31, 2009 and 2008 were $26.2 million and $27.8 million, respectively.

At December 31, 2009, TSFG had $3.5 million restricted cash pledged as collateral for various purposes. At December 31, 2008, TSFG had no restricted cash pledged as collateral.

Note 7.   Securities

The aggregate amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) at December 31 were as follows:

   
2009
  
         
Gross
    
Gross
        
   
Amortized
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost
    
Gains
    
Losses
    
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  

 
98
 
   
2008
  
         
Gross
    
Gross
        
   
Amortized
    
Unrealized
    
Unrealized
    
Estimated
  
   
Cost
    
Gains
    
Losses
    
Fair Value
  
Securities Available for Sale
                        
U.S. Treasury
   $ 2,001     $ 68     $ -     $ 2,069  
U.S. Government agencies
     307,025       6,704       -       313,729  
Agency residential mortgage-backed securities
     1,467,516       14,632       13,509       1,468,639  
Private label residential mortgage-backed securities
     14,850       -       2,079       12,771  
State and municipals
     256,755       5,673       180       262,248  
Other investments (1)
     12,562       87       447       12,202  
    $ 2,060,709     $ 27,164     $ 16,215     $ 2,071,658  
                                 
Securities Held to Maturity
                                
State and municipals
   $ 22,609     $ 343     $ 4     $ 22,948  
Other investments
     100       -       -       100  
    $ 22,709     $ 343     $ 4     $ 23,048  
 
 
 
(1)
During 2009, TSFG reclassified FHLB stock from securities available for sale to other assets. Amounts for prior periods have been reclassified to conform to the current presentation.

The amortized cost and estimated fair value of securities available for sale and securities held to maturity (in thousands) at December 31, 2009, 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.

   
December 31, 2009
  
   
Amortized
    
Estimated
  
   
Cost
    
Fair Value
  
Securities Available for Sale
            
Due in one year or less
   $ 63,721     $ 64,933  
Due after one year through five years
     1,255,518       1,261,400  
Due after five years through ten years
     169,980       175,253  
Due after ten years
     575,777       592,135  
No contractual maturity
     1,962       1,680  
    $ 2,066,958     $ 2,095,401  
                 
Securities Held to Maturity
                
Due in one year or less
   $ 4,836     $ 4,859  
Due after one year through five years
     121,946       123,908  
Due after five years through ten years
     734       729  
Due after ten years
     -       -  
No contractual maturity
     -       -  
    $ 127,516     $ 129,496  

Proceeds from sales of securities available for sale, gross realized gains and losses on sales, and maturities and other securities transactions (in thousands) for the years ended December 31 are summarized as follows. The net gains or losses are shown in noninterest income as gain (loss) on securities.

 
99
 
   
2009
    
2008
    
2007
  
Proceeds from sales of securities available for sale
   $ 464,368     $ 257,483     $ 309,110  
                         
Sales transactions of securities available for sale:
                        
Gross realized gains
   $ 13,520     $ 2,544     $ 2,795  
Gross realized losses (1)
     (1,813 )     (986 )     (5,427 )
Other securities transactions:
                        
Gross realized gains
     641       4,262       -  
Gross realized losses
     -       (6 )     -  
Other-than-temporary impairment
     (4,314 )     (2,706 )     (1,991 )
Net gain (loss) on securities
   $ 8,034     $ 3,108     $ (4,623 )

 
(1)
Includes impairment losses on securities subsequently sold.

Securities with market values of approximately $1.1 billion and $1.4 billion at December 31, 2009 and 2008, respectively, were pledged to secure public deposits and for other purposes. The amortized cost totaled approximately $1.1 billion and $1.4 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 a continuous unrealized loss position, at December 31 were as follows (in thousands):

   
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
                                    
US 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  

   
2008
  
   
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
                                    
Agency residential mortgage-backed securities
   $ 342,792     $ 3,062     $ 399,557     $ 10,447     $ 742,349     $ 13,509  
Private label residential mortgage-backed securities
     12,771       2,079       -       -       12,771       2,079  
State and municipals
     4,230       148       1,854       32       6,084       180  
Other investments
     369       128       700       319       1,069       447  
    $ 360,162     $ 5,417     $ 402,111     $ 10,798     $ 762,273     $ 16,215  
                                                 
Securities Held to Maturity
                                                
State and municipals
   $ -     $ -     $ 1,036     $ 4     $ 1,036     $ 4  

At December 31, 2009, TSFG had 52 individual investments that were in an unrealized loss position. The unrealized losses summarized above, except for other investments, were primarily attributable to changes in interest rates, rather than deterioration in

 
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credit quality. The majority of these securities are government or agency securities and, therefore, pose minimal credit risk, and TSFG’s private label mortgage-backed securities are AAA-rated. TSFG does not intend to sell these securities and it is not more likely than not that it will be required to sell the securities before recovery of the amortized cost basis. Therefore, at December 31, 2009, these investments are not considered impaired on an other-than-temporary basis.

In 2009, TSFG recorded $435,000 in other-than-temporary impairment on certain community bank-related equity securities included in the other investments category. At December 31, 2009, the remaining securities in the other investments category with unrealized losses 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 had been in an unrealized loss position for more than a year, improving trends in fair value.

In second quarter 2008, TSFG recorded $927,000 in other-than-temporary impairment on its corporate bond portfolio due to a change in intent to hold the securities until a recovery in value based on a change in investment strategy. In third quarter 2008, TSFG sold approximately $8.4 million of corporate bonds and recognized a gain on sale of approximately $129,000. Additionally in 2008, TSFG recorded $2.1 million in other-than-temporary impairment on certain community bank-related investments included in the other investments portfolio. In 2007, TSFG recorded $2.9 million in other-than-temporary impairment on its corporate bond portfolio, and sold approximately $70 million of those bonds.

TSFG also invests in limited partnerships, limited liability companies (LLC's) and other privately held companies. These investments are included in other assets. In 2009, 2008, and 2007, TSFG recorded $3.9 million, $589,000, and $2.0 million, respectively, in other-than-temporary impairment on these investments. At December 31, 2009, TSFG's investment in these entities totaled $14.5 million, of which $7.1 million were accounted for under the cost method and $7.4 million were accounted for under the equity method. At December 31, 2008, TSFG's investment in these entities totaled $18.1 million, of which $5.3 million were accounted for under the cost method and $12.8 million were accounted for under the equity method.

Also included in other assets were $5.2 million of various auction rate preferred securities which TSFG repurchased during first quarter 2009 from brokerage customers who purchased the securities during 2007. TSFG recorded a loss of $676,000 upon purchase of $6.9 million of these securities during first quarter 2009 to adjust these securities to estimated fair value based on illiquidity in the market.

 
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Note 8. Loans

The following is a summary of loans by category (in thousands) at December 31:

   
2009
    
2008
  
Commercial Loans
            
Commercial and industrial
   $ 2,080,329     $ 2,722,611  
Commercial owner - occupied real estate
     1,271,525       1,270,746  
Commercial real estate
     3,501,809       4,074,331  
      6,853,663       8,067,688  
Consumer Loans
                
Indirect - sales finance
     230,426       635,637  
Consumer lot loans
     144,315       225,486  
Direct retail
     83,460       95,397  
Home equity
     787,645       813,201  
      1,245,846       1,769,721  
                 
Mortgage Loans
     286,618       354,663  
Loans held for investment
     8,386,127       10,192,072  
Loans held for sale
     15,758       30,963  
Total loans
   $ 8,401,885     $ 10,223,035  
                 
Included in the above:
                
Nonaccrual loans held for investment
   $ 399,046     $ 349,382  
Nonaccrual loans held for sale
     -       16,282  
Loans past due 90 days still accruing interest
     10,465       47,481  

The following tables summarize information on impaired loans (in thousands) at and for the years ended December 31:

   
2009
    
2008
    
2007
  
Impaired loans with specific allowance
   $ 197,576     $ 193,280     $ 35,856  
Impaired loans with no specific allowance
     194,763       94,217       32,246  
Total impaired loans (year end)
   $ 392,339     $ 287,497     $ 68,102  
                         
Related allowance (year end)
   $ 37,656     $ 44,418     $ 11,340  
Interest income recognized
     1,484       112       59  
Foregone interest
     15,527       14,439       3,437  

The average recorded investment in impaired loans for the years ended December 31, 2009, 2008, and 2007 was $400.5 million, $222.0 million, and $40.4 million, respectively. At December 31, 2009, 2008 and 2007, impaired loans included $33.8 million, $6.4 million, and $1.7 million, respectively, in restructured loans.

TSFG directors, directors of subsidiaries of TSFG, executive officers, and associates of such persons were customers of and had transactions with TSFG in the ordinary course of business. Included in such transactions are outstanding loans and commitments, all of which were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of these outstanding loans was $16.8 million, which included $9.5 million of nonaccrual loans. At December 31, 2008 and 2007, the aggregate dollar amount of these outstanding loans was $19.5 million and $35.5 million, respectively. During 2009, new loans of $12.8 million were made, and payments totaled $15.5 million. During 2008, new loans of $5.7 million were made, and payments totaled $21.7 million.

Credit risk represents the maximum accounting loss that would be recognized at the reporting date if borrowers failed to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. Credit risk associated with these concentrations could arise when a significant amount of loans, related by similar characteristics, are simultaneously

 
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impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected. The Company does not have a significant concentration to any individual client. The major concentrations of credit risk for the Company arise by collateral type in relation to loans and credit commitments. The most significant concentration that exists is in loans secured by commercial real estate. At December 31, 2009, the Company had $3.5 billion in commercial real estate loans, representing 41.8% of total loans held for investment. A geographic concentration arises because the Company operates primarily in the Southeastern region of the United States.

At December 31, 2009, loans with a carrying amount of $4.5 billion were pledged as collateral for various borrowings and lines of credit.

During 2009, TSFG transferred $557.0 million from the held for investment portfolio to the held for sale portfolio, and subsequently sold the loans. The transfers and subsequent sales included $247.5 million of nonperforming loans (including shared national credits) for which TSFG charged-off $84.0 million against the allowance for loan losses prior to transferring them to loans held for sale. The transfers and subsequent sales also included $230.3 million of indirect auto loans and $79.2 million of performing shared national credits, which resulted in an allowance adjustment of $4.5 million.

During 2008, TSFG transferred nonperforming loans with an unpaid principal balance totaling $117.3 million from the held for investment portfolio to the held for sale portfolio, and charged-off $53.4 million of these loans against the allowance for loan losses. Of these loans, $41.2 million (net of charge-offs) were sold and $3.1 million were transferred back to loans held for investment, based on the withdrawal of the potential buyer’s offer and management’s decision to work out the loans internally. The remaining balance was reduced by lower of cost or fair value adjustments and unscheduled paydowns.

Note 9. Allowance for Credit Losses

The allowance for loan losses, reserve for unfunded lending commitments, and allowance for credit losses for each of the years in the three-year period ended December 31, 2009 are presented below (in thousands).

   
2009
    
2008
    
2007
  
Allowance for loan losses
                  
Balance at beginning of year
   $ 247,086     $ 126,427     $ 111,663  
Allowance adjustment for loans sold
     (4,471 )     -       -  
Provision for loan losses
     664,208       344,069       67,325  
Loans charged-off
     (556,585 )     (230,961 )     (59,408 )
Recoveries of loans previously charged-off
     15,404       7,551       6,847  
Balance at end of year
   $ 365,642     $ 247,086     $ 126,427  
                         
Reserve for unfunded lending commitments
                        
Balance at beginning of year
   $ 2,788     $ 2,268     $ 1,025  
Provision for unfunded lending commitments
     4,696       520       1,243  
Balance at end of year
   $ 7,484     $ 2,788     $ 2,268  
                         
Allowance for credit losses
                        
Balance at beginning of year
   $ 249,874     $ 128,695     $ 112,688  
Allowance adjustment for loans sold
     (4,471 )     -       -  
Provision for credit losses
     668,904       344,589       68,568  
Loans charged-off
     (556,585 )     (230,961 )     (59,408 )
Recoveries of loans previously charged-off
     15,404       7,551       6,847  
Balance at end of year
   $ 373,126     $ 249,874     $ 128,695  

 
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Note 10. Premises and Equipment

Premises and equipment at December 31 are summarized (in thousands) as follows:

   
2009
    
2008
  
Land and land improvements
   $ 78,121     $ 56,989  
Buildings
     115,629       89,715  
Furniture, fixtures and equipment
     126,547       133,743  
Capitalized software
     39,874       35,518  
Leasehold improvements
     63,212       62,017  
Construction in progress
     4,438       54,024  
      427,821       432,006  
Less accumulated depreciation and amortization
     166,298       149,534  
    $ 261,523     $ 282,472  

During 2009, 2008, and 2007 TSFG capitalized $738,000, $1.6 million and $505,000, respectively, of interest related to construction in progress. Depreciation and amortization of premises and equipment totaled $22.6 million, $22.5 million, and $20.5 million in 2009, 2008, and 2007, respectively. At December 31, 2009, there were no land or buildings pledged as collateral for long-term debt.

Note 11. Impairment of Long-Lived Assets

During 2005, TSFG initiated plans for a “corporate campus” to meet expected current and future facility needs and serve as the primary headquarters for its banking operations. During 2009, TSFG announced its intention to market its campus facility for sale. The campus site contains approximately 60 acres. Two office buildings have been completed, the conference center is substantially complete, and ten additional building sites are available. At December 31, 2009, TSFG occupied approximately 20% of the available space in the office buildings at the campus in order to house certain of its operations that were previously located in facilities with leases expiring in 2009 and early 2010.

Based on the fair value of the property as determined by third-party appraisal, TSFG recorded impairment charges of $19.4 million in 2009, which are included in noninterest expense. In determining the impairment charge, the cost basis was reduced by the estimated net realizable value of state tax credits available to TSFG. At December 31, 2009, the carrying amount of the campus was $56.1 million and the carrying amount of the state tax credits was $7.6 million. For purposes of segment reporting, the asset is included in the “Other” column in Note 32. Management will continue to monitor market conditions and offered prices, and further write-downs could be required in future periods.

Also in 2009, TSFG recorded a $612,000 impairment loss (included in noninterest expense) from the write-down of its corporate jet. The corporate jet was subsequently sold during 2009 with no significant gain or loss on the sale.

In addition, during the year ended December 31, 2009, TSFG recorded $1.6 million in impairment losses (also included in noninterest expense) associated with vacated branches and office locations, primarily attributable to subletting office space at less than the contractual lease rate.

 
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Note 12. Goodwill

The following summarizes the changes in the carrying amount of goodwill related to each of TSFG’s business segments (in thousands) for the years ended December 31, 2009 and 2008:

   
Carolina First
    
Mercantile
    
Other
    
Total
  
Balance, December 31, 2007
                        
Goodwill
   $ 203,800     $ 427,887     $ 19,316     $ 651,003  
Accumulated impairment losses
     -       -       -       -  
      203,800       427,887       19,316       651,003  
Goodwill impairment charge
     -       (426,049 )     -       (426,049 )
Purchase accounting adjustments
     -       (1,838 )     1,045       (793 )
                                 
Balance, December 31, 2008
                                
Goodwill
     203,800       426,049       20,361       650,210  
Accumulated impairment losses
     -       (426,049 )     -       (426,049 )
      203,800       -       20,361       224,161  
Goodwill impairment charge (1)
     -       -       (2,511 )     (2,511 )
Purchase accounting adjustments
     -       -       321       321  
Goodwill allocated to sales of ancillary businesses
     (2,172 )     -       (5,681 )     (7,853 )
                                 
Balance, 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  

 
(1)
Goodwill impairment charge in 2009 was related to ancillary businesses that were subsequently sold.

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

For purposes of the goodwill impairment evaluation performed at June 30, 2009, the fair value of the Carolina First reporting unit was determined primarily using discounted cash flow models based on internal forecasts (90% weighting) and, to a lesser extent, market-based trading and transaction multiples (10% weighting). More weight was given to the discounted cash flow models since market-based multiples are not considered directly comparable given the lack of a complete operational entity for each reporting unit, and based on the internal forecasts taking a longer term view of the Company’s performance. The internal forecasts included certain assumptions made by management, including expected growth rates in loans and customer funding, changes in net interest margin, credit quality trends, and the forecasted levels of other income and expense items. Forecasts were prepared for each of the next five years, with a terminal cash flow assigned to the remainder of the forecast horizon. A range of terminal growth rates ranging from 3% to 7% were applied to the terminal cash flow. Each period’s cash flow was then discounted using a range of discount rates based on the risk-free rate plus a premium based on overall stock market level of risk compared to the level of risk of our own stock. The portion of the estimated value derived from market-based trading and transaction multiples was based on a weighting of market multiples for selected peer institutions based on such metrics as book value of equity, tangible equity, and assets. (Earnings multiples were not used because most peers did not have

 
105

earnings.) The value assigned to the reporting unit for purposes of the goodwill impairment evaluation was based on the midpoint of the range of values determined using the method outlined above. This valuation indicated that the fair value of the Carolina First reporting unit was less than its carrying value. However, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value, and thus no impairment charge was required as of the June 30, 2009 test date for the Carolina First banking segment.

As TSFG, including its Carolina First reporting unit, continued to report additional losses and other conditions had changed during third quarter 2009, TSFG performed an updated evaluation of the goodwill related to the Carolina First reporting unit as of September 30, 2009. In connection with its evaluation, TSFG engaged an independent third party to review the methodology and assumptions in Step 1 and to perform the valuation of the loan portfolio and the core deposit intangible for the Carolina First banking segment for purposes of performing Step 2. (The remaining $12.5 million of goodwill for other segments was related to TSFG’s insurance operations and was not evaluated for impairment on an interim basis based on operating results.) Based on changes in management’s views on its current outlook and the review by the third party, the Company lowered the terminal growth rates to a range of 2% to 4% and increased the targeted capital level allocated to the Carolina First reporting unit to reflect current industry conditions and company-specific expectations as part of its Step 1 analysis. Although the valuation with the updated assumptions continued to indicate that the fair value of the Carolina First reporting unit was less than its carrying value, Step 2 of the evaluation indicated that the implied fair value of the goodwill was greater than its carrying value at September 30, 2009, primarily due to the excess of the book value of the Carolina First loan portfolio over its fair value based on exit price, and no impairment was recorded. No formal impairment evaluation was performed at December 31, 2009 since there were no material changes to the assumptions and expectations used as of September 30, 2009.

In the current environment, forecasting cash flows, credit losses and growth in addition to valuing the Company’s assets with any degree of assurance is very difficult and subject to significant changes over very short periods of time. Management will continue to update its analysis as circumstances change, and as market conditions continue to be volatile and unpredictable, and impairment write-downs on goodwill related to TSFG’s reporting units may be necessary in future periods.

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.

During first quarter 2008, TSFG recognized $188.4 million in goodwill impairment in the Mercantile banking segment primarily due to increased projected credit costs and a related decrease in projected loan growth, as well as changes in the measurement of segment profitability. During fourth quarter 2008, TSFG recognized an additional $237.6 million of goodwill impairment primarily due to an increase in the discount rate used for valuing future cash flows of our Mercantile reporting unit and a reduction in the projected cash flows primarily over the next two years. The range of discount rates used increased to 14% to 18% at December 31, 2008 (from 10% to 14% in prior evaluations) due to increases in overall stock market volatility as well as volatility of our stock.

 
106

Note 13. Other Intangible Assets

Other intangible assets, net of accumulated amortization, at December 31 are summarized as follows (in thousands):

   
2009
    
2008
  
Core deposit intangible (1)
   $ 45,009     $ 59,550  
Less accumulated amortization (1)
     (31,461 )     (41,979 )
      13,548       17,571  
Non-compete agreement intangible
     5,672       5,672  
Less accumulated amortization
     (5,669 )     (5,460 )
      3       212  
Customer list intangible
     6,725       7,960  
Less accumulated amortization
     (4,569 )     (3,884 )
      2,156       4,076  
    $ 15,707     $ 21,859  

 
(1)
During 2009, TSFG removed $14.5 million of fully amortized core deposit intangible from both the gross carrying amount and accumulated amortization.

The following presents the details for amortization expense of intangible assets (in thousands) for the years ended December 31:

   
2009
    
2008
    
2007
  
Core deposit intangible
   $ 4,023     $ 4,811     $ 5,663  
Non-compete agreement intangible
     209       471       1,254  
Customer list intangible
     685       856       980  
Total amortization expense of intangible assets
   $ 4,917     $ 6,138     $ 7,897  

The estimated amortization expense for amortizable intangible assets (in thousands) for the years ended December 31 is as follows:

         
Non-
              
   
Core
    
Compete
    
Customer
        
   
Deposit
    
Agreement
    
List
        
   
Intangible
    
Intangible
    
Intangible
    
Total
  
2010
   $ 3,543     $ 3     $ 442     $ 3,988  
2011
     3,113       -       384       3,497  
2012
     2,317       -       313       2,630  
2013
     977       -       209       1,186  
2014
     519       -       172       691  
Aggregate total for all years thereafter
     3,079       -       636       3,715  
    $ 13,548     $ 3     $ 2,156     $ 15,707  

Note 14. Other Real Estate Owned

 The following presents the details (in thousands) for other real estate owned (which is included in other assets on the consolidated balance sheet) at and for the years ended December 31:

   
2009
    
2008
  
Balance at beginning of year
   $ 44,668     $ 6,467  
Loans transferred in
     165,061       51,158  
Sales
     (65,696 )     (11,907 )
Write-downs
     (21,947 )     (1,050 )
Balance at end of year
   $ 122,086     $ 44,668  

 
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Note 15. 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 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) at December 31 are presented below.

   
2009
    
2008
  
   
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
   $ 14,339     $ -     $ 780,000     $ 48,766     $ -     $ 1,670,000  
Interest rate floor associated with lending activities
     -       -       -       6,873       -       200,000  
                                                 
Fair value hedges
                                                
Interest rate swaps associated with brokered CDs
     1,895       48       54,185       2,491       1,376       220,352  
Total derivatives designated as hedging instruments under GAAP
   $ 16,234     $ 48     $ 834,185     $ 58,130     $ 1,376     $ 2,090,352  
                                                 
Derivatives not designated as hedging instruments under GAAP:
                                                
Interest rate swaps
   $ 279     $ 480     $ 119,755     $ -     $ 1,232     $ 10,000  
Forward foreign currency contracts
     12       12       13,331       1,660       1,660       11,063  
Customer swap contracts
     25,658       22,067       850,680       44,067       44,882       984,897  
Options, mortgage contracts, and other
     416       433       111,328       3,481       3,420       152,243  
Total derivatives not designated as hedging instruments under GAAP
   $ 26,365     $ 22,992     $ 1,095,094     $ 49,208     $ 51,194     $ 1,158,203  
                                                 
Total derivatives
   $ 42,599     $ 23,040     $ 1,929,279     $ 107,338     $ 52,570     $ 3,248,555  

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 2009 and 2008, such derivatives were used to hedge the variable cash inflows associated with existing pools of prime and LIBOR-based loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During 2009, the Company recognized a loss of $156,000 for hedge ineffectiveness attributable to a mismatch between the swap notional and the aggregate principal amount of the designated loan pools. In addition, certain swaps failed to qualify for hedge accounting due to this mismatch; accordingly, the change in fair value of these swaps during 2009 of $2.2 million was recognized directly in earnings as a loss and was included in the section entitled

 
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“Derivatives Not Designated as Hedging Instruments” throughout this footnote. No hedge ineffectiveness was recognized during 2008.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During 2009, the Company accelerated the reclassification of an unrealized gain in accumulated other comprehensive income of $3.2 million to earnings as a result of the hedged forecasted transactions becoming probable not to occur. During the next twelve months, the Company estimates that $15.2 million will be reclassified from accumulated other comprehensive income to the statement of operations. 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. During 2009 and 2008, the Company recognized a gain of $194,000 and $856,000, 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 2009 and 2008, which includes net settlements on the derivatives and any amortization of the basis adjustment in the hedged items, was a reduction to interest expense of $3.5 million and $8.3 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-dollar denominated transactions. Through these programs, derivative contracts are executed between the customers and TSFG. In most cases, offsetting contracts are executed between TSFG and selected third parties to hedge market risk created through the customer contracts. The interest rates on the third party contracts are identical to the interest rates on the customer contracts, and thus the change in fair value of the customer contracts will generally be offset by the change in fair value of the related third-party contracts, with the exception of any credit valuation adjustments that may be recorded. However, during 2009 certain counterparties terminated their third-party contracts as a result of TSFG’s ratings downgrades. As a result, certain customer contracts are no longer offset by third-party hedges. At December 31, 2009, the total fair value of TSFG’s interest rate swaps with customers was an asset of $25.7 million.

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.

 
109

Effect of Derivative Instruments on the Consolidated Statements of Operations

The effects of derivative instruments on the consolidated statements of operations for the years ended December 31 are presented in the tables below (in thousands):

   
2009
    
2008
  
Derivatives in Cash Flow Hedging Relationships
            
Interest rate swaps associated with lending activities:
            
Amount of gain recognized in OCI
   $ 7,813     $ 48,794  
Amount of gain reclassified from accumulated OCI to interest income (effective portion)
     34,961       20,143  
Amount of gain reclassified from accumulated OCI to gain/loss  on certain derivative activities (effective portion)
     2,618       -  
Amount of loss recognized in gain/loss on certain derivative activities (ineffective portion and amount excluded from effectiveness testing)
     (156 )     -  
Interest rate floor associated with lending activities:
                
Amount of gain recognized in OCI
     716       8,618  
Amount of gain reclassified from accumulated OCI to interest income (effective portion)
     6,532       5,404  
Amount of gain recognized in gain/loss on certain derivative activities (ineffective portion and amount excluded from effectiveness testing)
     293       -  

   
2009
    
2008
  
Derivatives in Fair Value Hedging Relationships
            
Interest rate swaps associated with brokered CDs:
            
Amount of gain recognized in gain/loss on certain derivative activities on derivative
   $ 2,177     $ 8,801  
Amount of loss recognized in gain/loss on certain derivative activities on hedged item
     (1,983 )     (7,945 )

       
Amount of Gain (Loss)
  
Derivatives Not
  
Location of Gain (Loss)
  
Recognized in Income on
  
Designated as
  
Recognized in Income on
  
Derivative
  
Hedging Instruments
  
Derivative
  
2009
    
2008
  
Interest rate swaps
  
Gain (loss) on certain derivative activities
   $ 954     $ (1,069 )
Interest rate swaps
  
Other noninterest income
     (498 )     -  
Customer swaps
  
Other noninterest income
     (509 )     4,372  
Mortgage contracts
  
Mortgage banking income
     (24 )     204  
Other contracts
  
Gain (loss) on certain derivative activities
     (54 )     6  
        $ (131 )   $ 3,513  

Credit-risk-related Contingent Features

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

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.

 
110

As of December 31, 2009, 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 $16.4 million. As of December 31, 2009 the Company had minimum collateral posting thresholds with certain of its derivative counterparties and had posted collateral of $26.7 million. Since the Company was in violation of certain debt rating provisions at December 31, 2009, it could have been required to settle its obligations under the agreements at the termination value ($16.4 million) and could have been required to post additional collateral with the respective counterparty (up to $4.8 million).

Note 16. Deposits

Deposits (in thousands) at December 31 are summarized in the table below.

   
2009
    
2008
  
Noninterest-bearing demand deposits
   $ 1,124,404     $ 1,041,140  
Interest-bearing checking
     1,060,470       1,078,921  
Money market accounts
     2,072,664       1,834,115  
Savings accounts
     322,924       190,519  
Time deposits under $100,000
     1,632,582       1,863,520  
Time deposits of $100,000 or more
     1,137,067       1,488,735  
Customer deposits
     7,350,111       7,496,950  
Brokered deposits
     1,946,101       1,908,767  
Total deposits
   $ 9,296,212     $ 9,405,717  

Maturities of time deposits (including brokered deposits) at December 31, 2009 are as follows (in thousands):

2010
   $ 2,771,903  
2011
     1,458,405  
2012
     361,899  
2013
     57,515  
2014
     28,205  
Thereafter
     37,823  
    $ 4,715,750  

Prepaid broker fees, net of accumulated amortization, totaled $6.4 million and $6.0 million at December 31, 2009 and 2008, respectively, and were included in other assets on the consolidated balance sheet. Amortization of prepaid broker fees totaled $5.2 million, $5.5 million, and $4.6 million in 2009, 2008, and 2007, respectively, and was reported in interest expense on deposits in the consolidated statements of operations.

Note 17. Income Taxes

The aggregate amount of income tax expense (benefit) (in thousands) included in the consolidated statements of operations and in the consolidated statements of changes in shareholders’ equity and comprehensive income (in thousands) for the years ended December 31, 2009, 2008, and 2007 were as follows:

   
2009
    
2008
    
2007
  
Income/loss before income taxes
   $ 37,794     $ (87,574 )   $ 33,400  
Changes recorded in shareholders' equity
                        
Cumulative effect of initial application of guidance related to uncertain tax positions
     -       -       (488 )
Cumulative effect of initial application of fair value option
     -       (32 )     -  
Change in unrealized gains/losses on fair value of cash flow hedges
     12,502       (11,153 )     (8,444 )
Change in unrealized gains/losses on available for sale securities
     (5,896 )     (22,135 )     (9,848 )
    $ 44,400     $ (120,894 )   $ 14,620  

 
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Income tax expense (benefit) attributable to income (loss) before income taxes ("income tax expense (benefit)") (in thousands) for the years ended December 31, 2009, 2008, and 2007 consisted of the following:

   
2009
    
2008
    
2007
  
Current
                  
U.S. Federal
   $ (20,093 )   $ (41,284 )   $ 22,937  
State and local
     188       916       3,037  
      (19,905 )     (40,368 )     25,974  
Deferred
                        
U.S. Federal
     48,249       (39,232 )     6,879  
State and local
     9,450       (7,974 )     547  
      57,699       (47,206 )     7,426  
Total income tax expense (benefit)
   $ 37,794     $ (87,574 )   $ 33,400  

Income tax expense (benefit) differed from the amounts computed by applying TSFG's statutory U.S. federal income tax rate of 35% for the years ended December 31, 2009, 2008, and 2007 to pretax income/loss from continuing operations as a result of the following (in thousands):

   
2009
    
2008
    
2007
  
Income tax (benefit) expense at federal statutory rate
   $ (223,461 )   $ (222,142 )   $ 37,337  
State income tax, net of federal benefit
     (13,543 )     (4,588 )     2,329  
Increase (decrease) resulting from:
                        
Subsidiary stock, recognition of basis difference
     (481 )     2       50  
Bank-owned life insurance
     (3,183 )     (4,507 )     (4,670 )
Book compensation cost for ISO stock options
     613       946       1,179  
Nontaxable municipal interest
     (2,856 )     (3,275 )     (3,817 )
Income tax credits
     (4,753 )     (3,364 )     (841 )
Dividends received deduction
     (36 )     (24 )     (24 )
Goodwill impairment
     1,495       149,117       -  
Purchase of REIT preferred shares at a discount
     (2,912 )     -       -  
Change in federal and state valuation allowance for deferred income tax assets
     286,498       83       (573 )
Other, net
     413       178       2,430  
    $ 37,794     $ (87,574 )   $ 33,400  
 
 
112
 
The tax effected sources of temporary differences that give rise to significant portions of deferred income tax assets and deferred income tax liabilities at December 31 are presented below (in thousands):

   
2009
    
2008
  
Deferred Income Tax Assets
            
Loan loss allowance deferred for income tax purposes
   $ 134,309     $ 90,906  
Compensation expense deferred for income tax reporting purposes
     18,322       21,293  
Federal capital loss carryforward
     2,738       1,484  
State net operating loss carryforwards
     17,656       6,802  
Excess basis of securities for income tax purposes over financial reporting purposes
     615       335  
Federal net operating loss carryforward
     171,865       958  
Miscellaneous accruals and reserves
     5,855       5,855  
Other
     13,439       4,550  
      364,799       132,183  
Less valuation allowance
     290,263       3,765  
      74,536       128,418  
Deferred Income Tax Liabilities
                
Excess basis of intangible assets for financial reporting purposes over income tax basis
     13,851       15,822  
Unrealized gains on securities available for sale
     9,955       4,059  
Income tax depreciation in excess of book depreciation
     19,634       18,523  
Excess basis of prepaid and deferred expenses for financial reporting purposes over income tax basis
     20,439       18,227  
Unrealized gains on cash flow hedges deferred for income tax reporting purposes
     6,704       19,206  
Excess carrying value of assets acquired for financial reporting purposes over income tax basis
     499       369  
Unrealized gains and other adjustments on fair value hedges and derivatives not qualifying for hedge accounting
     3,450       1,115  
Income tax bad debt reserve recapture adjustment
     4       4  
      74,536       77,325  
Net deferred income tax assets
   $ -     $ 51,093  

Changes in net deferred income tax assets were (in thousands):

   
2009
    
2008
  
Balance at beginning of year
   $ 51,093     $ 37,175  
Income tax effect from change in unrealized gains/losses on available for sale securities
     (5,896 )     (22,135 )
Income tax effect from change in fair values on cash flow hedges
     12,502       (11,153 )
Deferred income tax (expense) benefit on continuing operations
     (57,699 )     47,206  
Balance at end of year
   $ -     $ 51,093  

TSFG had a current tax receivable of $18.2 million and $45.2 million at December 31, 2009 and 2008, respectively.

The valuation allowance for deferred income tax assets as of December 31, 2009 and 2008 was $290.3 million and $3.8 million, respectively. Accounting literature states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. In making such judgments, significant weight is given to evidence that can be objectively verified. During third quarter 2009, the estimated realization period for the deferred tax asset based on forecasts of future earnings extended further into the 20-year carryforward period compared to the realization period forecasted in second quarter 2009. This extended realization period, combined with the objective evidence of a three-year cumulative loss position and continued near-term losses represented significant negative evidence that caused the Company to conclude that a $286.5 million increase to the deferred tax valuation allowance was required in 2009. To the extent that TSFG generates taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance will ultimately reverse (subject to ownership change

 
113

limitations) through income tax expense when TSFG can demonstrate a sustainable return to profitability that would lead management to conclude that it is more likely than not that the deferred tax asset will be utilized during the 20-year carryforward period.

At December 31, 2009, TSFG had federal income tax net operating loss (“NOL”) carryforwards of approximately $468.5 million that originated in 2009 and will expire in 2029. 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 ownership changes, including the issuance or exercise of rights to acquire stock, the purchase or sale of stock by 5% stockholders, as defined in the Treasury regulations, and the offering of stock by TSFG during any three-year period resulting in an aggregate change of more than 50% in the beneficial ownership of TSFG. As of December 31, 2009, we do not believe that an ownership change has occurred. Future equity transactions by TSFG or by 5% stockholders (including transactions beyond our control) could cause a Section 382 ownership change and therefore a limitation on the annual utilization of NOLs.

In the event of an ownership change (as defined for income tax purposes), Section 382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by these carryforwards. The limitation is generally equal to the product of (i) the fair market value of the equity of the company multiplied by (ii) a percentage approximately equivalent to the yield on long-term tax exempt bonds during the month in which an ownership change occurs. In addition, the limitation is increased if there are unrecognized built-in losses on the balance sheet prior to a change in ownership.

At December 31, 2009, TSFG had NOL carryforwards for state income tax purposes of $444.8 million available to offset future taxable state income, if any, which expire in 2010 through 2029. These state NOL carryforwards may also be subject to limitation upon change of control. TSFG also has capital loss carryforwards of $7.8 million, which are available to offset future taxable federal capital gains, if any, through 2013.

The following table summarizes the activity related to unrecognized tax benefits (in thousands) for the years ended December 31:

   
2009
    
2008
    
2007
  
Balance at beginning of year
   $ 4,382     $ 10,818     $ 13,218  
Increases related to current year tax positions
     -       154       2,836  
Decreases related to prior year tax positions
     (14 )     (70 )     (32 )
Decreases related to expiration of statute of limitations
     (1,630 )     (2,985 )     (21 )
Decreases related to audits/settlements with taxing authorities
     -       (3,535 )     (5,183 )
Balance at end of year
   $ 2,738     $ 4,382     $ 10,818  

If recognized, the gross unrecognized tax benefits of $2.7 million at December 31, 2009 would favorably affect the effective income tax rate in future periods. At December 31, 2009, approximately $428,000 of unrecognized tax benefits is expected to be resolved during the next 12 months through the expiration of the statute of limitations and resolution of outstanding audits with taxing authorities.

TSFG and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through 2005. Tax returns for 2006 forward are open to examination by the Internal Revenue Service. The Company is open to state and local income tax examinations for the tax years 2006 forward.
 
TSFG’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized $0, $79,000, and $363,000 of expense from interest and penalties in the statement of operations in 2009, 2008, and 2007, respectively. The Company had approximately $461,000 and $622,000 accrued for interest and penalties at December 31, 2009 and 2008, respectively.

 
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Note 18. Short-Term Borrowed Funds

Short-term borrowed funds at December 31 were (in thousands):

   
2009
    
2008
  
Customer sweep accounts
   $ 316,690     $ 493,012  
Treasury, tax and loan note
     5,987       3,516  
Federal funds purchased and repurchase agreements
     25       67,309  
Federal reserve borrowings
     -       1,050,000  
Commercial paper
     -       12,537  
    $ 322,702     $ 1,626,374  

Repurchase agreements and certain customer sweep accounts represent overnight and short-term borrowings collateralized by securities of the U.S. government or its agencies, which are held by third-party safekeepers. The approximate cost and fair value of these securities at December 31, 2009 were $358.8 million and $364.2 million, respectively. The approximate cost and fair value of these securities at December 31, 2008 were $532.9 million and $530.8 million, respectively.

The following summarizes selected data related to short-term borrowed funds (in thousands) at and for the years ended December 31:

   
2009
    
2008
  
Maximum outstanding at any month-end during the year
   $ 1,750,400     $ 2,324,472  
Balance outstanding at end of year
     322,702       1,626,374  
Average outstanding during the year
     810,919       1,626,453  
Average interest rate during the year
     0.28 %     2.14 %
Average interest rate at end of  year
     0.33       0.38  

Interest expense on short-term borrowings for the years ended December 31 related to the following (in thousands):

   
2009
    
2008
    
2007
  
Customer sweep accounts
   $ 1,011     $ 11,519     $ 22,724  
Treasury, tax and loan note
     3       4,382       11,208  
Federal funds purchased and repurchase agreements
     120       8,311       39,650  
Federal reserve borrowings
     1,012       8,734       -  
Commercial paper
     27       954       1,790  
FHLB advances
     86       870       4,476  
Line of credit to unaffiliated bank and other
     -       5       5  
    $ 2,259     $ 34,775     $ 79,853  

Note 19. Unused Lines of Credit

At December 31, 2009, TSFG had unused short-term lines of credit to purchase federal funds from unrelated banks totaling $113.7 million. These lines of credit are generally available on a one-to-ten day basis for funding short-term liquidity needs. In addition, at December 31, 2009, TSFG had $124.5 million of excess collateral to support FHLB advances, subject to adjustments regarding acceptability by the FHLB, and $202.3 million of excess collateral to support Treasury, tax and loan borrowings. A collateralized borrowing relationship with the Federal Reserve Bank of Richmond is in place for TSFG. At December 31, 2009, TSFG had $1.4 billion of excess qualifying collateral to secure advances from the Federal Reserve Bank. These lines of credit are subject to withdrawal at any time at the lenders’ option.

 
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Note 20. Long-Term Debt

Long-term debt at December 31 consisted of the following (in thousands, except for descriptions of terms):

   
2009
    
2008
  
FHLB advances, net of discount of $731,000 at December 31, 2009; fixed or variable rates ranging from 0.41% to 4.27% due from 2011 to 2018, notwithstanding certain earlier call dates; collateralized by a blanket lien on  qualifying loans, including first mortgages on one-to-four family residences valued at $323.9 million, home equity lines of credit and second mortgage loans valued at $607.2 million, and commercial loans valued at $987.6 million; initial maturity of one year or greater; interest payable quarterly
   $ 752,646     $ 233,497  
Repurchase agreements; fixed or variable rates ranging from 0.05% to 4.30% due in 2012; collateralized by securities of the U.S. government or its agencies, which are held by third-party safekeepers, valued at $132.7 million; interest payable quarterly
     125,000       200,000  
Subordinated Notes; due September 1, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.42%; balance can be prepaid in whole or in part after September 1, 2012 at accrued and unpaid interest plus outstanding principal (1)
     77,320       77,320  
Subordinated Notes; due June 15, 2036; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.59%; balance can be prepaid in whole or in part after June 15, 2011 at accrued and unpaid interest plus outstanding principal (1)
     41,238       41,238  
Subordinated Notes; due July 7, 2036; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.56%; balance can be prepaid in whole or in part after July 7, 2011 at accrued and unpaid interest plus outstanding principal (1)
     36,083       36,083  
Subordinated Notes; due September 15, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.32%; balance can be prepaid in whole or in part after December 15, 2012 at accrued and unpaid interest plus outstanding principal (1)
     30,928       30,928  
Mandatorily redeemable preferred stock of subsidiary; redeemable January 31, 2031; unsecured; dividends payable quarterly and at maturity at a rate per annum equal to 11.125% (2)
     26,300       26,300  
Subordinated Notes; due October 30, 2037; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 1.33%; balance can be prepaid in whole or in part after October 30, 2012 at accrued and unpaid interest plus outstanding principal (1)
     18,042       18,042  
Mandatorily redeemable preferred stock of subsidiary; redeemable May 31, 2012; unsecured; dividends payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 3.50% (2)
     5,500       30,500  
Subordinated Notes; due June 26, 2033; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 3.10% (not to exceed 11.75% through June 26, 2008); balance can be prepaid in whole or in part after June 26, 2008 at accrued and unpaid interest plus outstanding principal (1)
     3,093       3,093  
Subordinated Notes; due December 17, 2013; unsecured; interest payable quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 2.83%; balance can be prepaid after December 17, 2008 at par plus accrued and unpaid interest
     --       10,000  
Other
     719       768  
    $ 1,116,869     $ 707,769  

 
(1)
The balance can also be prepaid in whole (but not in part) at any time within a specified number of days (as defined in the indenture) following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the indenture).
 
(2)
The balance can be redeemed in whole or in part following the occurrence of a tax or capital event (as defined in the terms of the preferred stock).

 
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Required annual principal payments for the five years subsequent to December 31, 2009 are as follows (in thousands):

   
FHLB
    
Repurchase
              
   
Advances
    
Agreements
    
Other
    
Total
  
2010
   $ 123     $ -     $ 56     $ 179  
2011
     450,125       -       64       450,189  
2012
     100,128       125,000       6,099       231,227  
2013
     200,132       -       -       200,132  
2014
     135       -       -       135  
Thereafter
     2,734       -       233,004       235,738  
    $ 753,377     $ 125,000     $ 239,223     $ 1,117,600  

Debt issuance costs, net of accumulated amortization, totaled $1.0 million and $1.7 million at December 31, 2009 and 2008, respectively, and are included in other assets on the consolidated balance sheet. Amortization of debt issuance costs totaled $106,000, $233,000, and $466,000 in 2009, 2008, and 2007, respectively, and is reported in other noninterest expenses on the consolidated statements of operations.

During the years ended December 31, 2009, 2008, and 2007, TSFG recognized gains or losses on the early extinguishment of debt of $3.0 million gain, $2.1 million loss, and $2.0 million loss, respectively. Such gains and losses are included in noninterest expenses. The gain for 2009 was primarily due to the gain on the repurchase of $25.0 million of mandatorily redeemable preferred stock of a REIT subsidiary, partially offset by a loss on termination of $75.0 million of long-term repurchase agreements. The loss for 2008 was primarily due to prepayment penalties for FHLB advances partially offset by gains on brokered CDs for which the related interest rate swaps were called. The majority of the loss for 2007 reflects the write-off of unamortized debt issuance costs associated with $131.5 million of subordinated notes and mandatorily redeemable preferred stock, with an average spread of 347 basis points over LIBOR, which TSFG called for redemption.

Trust preferred securities (“Trust Securities”) are issued by statutory business trusts (the “Trusts”) which are not consolidated (see Note 1). These Trust Securities are mandatorily redeemable preferred security obligations of the Trusts. The sole assets of the Trusts are subordinated notes (the “Notes”) of TSFG, which are included in the Long-Term Debt table above. Each issue of the Notes has an interest rate equal to the corresponding Trust Securities distribution rate. TSFG has the right, subject to events of default, to defer payment of interest on the Notes for a period not to exceed five years, provided that no extension period may extend beyond the stated maturity of the relevant Notes. During any such extension period, distributions on the Trust Securities will also be deferred and the Company’s ability to pay dividends on its common and preferred stock will be restricted.

Effective first quarter 2010, TSFG opted to defer payment of interest on the Notes (which will in turn defer payment of the distributions on the Trust Securities), as well as to suspend dividends on all mandatorily redeemable preferred stock of its REIT subsidiary (“REIT Preferred Securities”). Since both the Notes and the REIT Preferred Securities are considered debt on the consolidated balance sheet, interest and dividends will continue to be accrued in the statement of operations despite the fact that the payments have been suspended. The terms of the REIT Preferred Securities include a provision that if six quarters of dividends are not declared and paid, the preferred holders get to elect two new trustees. In addition, the suspension of dividends on the REIT Preferred Securities prohibits any payment of common dividends out of the REIT subsidiary, which may cause it to lose its status as a REIT and thus become subject to taxation as a regular corporation.

Note 21. 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.

 
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In March 2009, Carolina First Bank was named as a defendant in a complaint filed in the In re Louis J. Pearlman bankruptcy pending in the United States Bankruptcy Court, Middle District of Florida, Orlando Division. The complaint seeks, among other things, to avoid certain fraudulent transfers Carolina First Bank allegedly received in connection with repayment of a loan and alleges approximately $24 million in compensatory damages, plus punitive damages. TSFG intends to vigorously defend the allegations and has moved to dismiss the complaint or, in the alternative, for a more definite statement. 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. 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. In the complaint, which seeks damages of $36 million, 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 the Carolina First Bank loan. TSFG intends to vigorously defend the allegations and has moved to dismiss the complaint.

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

Recourse Reserve

As part of its 2004 acquisition of Florida Banks, Inc. (“Florida Banks”), TSFG acquired a recourse reserve associated with loans previously sold from Florida Banks’ wholesale mortgage operation. This recourse requires the repurchase of loans at par plus accrued interest from the buyer, upon the occurrence of certain events. At December 31, 2009 and 2008, 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.

Lease Commitments

Minimum rental payments under noncancelable operating leases at December 31, 2009 are as follows (in thousands):

2010
   $ 17,490  
2011
     17,361  
2012
     16,780  
2013
     15,751  
2014
     14,128  
Thereafter
     94,534  
    $ 176,044  

Leases on premises and equipment have options for extensions under substantially the same terms as in the original lease period with certain rate escalations. Lease payments charged to expense totaled $20.0 million, $21.0 million, and $19.2 million in 2009, 2008, and 2007, respectively. The leases typically provide that the lessee pay property taxes, insurance, and maintenance cost.

Lending Commitments and Guarantees

In the normal course of business, to meet the financing needs of its customers, TSFG is a party to financial instruments with off-balance-sheet risk. These financial instruments include commitments to extend credit, standby letters of credit, repurchase agreements, and documentary letters of credit. Those 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 in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. TSFG uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 
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Commitments to extend credit are agreements to lend as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many 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 collateral obtained, if deemed necessary by TSFG upon extension of credit, is based on management's credit evaluation of the borrower.

Standby letters of credit represent an obligation of TSFG to a third party contingent upon the failure of TSFG’s customer to perform under the terms of an underlying contract with the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will be generally drawn only when the underlying event fails to occur as intended. TSFG has legal recourse to its customers for amounts paid, and these obligations are secured or unsecured, depending on the customers’ creditworthiness. Commitments under standby letters of credit are usually for one year or less. TSFG evaluates its obligation to perform as a guarantor and records reserves as deemed necessary.

The following presents a summary of the contractual amounts of TSFG’s financial instruments relating to extension of credit with off-balance sheet risk at December 31 (in thousands):

Loan commitments:
  
2009
    
2008
  
Commercial, industrial, and other
   $ 1,085,129     $ 1,296,635  
Commercial owner-occupied and commercial real estate
     119,928       324,360  
Home equity loans
     423,151       477,777  
Total loan commitments
     1,628,208       2,098,772  
Standby letters of credit
     199,237       213,960  
Documentary letters of credit
     2,066       941  
Unused business credit card lines
     31,746       33,836  
Total
   $ 1,861,257     $ 2,347,509  

The total portfolios of loans serviced or subserviced for non-affiliated parties at December 31, 2009 and 2008 were $52.5 million and $103.1 million, respectively.

TSFG directors, directors of subsidiaries of TSFG, executive officers, and associates of such persons were customers of and had transactions with TSFG in the ordinary course of business. Included in such transactions are loan commitments, all of which were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of these unfunded loan commitments to the aforementioned directors, officers and their associates totaled $7.0 million and are included in the unfunded loan commitments presented above.

 
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Note 22. Preferred Stock and Warrants

The following is a summary of TSFG’s preferred stock at and for the years ended December 31:

   
2009
  
   
Shares
    
Carrying
  
               
Converted
          
Value
  
   
Balance,
          
to Common
    
Balance,
    
December 31,
  
   
January 1,
    
Exchanged
    
Shares
    
December 31,
    
($000s)
  
Series 2008ND-V
     51,341       (21,852 )     (29,489 )     -     $ -  
Series 2008ND-NV
     177,639       (72,648 )     (104,991 )     -       -  
Series 2008D-V
     2,248       -       (1,200 )     1,048       1,048  
Series 2008D-NV
     7,472       -       (3,870 )     3,602       3,602  
Series 2009-A
     -       94,500       (94,500 )     -       -  
Mandatorily convertible preferred stock
     238,700       -       (234,050 )     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
     -       -       -       -       (15,867 )
Series 2008-T, net
     347,000       -       -       347,000       331,133  
Total preferred stock
     585,700       -       (234,050 )     351,650     $ 335,783  

   
2008
  
   
Shares
    
Carrying
  
               
Converted
          
Value
  
   
Balance,
          
to Common
    
Balance,
    
December 31,
  
   
January 1,
    
Issued
    
Shares
    
December 31,
    
($000s)
  
Series 2008ND-V
     -       55,562       (4,221 )     51,341     $ 51,341  
Series 2008ND-NV
     -       184,718       (7,079 )     177,639       177,639  
Series 2008D-V
     -       2,248       -       2,248       2,248  
Series 2008D-NV
     -       7,472       -       7,472       7,472  
Mandatorily convertible preferred stock
     -       250,000       (11,300 )     238,700       238,700  
Series 2008-T
     -       347,000       -       347,000       347,000  
Less discount originally attributable to the Warrant issued to the Treasury Department, net of accretion
     -       -       -       -       (19,321 )
Series 2008-T, net
     -       347,000       -       347,000       327,679  
Total preferred stock
     -       597,000       (11,300 )     585,700     $ 566,379  

On May 8, 2008, TSFG issued, in the aggregate, 250,000 shares of no par value, mandatory convertible non-cumulative preferred stock (“Series 2008ND/D Preferred Stock”), at a purchase price and liquidation preference of $1,000 per share. Dividends are payable quarterly, if declared by the Board of Directors, at an annual rate of 10%. Each share of Series 2008ND/D Preferred Stock is mandatorily convertible into 153.846 shares of TSFG’s common stock, based on a conversion price of $6.50 per share of common stock, on May 1, 2011. On or after July 18, 2010, the Series 2008ND/D Preferred Stock is also automatically convertible if, for a period of 20 consecutive trading days, the closing price of TSFG’s common stock has been at least $21.00 per share. In addition, the Series 2008ND/D Preferred Stock is convertible at the option of the holder before the mandatory conversion events described above.

The voting and conversion rights of the Series 2008ND/D Preferred Stock were voted upon and approved at a special shareholders’ meeting on July 18, 2008. As a result, all four Series 2008ND/D Preferred Stock series were considered common stock equivalents at December 31, 2009 and 2008 and would have added approximately 715,000 shares and 36.7 million shares, respectively, to the computation of diluted earnings per share, had the effect not been antidilutive.

Since July 18, 2008, except when they are entitled to vote as a separate class, the holders of the Series 2008ND/D Preferred Stock are entitled to vote their shares on an as-converted basis with our common stock as a single class. The affirmative vote of two-thirds of the holders of outstanding Series 2008ND/D Preferred Stock (voting as a separate class) is required for approval of any proposed changes in the preferences and special rights of such stock, or for certain acquisitions announced during the first 18 months following the issuance of the Series 2008ND/D

 
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Preferred Stock. The Series 2008 ND/D Preferred Stock has no participation rights, unless the quarterly cash dividend on TSFG’s common stock is increased above certain thresholds after May 1, 2010. In that event, the Series 2008ND/D Preferred Stock would be entitled to receive additional dividends in proportion to the increase in the common stock dividend. The Series 2008ND/D Preferred Stock is not redeemable and is not subject to any sinking fund.

In June 2009, as an inducement to convert preferred shares to common shares, TSFG exchanged 94,500 shares of Series 2008ND-V and Series 2008 ND-NV mandatorily convertible preferred stock for 94,500 shares of a new series of mandatorily convertible preferred stock (“Series 2009-A”) with a liquidation preference of $1,000 per share. The conversion rights of the Series 2009-A were voted upon and approved at a special shareholders’ meeting on September 11, 2009.

During 2009, 234,050 shares of mandatorily convertible preferred stock Series 2008 ND/D and Series 2009-A were converted into approximately 54.9 million common shares, which included 18.9 million shares (valued at $32.4 million) issued as an inducement to convert.

Dividends declared on the Series 2008ND/D during 2009 and 2008 were $7.3 million and $17.9 million, respectively. During 2009, TSFG recorded $32.4 million as deemed dividends resulting from induced conversions in the computation of net income available to common shareholders.

On December 5, 2008, TSFG issued 347,000 shares of no par value, cumulative perpetual preferred stock, Series 2008-T (“Series 2008-T Preferred Stock”), to the United States Department of the Treasury (“Treasury Department”) with a liquidation preference of $1,000 per share, as part of the Troubled Asset Relief Program Capital Purchase Program. The Series 2008-T Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. TSFG may not redeem the Series 2008-T Preferred Stock prior to February 15, 2012 except with the proceeds from a qualified equity offering. After February 15, 2012, TSFG may, at its option, redeem the Series 2008-T Preferred Stock at par value plus accrued and unpaid dividends. The Series 2008-T Preferred Stock is generally non-voting. Prior to December 5, 2011, unless the Company has redeemed the Series 2008-T Preferred Stock or the Treasury Department has transferred the Series 2008-T Preferred Stock to a third party, the consent of the Treasury Department will be required for the Company to increase its common stock dividend or repurchase its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practices and certain other circumstances. A consequence of the Series 2008-T Preferred Stock purchase includes certain restrictions on executive compensation that could limit the tax deductibility of compensation the Company pays to executive management. Dividends declared on the Series 2008-T during 2009 and 2008 were $13.0 million and $3.4 million, respectively. In addition, TSFG recorded $4.3 million as accumulated but undeclared cumulative dividends in the computation of net income available to common shareholders.

As part of its purchase of the Series 2008-T Preferred Stock, the Treasury Department received a warrant (“the Warrant”) to purchase 10,106,796 shares of the Company’s common stock at an initial per share price of $5.15. The Warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable upon exercise pursuant to customary anti-dilution provisions and upon certain issuances of the Company’s common stock at or below a specified price relative to the initial exercise price. The Warrant is immediately exercisable and expires ten years from the issuance date. The shares issuable pursuant to the Warrant were considered common stock equivalents and would have added 10.1 million shares to the computation of diluted earnings per share for the years ended December 31, 2009 and 2008, had the effect not been antidilutive.

The proceeds from the issuance of the Series 2008-T Preferred Stock and the Warrant were allocated based on the relative fair value of the Warrant as compared to the fair value of the preferred shares. The fair value of the Warrant was determined using a Black-Scholes model. The model includes assumptions regarding TSFG’s common stock price, dividend yield, stock price volatility, as well as assumptions regarding the risk-free interest rate. The fair value of the preferred shares was determined based on a discounted cash flow model using an estimated life of five years and a discount rate of 13%. As a result of the valuations, $327.4 million was allocated to the preferred shares and $19.6 million was allocated to the Warrant. The resulting discount on the preferred shares will be accreted through retained earnings over the five-year estimated life using the effective interest method. During 2009 and 2008, accretion of the preferred discount totaled $3.5 million and $243,000, respectively, and was treated as a deemed dividend to preferred shareholders in the computation of earnings per share.

All preferred shares outstanding are in parity to each other and rank senior to common shares both as to dividend and liquidation preferences. Subsequent to year-end, in early 2010, TSFG suspended dividend payments on all series of preferred stock.

 
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Note 23. Capital Stock

On March 5, 2009, TSFG filed a “universal shelf” registration statement registering up to $750.0 million of securities to provide additional flexibility in managing capital levels, both in terms of debt and equity. On June 24, 2009, TSFG completed a common stock offering, selling 75 million shares at a gross offering price of $1.00 per share. In July 2009, TSFG sold an additional 10 million shares at $1.00 per share pursuant to the exercise in full of the underwriters’ over-allotment option. The common stock offerings generated proceeds to TSFG of $79.7 million for the year ended December 31, 2009, net of issuance costs for underwriting and expenses. TSFG used the net proceeds to increase the capital at TSFG’s subsidiary bank.

On September 11, 2009, TSFG held a special meeting of shareholders at which an amendment to the Articles of Incorporation was approved to increase the number of authorized shares of common stock from 200 million to 325 million.

In December of 2006, TSFG’s Board of Directors authorized a stock repurchase program of up to 4 million shares. This authorization replaced TSFG’s existing stock repurchase authorizations. Through August 2007, TSFG had repurchased 3 million shares pursuant to this authorization. In August 2007, the Board of Directors amended and restated the existing stock repurchase authorization to be an additional $100 million, which expires if unused on or before June 30, 2008. In fourth quarter 2007, TSFG repurchased 600,000 shares for $12.0 million, leaving $88.0 million under this authorization, which expired unused on June 30, 2008.

TSFG has a Dividend Reinvestment Plan, which allows shareholders to invest dividends and optional cash payments in additional shares of common stock. Shareholders of record are automatically eligible to participate in the plan.

Note 24. Regulatory Capital Requirements

TSFG and Carolina First Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on TSFG's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, TSFG and Carolina First Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. TSFG's and Carolina First Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require TSFG and Carolina First Bank to maintain minimum amounts and ratios (set forth in the following table) of total and tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and to average assets (as defined). Management believes, as of December 31, 2009, that TSFG and Carolina First Bank met all capital adequacy requirements.

As of December 31, 2009, the most recent notification from federal banking agencies categorized TSFG and Carolina First Bank as "well capitalized" under the regulatory framework. To be categorized as "well capitalized," Carolina First Bank must maintain minimum total risk-based capital, tier 1 capital, and tier 1 leverage ratios as set forth in the table. Since December 31, 2009, there have been no events or conditions that management believes have changed Carolina First Bank’s categories.

 
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TSFG's and Carolina First Bank's capital levels at December 31 exceeded the "well capitalized levels," as shown below (dollars in thousands):

               
Minimum Requirements
  
                           
To Be Well Capitalized
  
                           
Under Prompt
  
               
For Capital Adequacy
    
Corrective Action
  
   
Actual
    
Purposes
    
Provisions
  
   
2009
    
2008
    
2009
    
2008
    
2009
    
2008
  
TSFG
                                    
Tier 1 capital
   $ 948,762     $ 1,513,452     $ 382,008     $ 470,581       n/a       n/a  
Total risk-based capital
     1,073,472       1,688,077       764,015       941,161       n/a       n/a  
Tier 1 capital ratio
     9.93 %     12.86 %     4.00 %     4.00 %     n/a       n/a  
Total risk-based capital ratio
     11.24       14.35       8.00       8.00       n/a       n/a  
Leverage ratio
     7.91       11.22       4.00       4.00       n/a       n/a  
                                                 
Carolina First Bank
                                                
Tier 1 capital
   $ 854,808     $ 1,277,340     $ 381,423     $ 469,428     $ 572,134     $ 704,142  
Total risk-based capital
     1,005,638       1,477,910       762,846       938,856       953,557       1,173,570  
Tier 1 capital ratio
     8.96 %     10.88 %     4.00 %     4.00 %     6.00 %     6.00 %
Total risk-based capital ratio
     10.55       12.59       8.00       8.00       10.00       10.00  
Leverage ratio
     7.13       9.49       4.00       4.00       5.00       5.00  
Given our asset quality and earnings performance, if we are not able to substantially increase our regulatory capital in the near term, we believe that it is likely that our regulators would request that we stipulate to a consent order, to be entered into between the bank and each of its banking regulators. A consent order would, among other things, result in Carolina First Bank being deemed “adequately capitalized” (irrespective of the fact that it may be “well capitalized”) and could require that the Company raise additional capital within a specified timeframe and limit TSFG's  access to the brokered CD market and restrict the rates it can offer on customer deposits. In addition, a consent order would likely impose higher capital ratios on Carolina First Bank than would otherwise be required. If the Company is unable to raise the capital required or otherwise comply with the terms of any such consent order, further regulatory actions could be taken, and its ability to operate as a going concern could be negatively impacted. Furthermore, because such consent orders are public, there could be an adverse customer or market reaction to such announcement.
 
Note 25. Restrictions on Dividends

The ability of TSFG to pay cash dividends over the long term is dependent upon receiving cash in the form of dividends from its subsidiaries. Current federal law prohibits, except under certain circumstances and with prior regulatory approval, an insured depository institution from paying dividends or making any other capital distribution if, after making the payment or distribution, the institution would be considered "undercapitalized," as that term is defined in applicable regulations. In addition, South Carolina banking regulations restrict under certain circumstances the amount of dividends that the subsidiary bank can pay to TSFG.

The terms of TSFG’s preferred stock include a restriction on declaring or paying common dividends unless all preferred dividends are paid.  In addition, the Federal Reserve has the authority to prohibit TSFG from paying a dividend on its common and preferred stock and trust preferred securities. During third quarter 2009, TSFG suspended its common dividend. Future TSFG common dividends will depend upon a number of factors, including payment of the preferred stock dividends, financial performance, capital requirements and assessment of capital needs. Subsequent to year-end, TSFG suspended dividends on all remaining outstanding equity and capital instruments, including its trust preferred and REIT preferred securities. Based on informal communications from federal banking regulators, currently none of TSFG or Carolina First Bank, or any of their respective subsidiaries (including, but not limited to, the real estate investment trust subsidiary) are permitted to pay dividends on capital securities.

 
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Note 26. Average Share Information

The following is a summary of the basic and diluted average common shares outstanding and (loss) earnings per share calculations (in thousands, except share and per share data) for the years ended December 31:

   
2009
    
2008
    
2007
  
Net (loss) income available to common shareholders
   $ (736,943 )   $ (568,776 )   $ 72,611  
                         
Basic
                        
Average common shares outstanding (denominator)
     141,207,510       73,136,936       73,618,338  
(Loss) earnings per share
   $ (5.22 )   $ (7.78 )   $ 0.99  
                         
Diluted
                        
Average common shares outstanding
     141,207,510       73,136,936       73,618,338  
Dilutive potential common shares
     -       -       467,102  
Average diluted shares outstanding (denominator)
     141,207,510       73,136,936       74,085,440  
(Loss) earnings per share
   $ (5.22 )   $ (7.78 )   $ 0.98  

For the years ended December 31, 2009, 2008, and 2007, options to purchase an additional 3.7 million, 4.7 million, and 2.0 million shares, respectively, of common stock were outstanding but were not included in the computation of 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 year ended December 31, 2009 because of their antidilutive effect were 715,000 shares of common stock related to mandatorily convertible preferred stock, 10.1 million shares of common stock related to warrants, and 262,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs. Also excluded from the computation of diluted earnings per share for the year ended December 31, 2008 because of their antidilutive effect were 36.7 million shares of common stock related to mandatorily convertible preferred stock, 10.1 million shares of common stock related to warrants, and 385,000 shares of common stock related to restricted stock and restricted stock units granted under equity incentive programs.

Note 27. Share-Based Compensation

TSFG has a Long-Term Incentive Plan (the “LTIP”), a restricted stock plan, and various stock option plans. These plans provide for grants of restricted stock units (“RSUs”), restricted stock, options to purchase TSFG’s $1 par value common stock, or other share-based awards. Service awards are expensed over the vesting period (typically three or five years following the grant date). For performance-based RSUs and restricted stock, TSFG estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vesting date. Compensation expense is adjusted in the period such estimates change. Income tax benefits related to stock compensation in excess of grant date fair value are recognized as an increase to surplus upon vesting and delivery of the stock. The compensation cost that was charged against income for these plans and the total income tax benefit recognized in the income statement for share-based compensation arrangements were as follows (in thousands):

   
2009
    
2008
    
2007
  
Compensation cost charged against income
   $ 4,890     $ 9,936     $ 7,469  
Total income tax benefit recognized in income statement (1)
     -       2,534       1,432  
 
 
(1)
At December 31, 2009, TSFG had a full valuation allowance against its deferred tax asset. As a result, no income tax benefit was recognized during 2009 for compensation cost charged against income.

Restricted Stock and Other Share-Based Awards

TSFG’s LTIP provides for incentive compensation in the form of stock options, restricted stock, RSUs, performance units (which may be stock based), stock appreciation rights and other stock-based forms of compensation. These grants may be made to directors, officers, employees, prospective employees, and consultants of TSFG. At December 31, 2009, authorized shares under the LTIP totaled 3.0 million shares (subject to further limitation of 1.7 million shares for restricted stock), of which approximately 1.1 million shares were available to be granted. TSFG also has a Restricted Stock Plan for awards to certain key employees. At December

 
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31, 2009, authorized shares under the Restricted Stock Plan totaled 875,000 shares, of which approximately 60,000 shares were available to be granted.

Shares of restricted stock granted to employees under both the LTIP and the Restricted Stock Plan are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights.

Certain of TSFG’s RSUs were performance-based awards with vesting dependent on achieving, during 2009, certain earnings per share targets relative to a broad regional bank peer group, and return on equity targets. These performance targets were not reached, and the corresponding RSUs were forfeited during 2009. TSFG had recognized no expense related to the performance targets in 2009, 2008, or 2007 based on its assessment that meeting the performance targets was not probable.

The following is a summary of the status of TSFG’s nonvested shares of restricted stock and RSUs as of December 31, 2009 and changes during the year ended December 31, 2009.

         
Weighted
          
Weighted
  
         
Average
          
Average
  
         
Grant-Date
    
Restricted
    
Grant-Date
  
   
RSUs
    
Fair Value
    
Shares
    
Fair Value
  
Nonvested at January 1, 2009
     563,310 (1)   $ 18.35       92,570     $ 18.15  
Granted
     5,103       1.70       20,000       1.78  
Vested
     (73,492 )     18.93       (51,022 )     19.58  
Cancelled
     (289,177 )     21.93       (5,119 )     23.35  
Nonvested at December 31, 2009
     205,744     $ 11.94       56,429     $ 10.59  
 
 
(1)
Assumes maximum performance targets are met for performance-based awards.

As of December 31, 2009, there was $1.4 million of total unrecognized compensation cost related to nonvested shares of restricted stock and RSUs. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.2 years. The total fair value of shares and RSUs vested during 2009, 2008, and 2007 was $2.4 million, $13.8 million and $2.6 million, respectively. The weighted average grant date fair value of RSUs in 2008 and 2007 was $10.07 per share and $23.26 per share, respectively. The weighted average grant date fair value of restricted stock in 2008 and 2007 was $15.42 per share and $21.41 per share, respectively.

In third quarter 2008, TSFG’s Board of Directors modified and accelerated the vesting of several previous share-based awards to CEO/Chairman Mack Whittle in connection with his retirement (which was effective October 27, 2008). As a result, expense related to unvested tranches of the original awards was reversed, and the incremental expense related to the modified awards ($2.0 million) was recognized during the third and fourth quarters of 2008.

In 2005, under the LTIP, TSFG issued cash-settled stand alone stock appreciation rights, which are accounted for as liability-classified awards. The strike price of each stock appreciation right equals the fair market value of TSFG's common stock on the date of grant. Stock appreciation rights issued to employees under this plan are exercisable on a cumulative basis for 20% of the shares on each of the first five anniversaries of the grant, and have a maximum contractual term of ten years. The following is a summary of the stock appreciation rights activity under the LTIP for the year ended December 31, 2009.

   
Shares
    
Weighted
Average
Exercise
Price
    
Weighted
Average
Remaining
Contractual
Term (Years)
    
Aggregate
Intrinsic
Value
($000)
  
Outstanding, January 1, 2009
     153,325     $ 29.40              
Cancelled
     (23,975 )     29.40              
Outstanding, December 31, 2009
     129,350     $ 29.40       5.9     $ -  
                                 
Exercisable, December 31, 2009
     103,780     $ 29.40       5.9     $ -  

 
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There was no material unrecognized stock-based compensation expense related to stock appreciation rights at December 31, 2009.

Stock Option Plans

TSFG has a Stock Option Plan, a Directors' Stock Option Plan, a Fortune 50 Stock Option Plan, and various option plans assumed in connection with acquisitions (collectively referred to as “stock-based option plans”). At December 31, 2009, authorized shares under the Stock Option Plan totaled 5.2 million shares, of which approximately 1.1 million were available to be granted. The exercise price of each option either equals or exceeds the fair market value of TSFG's common stock on the date of grant. Options issued to employees under the Stock Option Plan are typically exercisable on a cumulative basis for 20% of the shares on each of the first five anniversaries of the grant, and have a maximum contractual term of ten years. Under the Directors' Stock Option Plan, TSFG may grant options to its non-employee directors and advisory board members. At December 31, 2009, authorized shares under the Directors’ Stock Option Plan totaled 650,000 shares, of which approximately 206,000 were available to be granted. The exercise price of each director’s option equals the fair market value of TSFG's common stock on the date of grant. Options issued to directors under the Directors’ Stock Option Plan vest immediately on the grant date, and have a maximum contractual term of ten years.

The fair value of TSFG’s market-based stock options is estimated at the date of grant using a Monte Carlo simulation. The fair value of TSFG’s other stock options is estimated at the date of grant using the Black-Scholes option-pricing model. Both models require the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that these option-pricing models provide a reasonable estimate of fair value, the models do not necessarily provide the best single measure of fair value for TSFG’s employee stock options. Assumptions include, but are not limited to, TSFG’s expected price volatility over the term of the awards, which is based on historical volatility of TSFG’s common stock. The following is a summary of TSFG’s weighted-average assumptions used to estimate the weighted-average per share fair value of options granted on the date of grant using the Black-Scholes option-pricing model:

   
2009
    
2008
    
2007
  
Expected life (in years)
     6.01       6.01       6.01  
Expected volatility
     77.73 %     40.96 %     23.45  
Risk-free interest rate
     3.21       3.08       3.93  
Expected dividend yield
     3.00       2.88       4.32  
Weighted-average fair value of options granted during the period
   $ 0.90     $ 3.20     $ 2.95  

No market-based stock options were granted in 2009 or 2007. Assumptions used to estimate the per-share fair value of options granted during 2008 using the Monte Carlo simulation method were similar to those summarized in the table above, and yielded a fair value per option of $2.13.

The following is a summary of the activity under the stock-based option plans for the year ended December 31, 2009.

               
Weighted
        
         
Weighted
    
Average
    
Aggregate
  
         
Average
    
Remaining
    
Intrinsic
  
         
Exercise
    
Contractual
    
Value
  
   
Shares
    
Price
    
Term (Years)
     ($000)  
Outstanding, January 1, 2009
     4,688,093     $ 18.63                
Granted
     36,250       1.63                
Cancelled
     (1,014,042 )     17.99                
                               
Outstanding, December 31, 2009
     3,710,301     $ 18.63       5.9     $ -  
                                 
Exercisable, December 31, 2009
     2,145,442     $ 22.44       4.2     $ -  

Unrecognized stock-based compensation expense related to stock options totaled $3.0 million at December 31, 2009. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 1.8 years.

 
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No options were exercised during 2009. The total intrinsic value of options exercised during 2008 and 2007 was $19,000 and $3.6 million, respectively. Cash received from options exercised under all share-based payment arrangements for 2008 and 2007 was $35,000 and $8.1 million, respectively. The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $6,000 and $1.1 million, respectively, for 2008 and 2007. TSFG has a policy of issuing new shares to satisfy stock option exercises.

Note 28. Employee Benefits

TSFG maintains the Carolina First Salary Reduction Plan and Trust ("401(k) Plan") for all eligible employees. Upon ongoing approval of the Board of Directors, TSFG matches a percentage of employee contributions subject to certain adjustments and limitations. Contributions of $3.3 million, $5.4 million, and $5.5 million were charged to operations in 2009, 2008, and 2007, respectively.

TSFG maintains Supplementary Executive Retirement Plans (“SERPs”) for certain officers. These plans provide salary continuation benefits after the participant reaches normal retirement age (usually age 65) or early retirement (age 55 and 7 years of service) and continue for 15 years unless an alternate payout election is made by the executive. The SERPs also provide limited benefits in the event of early termination or disability while employed by TSFG and full benefits to the officer’s beneficiaries in the event of the officer’s death. In the event of a change of control of TSFG as defined in the SERPs, the officers become 100% vested in the total benefit. For the years ended December 31, 2009, 2008, and 2007, costs of $2.0 million, $3.5 million, and $4.3 million, respectively, were charged to expense related to these SERPs.

The SERP liability is accrued over the period until normal retirement date. The accrual is determined based on the present value of the estimated annual benefit payments at normal retirement, and by calculating a level principal amount required for the accrual to reach the present value of the estimated annual benefit payments at normal retirement. A discount rate is used to determine the present value of future benefit obligations. The discount rate for each plan is determined using the Moodys Aaa corporate bond rate published in the Federal Register as of the prior year end. In determining the estimated future annual benefit obligations, an estimated rate of compensation growth per year is generally used and may be adjusted as expectations about future compensation levels change. Compensation, for purposes of determining the annual benefit levels as defined in the plans, is the average of the highest three years annual base salary plus bonus. The benefit level, as a percentage of compensation, generally ranges between 15% and 60%, as specified in each SERP agreement.

If the Executive retires prior to normal retirement, or there is a change in the anticipated retirement date, and the Executive is eligible for the early retirement benefit under the SERP plan, the accrual is adjusted to reflect the calculated amount pursuant to provisions of the early retirement benefit.

TSFG maintains an Executive Deferred Compensation Plan for certain officers and directors. This plan allows eligible officers to defer up to 80% of base annual salary and 100% of annual bonus compensation on a pre-tax basis. TSFG provides a match of 10% of the contribution. The deferral elections are irrevocable and cannot be changed during the plan year. TSFG’s match becomes fully vested after five years. Payments from the plan will automatically begin upon the employee’s retirement, termination of employment, or death during employment. However, employees may choose to receive payments prior to these events, such as an in-service distribution, an elective early withdrawal, or upon a change in control. TSFG’s matching contributions, included in deferred compensation expense, totaled $25,000, $154,000, and $103,000 in 2009, 2008, and 2007, respectively.

TSFG common and/or preferred stock is an investment option for deferred compensation under TSFG’s Executive Deferred Compensation Plan for certain officers. The common and/or preferred stock purchased by TSFG for this deferred compensation plan is maintained in a rabbi trust (the “Trust”), on behalf of the participants. The assets of the Trust are subject to the claims of general creditors of TSFG. The deferred compensation obligation in the Trust is classified as a component of shareholders’ equity, and the common and/or preferred stock held by the Trust is classified as a reduction of shareholders’ equity. The obligations of TSFG under this investment option of the deferred compensation plan, and the shares held by the Trust, have no net effect on outstanding shares. Subsequent changes in the fair value of the common and preferred stock are not reflected in earnings or shareholders’ equity.

 
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Note 29. CEO Retirement

On September 2, 2008, the Board of Directors and Mack I. Whittle, the Company’s Chairman, President, and Chief Executive Officer, entered into a severance agreement pursuant to which Whittle would receive certain retirement benefits and retire on or before December 30, 2008 (at the Board’s election). Subsequently, the Executive Committee, on behalf of the Board, specified that Whittle’s retirement would be effective October 27, 2008. Those benefits included, among others, a lump sum cash payment of $4.1 million (subject to a six month delay pursuant to Section 409A of the Internal Revenue Code), vesting of all equity awards (see Note 27 – Share-Based Compensation), service credit under the SERP through age 65 which provides an annual retirement payment commencing at retirement date, vested benefits under other Company plans, continued welfare and fringe benefits for three years, and three years of continued life insurance coverage. The incremental expense related to these benefits was approximately $12 million, which was recognized in the second half of 2008.

Note 30. Related Party Transactions

At December 31, 2009 and 2008, TSFG had loans to TSFG directors, directors of its subsidiaries, executive officers, and associates of such persons totaling $16.8 million (which included $9.5 million of nonaccrual loans) and $19.5 million, respectively. All of these loans were made under normal credit terms and did not involve more than normal risk of collection at origination. At December 31, 2009, the aggregate dollar amount of unfunded loan commitments to the aforementioned directors, officers and their associates totaled $7.0 million. See Notes 8 and 21 for further details.

Note 31. 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; or other inputs that are observable or can be corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes U.S. government agencies, agency mortgage-backed debt securities, private-label mortgage-backed debt securities, state and municipal bonds and certain derivative contracts.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Securities Available for Sale. Where quoted market prices are available in an active market, securities are valued at the last traded price by obtaining information 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

 
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prices of pools or tranches of securities with similar characteristics. These types of securities are classified as Level 2 within the valuation hierarchy and generally include U.S. government agencies, agency mortgage-backed debt securities, private-label mortgage-backed debt securities, and state and municipal bonds. In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3 within the valuation hierarchy.

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

   
2008
  
   
Total
    
Level 1
    
Level 2
    
Level 3
  
                         
Securities available for sale
   $ 2,071,658     $ 155,938     $ 1,915,154     $ 566  
Mortgage loans held for sale
     14,681       -       14,681       -  
Derivative assets
     107,338       -       103,998       3,340  
Total
   $ 2,193,677     $ 155,938     $ 2,033,833     $ 3,906  
                                 
                                 
Derivative liabilities
   $ 52,570     $ -     $ 48,820     $ 3,750  

 
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The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands) for the years ended December 31:

   
2009
    
2008
  
         
Net
          
Net
  
   
Securities
    
Derivative
    
Securities
    
Derivative
  
   
Available
    
Asset
    
Available
    
Asset
  
   
For Sale
    
(Liability)
    
For Sale
    
(Liability)
  
                         
Balance at beginning of period
   $ 566     $ (410 )   $ 2,402     $ 370  
Total net gains (losses) included in net loss
     -       865       -       (829 )
Purchases, sales, issuances and settlements, net
     (265 )     -       (1,836 )     10  
Transfers into Level 3, net
     -       2,873       -       39  
Balance at end of period
   $ 301     $ 3,328     $ 566     $ (410 )
                                 
Net gains (losses) included in net loss relating to assets held at December 31
   $ -     $ 1,308     $ -     $ (829 )

For 2009 and 2008, the net gains and 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.

For financial assets measured at fair value on a nonrecurring basis in the years ended December 31, 2009 and 2008 that were still held in the balance sheet at year 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 year end (in thousands).

   
Carrying value at year end
    
Total gains (losses)
  
   
Total
    
Level 1
    
Level 2
    
Level 3
    
for the year ended
  
December 31, 2009
                              
Loans held for investment
   $ 242,405     $ -     $ -     $ 242,405     $ (118,094 )
Long-lived assets
     56,125       -       56,125       -       (19,378 )
Other real estate owned
     91,059       -       -       91,059       (78,563 )
Private equity investments
     4,605       -       -       4,605       (3,710 )
Auction rate preferred securities
     5,174       -       -       5,174       (676 )
                                    $ (220,421 )
                                         
December 31, 2008
                                        
Loans held for investment
   $ 243,079     $ -     $ -     $ 243,079     $ (106,183 )
Loans held for sale
     16,282       -       -       16,282       (20,056 )
                                    $ (126,239 )

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

 
130

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 for which the fair value option has not been elected 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.

Long-lived assets. Nonrecurring fair value adjustments on long-lived assets (such as the campus facility discussed in Note 11) reflect impairment write-downs. Long-lived assets subjected to nonrecurring fair value adjustments may be classified as Level 2 or Level 3 depending on the inputs to the valuation. When appraisals are used to determine impairment and these appraisals require significant adjustments to market-based valuation inputs, or when the valuation applies an income approach based on unobservable cash flows to measure fair value, the related assets subjected to nonrecurring fair value adjustments are typically classified as Level 3 due to the fact that Level 3 inputs are significant to the fair value measurement.

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.

Fair Value Option

Effective second quarter 2009, TSFG elected to discontinue its use of the fair value option on new production of mortgage loans held for sale. This change corresponds to TSFG’s decision to no longer sell mortgage loans on a pooled basis. For the year ended December 31, 2009, changes in fair value of these loans resulted in a net loss of $91,000, which was recorded in mortgage banking income. These changes in fair value were mostly offset by hedging activities. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

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.

 
131

The methodologies used to determine fair value for securities, derivative assets and liabilities, impaired loans held for investment, and loans held for sale for which the fair value option has not been elected 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.

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) at December 31 were as follows:

   
2009
    
2008
  
   
Carrying
    
Fair
    
Carrying
    
Fair
  
   
Amount
    
Value
    
Amount
    
Value
  
Financial Assets
                        
Cash and due from banks
   $ 383,184     $ 383,184     $ 292,219     $ 292,219  
Interest-bearing bank balances
     124       124       166       166  
Securities available for sale
     2,095,401       2,095,401       2,071,658       2,071,658  
Securities held to maturity
     127,516       129,496       22,709       23,048  
Net loans
     8,036,243       7,213,252       9,975,949       9,494,197  
Derivative assets
     42,599       42,599       107,338       107,338  
                                 
Financial Liabilities
                                
Deposits
     9,296,212       9,344,083       9,405,717       9,487,817  
Short-term borrowings
     322,702       322,545       1,626,374       1,626,025  
Long-term debt
     1,116,869       1,007,901       707,769       705,504  
Derivative liabilities
     23,040       23,040       52,570       52,570  

 
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Note 32. 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 earnings credits to liabilities with an offset in “Other.” The management reporting process measures the performance of the defined segments based on TSFG’s management structure and is not necessarily comparable with similar information for other financial services companies or representative of results that would be achieved if the segments operated as stand-alone entities. If the management structure and/or allocation process change, allocations, transfers and assignments may change. Segment information (in thousands) is shown in the table below.

 
133
 
   
Carolina
                    
   
First
    
Mercantile
    
Other
    
Total
  
Year Ended December 31, 2009
                        
Net interest income before inter-segment income (expense)
   $ 175,448     $ 86,184     $ 69,900     $ 331,532  
Inter-segment interest income (expense)
     13,194       35,107       (48,301 )     -  
Net interest income
     188,642       121,291       21,599       331,532  
Provision for credit losses (1)
     259,619       313,131       96,154       668,904  
Noninterest income
     53,214       22,432       42,387       118,033  
Goodwill impairment
     -       -       2,511       2,511  
Other noninterest expenses - direct (2)
     127,850       105,955       182,805       416,610  
Contribution before allocation
     (145,613 )     (275,363 )     (217,484 )     (638,460 )
Noninterest expenses - allocated (3)
     89,333       50,245       (139,578 )     -  
Contribution before income taxes
   $ (234,946 )   $ (325,608 )   $ (77,906 )     (638,460 )
Income tax expense
                             37,794  
Net loss
                           $ (676,254 )
                                 
December 31, 2009
                                
Total assets
   $ 5,360,888     $ 2,939,438     $ 3,594,656     $ 11,894,982  
Total loans held for investment
     5,078,731       2,910,947       396,449       8,386,127  
Total deposits
     4,164,396       3,133,156       1,998,660       9,296,212  
                                 
Year Ended December 31, 2008
                                
Net interest income before inter-segment income (expense)
   $ 218,893     $ 133,080     $ 28,190     $ 380,163  
Inter-segment interest income (expense)
     (3,630 )     (2,293 )     5,923       -  
Net interest income
     215,263       130,787       34,113       380,163  
Provision for credit losses
     129,710       192,371       22,508       344,589  
Noninterest income
     58,666       28,447       34,854       121,967  
Goodwill impairment
     -       426,049       -       426,049  
Other noninterest expenses - direct (2)
     96,443       72,686       197,055       366,184  
Contribution before allocation
     47,776       (531,872 )     (150,596 )     (634,692 )
Noninterest expenses - allocated (3)
     90,212       60,437       (150,649 )     -  
Contribution before income taxes
   $ (42,436 )   $ (592,309 )   $ 53       (634,692 )
Income tax benefit
                             (87,574 )
Net loss
                           $ (547,118 )
                                 
December 31, 2008
                                
Total assets
   $ 6,117,729     $ 3,629,680     $ 3,854,917     $ 13,602,326  
Total loans held for investment
     5,856,742       3,548,031       787,299       10,192,072  
Total deposits
     4,383,851       3,060,230       1,961,636       9,405,717  

Year Ended December 31, 2007
                        
Net interest income before inter-segment income (expense)
   $ 262,667     $ 174,309     $ (54,195 )   $ 382,781  
Inter-segment interest income (expense)
     (29,904 )     (18,921 )     48,825       -  
Net interest income
     232,763       155,388       (5,370 )     382,781  
Provision for credit losses (1)
     37,457       25,262       5,849       68,568  
Noninterest income
     54,462       27,855       31,395       113,712  
Noninterest expenses - direct (2)
     84,958       60,742       175,549       321,249  
Contribution before allocation
     164,810       97,239       (155,373 )     106,676  
Noninterest expenses - allocated (3)
     71,694       45,309       (117,003 )     -  
Contribution before income taxes
   $ 93,116     $ 51,930     $ (38,370 )     106,676  
Income tax expense
                             33,400  
Net income
                           $ 73,276  

 
(1)
In 2009, TSFG began allocating provision expense to the segments using an expected loss methodology. Prior periods reflect a more general allocation. Provision expense included in “Other” includes the provision related to indirect auto, certain New Market Tax Credit loans, and the amount needed to account for differences in the consolidated allowance model and segment results that use an expected loss methodology.
 
(2)
Noninterest expenses – direct include the direct costs of the segment’s operations such as facilities, personnel, and other operating expenses.
 
(3)
Noninterest expenses – allocated include expenses not directly attributable to the segments, such as information services, operations, human resources, accounting, finance, treasury, and corporate incentive plans.

 
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Note 33. Parent Company Financial Information

The following is condensed financial information (dollars in thousands) of The South Financial Group (Parent Company only):

Condensed Balance Sheets
  
   
December 31,
  
   
2009
    
2008
  
Assets
            
Cash and due from banks
   $ 3,488     $ 27,787  
Interest-bearing bank balances
     52,682       182,000  
Investment in subsidiaries:
                
Bank subsidiaries
     1,125,649       1,607,229  
Nonbank subsidiaries
     -       3,798  
Total investment in subsidiaries
     1,125,649       1,611,027  
Receivable from subsidiaries
     154       2,630  
Other investments
     1,680       2,023  
Other assets
     17,499       31,630  
    $ 1,201,152     $ 1,857,097  
                 
Liabilities and Shareholders' Equity
                
Accrued expenses and other liabilities
   $ 872     $ 11,311  
Payables to subsidiaries
     402       6,014  
Borrowed funds
     -       12,537  
Subordinated debt
     206,704       206,704  
Shareholders' equity
     993,174       1,620,531  
    $ 1,201,152     $ 1,857,097  

Condensed Statements of Income
  
   
Years Ended December 31,
  
   
2009
    
2008
    
2007
  
Income
                  
Equity in undistributed net (loss) income of subsidiaries
   $ (655,123 )   $ (568,826 )   $ 203  
Dividend income from subsidiaries
     -       27,405       75,886  
(Loss) gain on equity investments
     (3,655 )     1,450       (68 )
Interest income from subsidiaries
     1,574       193       356  
Other
     3,008       4,338       6,261  
      (654,196 )     (535,440 )     82,638  
Expenses
                        
Interest on borrowed funds
     4,920       10,700       17,074  
Loss on early extinguishment of debt
     -       -       1,772  
Other
     3,656       4,596       (8,205 )
      8,576       15,296       10,641  
(Loss) income before taxes
     (662,772 )     (550,736 )     71,997  
Income tax expense (benefit)
     13,482       (3,618 )     (1,279 )
Net (loss) income
   $ (676,254 )   $ (547,118 )   $ 73,276  
 
 
135
 
Condensed Statements of Cash Flows
  
   
Years Ended December 31,
  
   
2009
    
2008
    
2007
  
Operating Activities
                  
Net (loss) income
   $ (676,254 )   $ (547,118 )   $ 73,276  
Adjustments to reconcile net (loss) income to net cash (used for) provided by operations
                        
Equity in undistributed net loss (income) of subsidiaries
     655,123       568,826       (203 )
Loss (gain) on equity investments
     3,655       (1,450 )     68  
Loss on early extinguishment of debt
     -       -       1,772  
Decrease in other assets
     12,126       15,284       17,917  
Decrease in other liabilities
     (246 )     (357 )     (16,279 )
Net cash (used for) provided by operating activities
     (5,596 )     35,185       76,551  
                         
Investing Activities
                        
(Investment in) distribution from subsidiaries
     (181,326 )     (385,113 )     12  
Proceeds from disposition of equity investments
     -       1,993       8,235  
Purchase of equity investments
     -       -       (1,178 )
Net cash (used for) provided by investing activities
     (181,326 )     (383,120 )     7,069  
                         
Financing Activities
                        
Decrease in borrowings
     (12,537 )     (18,291 )     (2,003 )
Issuance of subordinated debt
     -       -       126,290  
Payment of subordinated debt
     -       -       (98,457 )
Issuance of preferred stock and warrant, net
     -       584,970       -  
Cash dividends paid on common stock
     (3,440 )     (29,106 )     (53,493 )
Cash dividends paid on preferred stock
     (29,609 )     (11,920 )     -  
Issuance of common stock, net
     79,725       -       -  
Repurchase of common stock
     -       -       (83,291 )
Other, net
     (834 )     2,101       12,316  
Net cash provided by (used for) financing activities
     33,305       527,754       (98,638 )
Net change in cash and cash equivalents
     (153,617 )     179,819       (15,018 )
Cash and cash equivalents at beginning of year
     209,787       29,968       44,986  
Cash and cash equivalents at end of year
   $ 56,170     $ 209,787     $ 29,968  

 
136
 
Note 34. Quarterly Financial Data (Unaudited)
 
The following provides quarterly financial data for 2009 and 2008 (dollars in thousands, except per share data).

2009 Quarterly Financial Data
  
                         
   
Three Months Ended
  
   
December 31
    
September 30
    
June 30
    
March 31
  
                         
Interest income
   $ 127,548     $ 131,421     $ 142,035     $ 146,902  
Interest expense
     47,002       51,383       56,105       61,884  
Net interest income
     80,546       80,038       85,930       85,018  
Provision for credit losses
     170,761       224,179       131,337       142,627  
Noninterest income
     28,550       33,470       32,272       23,741  
Noninterest expenses
     103,163       89,529       136,188       90,241  
Loss before income taxes
     (164,828 )     (200,200 )     (149,323 )     (124,109 )
Income tax expense (benefit) (1)
     23,843       123,304       (59,647 )     (49,706 )
Net loss
     (188,671 )     (323,504 )     (89,676 )     (74,403 )
Preferred stock dividends and other
     (5,221 )     (17,251 )     (21,809 )     (16,408 )
Net loss available to common shareholders
   $ (193,892 )   $ (340,755 )   $ (111,485 )   $ (90,811 )
                                 
Loss per common share, basic
   $ (0.90 )   $ (1.95 )   $ (1.23 )   $ (1.10 )
Loss per common share, diluted
   $ (0.90 )   $ (1.95 )   $ (1.23 )   $ (1.10 )

2008 Quarterly Financial Data
  
                         
   
Three Months Ended
  
   
December 31
    
September 30
    
June 30
    
March 31
  
                         
Interest income
   $ 168,225     $ 178,238     $ 181,192     $ 194,385  
Interest expense
     76,592       82,619       80,987       101,679  
Net interest income
     91,633       95,619       100,205       92,706  
Provision for credit losses
     122,926       84,608       63,763       73,292  
Noninterest income
     30,012       28,665       32,187       31,103  
Noninterest expenses (2)
     342,093       94,157       87,617       268,366  
Loss before income taxes
     (343,374 )     (54,481 )     (18,988 )     (217,849 )
Income tax benefit
     (33,435 )     (29,526 )     (8,056 )     (16,557 )
Net loss
     (309,939 )     (24,955 )     (10,932 )     (201,292 )
Preferred stock dividends and other
     (9,424 )     (6,257 )     (5,840 )     (137 )
Net loss available to common shareholders
   $ (319,363 )   $ (31,212 )   $ (16,772 )   $ (201,429 )
                                 
Loss per common share, basic
   $ (4.29 )   $ (0.43 )   $ (0.23 )   $ (2.78 )
Loss per common share, diluted
   $ (4.29 )   $ (0.43 )   $ (0.23 )   $ (2.78 )

 
(1)
Includes an increase to the deferred tax asset valuation allowance of $86.4 million and $200.1 million, respectively, during the quarters ended December 31, 2009 and September 30, 2009.
 
(2)
Includes goodwill impairment of $237.6 million and $188.4 million, respectively, during the quarters ended December 31, 2008 and March 31, 2008.

 
137

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There have been no changes in or disagreements with accountants on accounting and financial disclosure.

Controls and Procedures

TSFG maintains disclosure controls and procedures and internal control over financial reporting as required under Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to TSFG’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Disclosure Controls and Procedures

 
(a)
At December 31, 2009, TSFG’s management, under the supervision and with the participation of TSFG’s 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 December 31, 2009, 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.

Internal Control over Financial Reporting

(b)           (1) Statement of management’s responsibility for maintaining adequate internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.

(2) Statement identifying the framework utilized by management to assess internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.

(3) Management’s assessment of the effectiveness of internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.

(4) Statement that the independent registered public accounting firm has issued an attestation report on internal control over financial reporting:
See Management’s Report on Internal Control Over Financial Reporting included in Item 8 of this Annual Report on Form 10-K.

 
(c)
Attestation report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, on the effectiveness of TSFG’s internal control over financial reporting:
See “Report of Independent Registered Public Accounting Firm” included in Item 8 of this Annual Report on Form 10-K.

 
(d)
Changes in internal control 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 is assessment during the quarter ended December 31, 2009 or through the date of this Annual

 
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Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, TSFG’s internal control over financial reporting.

Other Information

None.

 
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Item 10.
Directors, Executive Officers and Corporate Governance

See Executive Compensation Plan Data in the Registrants’ Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

See Election of Directors, Business Experience of Directors and Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in the Registrant's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

See Executive Officers of the Registrant included in Item 1 of this Annual Report on Form 10-K for a listing of executive officers.

TSFG has adopted a Code of Ethics that is specifically applicable to senior management and financial officers, including its principal executive officer, its principal financial officer, its principal accounting officer and controllers. This Code of Ethics can be viewed on TSFG’s website, www.thesouthgroup.com, under the Investor Relations / Corporate Governance tab. TSFG’s Code of Conduct, applicable to all employees, may also be viewed on TSFG’s website under the Investor Relations / Corporate Governance tab.

Executive Compensation

See Director Compensation and Executive Compensation in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference. However, the information provided in the Proxy Statement under the heading “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, subject to Regulation 14A or 14C, other than as provided in Item 402 of Regulation S-K, or subject to liabilities of Section 18 of the Securities Exchange Act of 1934.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See Security Ownership of Certain Beneficial Owners and Management in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

Certain Relationships and Related Transactions, and Director Independence

See Certain Relationships and Related Transactions in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

Principal Accountant Fees and Services

See Audit Fees, Other Audit Committee Matters, and Ratification of Independent Registered Public Accounting Firm for 2010 in TSFG's Proxy Statement relating to the 2010 Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

 
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Item 15.
Exhibits and Financial Statement Schedules

(a)(1)  Financial Statements filed as part of this report:

The following items are included in Item 8 hereof:

 
Management’s Report on Internal Control over Financial Reporting
 
Report of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets—December 31, 2009 and 2008
 
Consolidated Statements of Operations—Years ended December 31, 2009, 2008 and 2007
 
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive (Loss) Income—Years ended December 31, 2009, 2008 and 2007
 
Consolidated Statements of Cash Flows—Years ended December 31, 2009, 2008 and 2007
 
Notes to Consolidated Financial Statements

(a)(2)   Financial Statement Schedules

All schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X and all other schedules to the financial statements of TSFG required by Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and, therefore, have been omitted, or the required information is contained in the Consolidated Financial Statements or the notes thereto, which are included in Item 8 hereof.

(a)(3)   Listing of Exhibits  

Exhibit No.
  
Description of Exhibit
  
Location
3.1
  
Articles of Incorporation
  
Incorporated by reference to Exhibit 3.1 of TSFG’s Quarterly Report on Form 10-Q for the three months ended September 30, 2009
3.2
  
Bylaws of TSFG
  
Incorporated by reference to Exhibit 3.2 of TSFG's Quarterly Report on Form 10-Q for the three months ended June 30, 2009
4.1
  
Specimen TSFG Common Stock certificate
  
Incorporated by Reference to Exhibit 4.1 of TSFG's Registration Statement on Form S-1
4.2
  
Specimen certificate for shares of Preferred Stock, Series 2008D-V
  
Incorporated by Reference to Exhibit 4.3 of TSFG's Registration Statement on Form S-3 dated June 6, 2008
4.3
  
Specimen certificate for shares of Preferred Stock, Series 2008D-NV
  
Incorporated by Reference to Exhibit 4.4 of TSFG's Registration Statement on Form S-3 dated June 6, 2008
4.4
  
Specimen Certificate for the Series 2008-T Preferred Stock
  
Incorporated by reference to Exhibit 4.1 of TSFG's Current Report on Form 8-K dated December 5, 2008
4.5
  
Warrant for Purchase of Shares of Common Stock
  
Incorporated by reference to Exhibit 4.2 of TSFG’s Current Report on Form 8-K dated December 5, 2008
4.6
  
Amended and Restated Common Stock Dividend Reinvestment Plan
  
Incorporated by reference to the Prospectus in TSFG’s Registration Statement on Form S-3, Commission File No. 333-149820
10.1 *
  
TSFG Amended and Restated Restricted Stock Agreement Plan
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2006 and Exhibit 10.4 to TSFG’s Current Report on Form 8-K dated August 14, 2007
10.2 *
  
TSFG Amended and Restated Stock Option Plan
  
Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 333-158835

 
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Exhibit No.
  
Description of Exhibit
  
Location
10.3 *
  
TSFG Salary Reduction Plan
  
Incorporated by reference to Exhibit 28.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 33-25424
10.4-a *
  
Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and H. Lynn Harton
  
Incorporated by reference to Exhibit 10.20 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007
10.4-b *
  
Retention Bonus Award Agreement dated September 18, 2008 between TSFG and H. Lynn Harton
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008
10.4-c *
  
Supplemental Executive Retirement Agreement between TSFG and H. Lynn Harton
  
Incorporated by reference to Exhibit 10.24 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007
10.5-a *
  
Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and James R. Gordon
  
Incorporated by reference to Exhibit 10.6 of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2007
10.5-b *
  
Retention Bonus Award Agreement dated September 18, 2008 between TSFG and James R. Gordon
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008
10.5-c *
  
Supplemental Executive Retirement Agreement between TSFG and James R. Gordon
  
Incorporated by reference to Exhibit 99.2 of TSFG’s Current Report on Form 8-K dated March 20, 2007
 
Noncompetition, Severance and Employment Agreement dated September 3, 2007 between TSFG and J. Ernesto Diaz
  
Filed herewith
 
Supplemental Executive Retirement Agreement between TSFG and J. Ernesto Diaz
  
Filed herewith
10.7-a *
  
Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and Christopher T. Holmes
  
Incorporated by reference to Exhibit 10.8-a of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008
10.7-b *
  
Retention Bonus Award Agreement dated September 18, 2008 between TSFG and Christopher T. Holmes
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated September 18, 2008
10.7-c *
  
Supplemental Executive Retirement Agreement between TSFG and Christopher T. Holmes
  
Incorporated by reference to Exhibit 10.8-c of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008
10.8-a *
  
Noncompetition, Severance and Employment Agreement dated February 25, 2008 between TSFG and William P. Crawford, Jr.
  
Incorporated by reference to Exhibit 10.10-a of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008
10.8-b *
  
Supplemental Executive Retirement Agreement between TSFG and William P. Crawford, Jr.
  
Incorporated by reference to Exhibit 10.10-b of TSFG’s Annual Report on Form 10-K for the year ended December 31, 2008
 
Noncompetition, Severance and Employment Agreement dated May 14, 2003 between TSFG and J.W. Davis
  
Filed herewith
 
Consulting Agreement dated March 1, 2010 between Carolina First Bank and J.W. Davis
  
Filed herewith
10.10 *
  
TSFG Management Performance Incentive Plan (MPIP) (the short term bonus plan)
  
Incorporated by reference to Exhibit 10.2 of TSFG’s Current Report on Form 8-K dated August 14, 2007
10.11 *
  
Amended TSFG Long Term Incentive Plan
  
Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 161130
10.12 *
  
Amended and Restated TSFG Employee Stock Purchase Plan
  
Incorporated by reference to Exhibit 99.1 of TSFG’s Registration Statement on Form S-8, Commission File No. 333-160959

 
142
 
Exhibit No.
  
Description of Exhibit
  
Location
10.13 *
  
TSFG Directors Stock Option Plan
  
Incorporated by reference to Exhibit 99.1 from TSFG’s Registration Statement on Form S-8, Commission File No. 33-82668/82670
10.14 *
  
TSFG Amended and Restated Fortune 50 Plan
  
Incorporated by reference to the Prospectus in TSFG’s Registration Statement on Form S-8, Commission File No. 333-31948
10.15 *
  
TSFG Executive Deferred Compensation Plan
  
Incorporated by reference to Exhibit 10.3 of TSFG’s Current Report on Form 8-K dated December 10, 2008
10.16 *
  
Form of Grant for TSFG 2007-2009 Long-Term Incentive Plan – Restricted Stock Unit Award Agreement
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated August 14, 2007
10.17 *
  
Form of Grant for TSFG 2008-2010 Long-Term Incentive Plan – Restricted Stock Unit Award Agreement
  
Incorporated by reference to Exhibit 10.21 of TSFG’s Annual Report on Form 10-K for the year ending December 31, 2008
10.18
  
Letter Agreement dated December 5, 2008 between TSFG and U.S. Department of Treasury
  
Incorporated by reference to Exhibit 10.1 of TSFG’s Current Report on Form 8-K dated December 5, 2008
 
Form of Waiver, executed by each of Messrs. Harton, Gordon, Crawford, Davis, Diaz and Holmes
  
Filed herewith
10.20   Stipulation of Compromise and Settlement dated March 31, 2009   Incorporated by reference to Exhibit 99.1 of TSFG's Current Report on Form 8-K dated April 2, 2009
11.1
  
Statement of Computation of Earnings Per Share
  
Filed herewith as Note 26 of the Notes to Consolidated Financial Statements
 
Subsidiaries of TSFG
  
Filed herewith
22.1
  
Proxy Statement for the 2010 Annual Meeting of Shareholders
  
Future filing incorporated by reference pursuant to General Instruction G(3)
 
Consent of PricewaterhouseCoopers LLP
  
Filed herewith
23.2
  
Opinion of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm
  
Included herewith
 
Certification of 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
  
Filed herewith
 
Certification of 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
  
Filed herewith
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002
  
Filed herewith
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002
  
Filed herewith
 
Certification of Principal Executive Officer pursuant to the Emergency Economic Stability Act of 2008
  
Filed herewith
 
Certification of Principal Financial Officer pursuant to the Emergency Economic Stability Act of 2008
  
Filed herewith

 
*
This is a management contract or compensatory plan.

Copies of exhibits are available upon written request to the Corporate Secretary of The South Financial Group, Inc.

Type
Date Filed
Reporting Purpose

 
(c)
See Item 15(a)(3).

 
143

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

The South Financial Group, Inc.

Name
  
Title
  
Date
         
/s/H. Lynn Harton.
H. Lynn Harton
  
President and Chief Executive Officer
(Principal Executive Officer)
  
March 16, 2010
 
/s/ James R. Gordon
James R. Gordon
  
 
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
  
 
March 16, 2010
 
/s/ Christopher G. Speaks
Christopher G. Speaks
  
 
Executive Vice President and Chief Accounting Officer
(Principal Accounting Officer)
  
 
March 16, 2010
         
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated:
 
Name
  
Title
  
Date
 
/s/John C. B. Smith, Jr.
John C. B. Smith, Jr.
  
 
Chairman and Director
  
 
March 16, 2010
 
/s/ William R. Timmons III
William R. Timmons III
  
 
Vice-Chairman and Director
 
  
 
March 16, 2010
 
/s/ J. W. Davis
J. W. Davis
  
 
Director
  
 
March 16, 2010
 
/s/ M. Dexter Hagy
M. Dexter Hagy
  
 
Director
  
 
March 16, 2010
 
/s/H. Lynn Harton.
H. Lynn Harton
  
Director
  
 
March 16, 2010
 
/s/ William S. Hummers III
William S. Hummers III
  
 
Director
  
 
March 16, 2010
 
/s/ Challis M. Lowe
Challis M. Lowe
  
 
Director
  
 
March 16, 2010
 
/s/ Jon W. Pritchett
Jon W. Pritchett
  
 
Director
  
 
March 16, 2010
 
/s/ H. Earle Russell, Jr.
H. Earle Russell, Jr.
  
 
Director
  
 
March 16, 2010
 
/s/ Edward J. Sebastian
Edward J. Sebastian
  
 
Director
  
 
March 16, 2010
 
/s/ David C. Wakefield III
David C. Wakefield III
  
 
Director
  
 
March 16, 2010

 
144