Updated from Tuesday, Oct. 28

The top executive at a midsize bank holding company is retiring with a more than $12 million payday, even as the company is applying for a government investment that could restrict such windfalls.

The South Financial Group ( TSFG) on Tuesday said Chairman, President and CEO Mack Whittle had left his post, effective Monday. Whittle had earlier said he would leave by the end of the year, and during a conference call to discuss the company financial results last week he made no indication the timing had changed.

The unexpectedly sudden departure comes just days after the bank announced it plans to apply for a federal investment through the Troubled Asset Relief Program, or TARP, which contains provisions that void existing compensation agreements in order to prevent "golden parachutes."

"The timing is precarious as hell," says Adam Barkstrom, analyst with Sterne Agee.

Barkstrom wonders whether regulators insisted that Whittle be relieved of his responsibilities as a condition of participation in TARP. Another possibility, he suggested, is that the decision was driven by the company to protect Whittle's compensation from TARP.

Asked about the timing of Whittle's departure, the South Financial Group spokeswoman Mary Gentry said only the management transition is "moving smoothly." She downplayed any connection between Whittle's departure and the company's TARP application.

"The company is living up to the terms of an agreement entered into prior to the creation of TARP and we had no choice but to honor our obligations. Mack's the founder of the company and this contract reflects his years of service," Gentry says.

A call to the Treasury Department press office was not returned.

Treasury, through the $700 billion financial rescue plan approved by Congress earlier this month, plans to make $250 billion of preferred equity investments in banks to shore up confidence in the system and thaw frozen credit markets.

Nine of the nation's largest banks, including Bank of America ( BAC), JPMorgan Chase ( JPM), Citigroup ( C) and Wells Fargo ( WFC), agreed to an initial round of investments two weeks ago.

A host of regional banks, including PNC Financial Services ( PNC) and KeyCorp ( KEY), have disclosed investments this week. Banks have until Nov. 14 to apply and, if accepted, agree to join the program.

Whittle's stewardship of The South Financial Group, which he founded in 1986, has been less than stellar. The Greenville, S.C.-based holding company that includes Carolina First Bank, Mercantile Bank, Bank CaroLine and SouthGroup Wealth Management, has seen its shares fall from over $25 last year to a low of $2.52 on July 15 due largely to its portfolio of residential construction loans in Florida. Shares closed up nearly 17% to $4.75 Tuesday.

According to a Securities and Exchange Commission filing, the company said it "expects to recognize approximately $12 million in incremental expense" connected to Whittle's departure. Stock options and other benefits could raise the total significantly.

"He's leaving at the request of the board, is how I'd put it," Barkstrom says.

During the call last week, Brian Rohman, an executive at investment firm Robeco Investment Management, questioned the company's plans to allow Whittle to serve out his term on the board, which expires in 2011.

"I understand Mack is leaving the CEO role at the end of the year. But given the problems with the company over the last couple of years, can you justify why he's going to stay on the board?" Rohman asked.

Whittle replied he planned "to serve out the wishes of the shareholders." Pressed by Rohman, Whittle said the company was not pressuring him to step down.

Rohman declined further comment to TheStreet.com and Whittle did not return a call to his home.

The South Financial Group is still searching for a CEO while John C.B. Smith, its lead independent director, runs the board and oversees company operations. Smith did not return a phone call.