##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
September 30, 2005
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from____ to____
 Commission
file number 0-15083
 The South Financial Group, Inc.
  South Carolina
(State of Incorporation)
    
    57-0824914
(IRS Employer Identification No.)102 South Main Street, Greenville, South Carolina
(Address of Principal Executive Offices)
    
    29601
(Zip Code)
 (864) 255-7900
 þ o
 þ o
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Securities HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data) (Unaudited)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004(Restated)
    
    
    (Restated)AssetsCash and due from banks
    
    $
    264,979
    
    
    $
    210,125
    
    
    $
    199,847Interest-bearing bank balances
    
    
    14,165
    
    
    
    850
    
    
    
    4,669SecuritiesTrading
    
    
    1,402
    
    
    
    
    
    
    
    Available for sale
    
    
    3,968,618
    
    
    
    4,232,854
    
    
    
    4,234,843Held to maturity (market value $63,929, $77,302 and $76,552, respectively)
    
    
    63,577
    
    
    
    75,631
    
    
    
    75,245Total securities
    
    
    4,033,597
    
    
    
    4,308,485
    
    
    
    4,310,088LoansLoans held for sale
    
    
    59,135
    
    
    
    21,933
    
    
    
    21,302Loans held for investment
    
    
    9,293,031
    
    
    
    7,984,824
    
    
    
    8,107,757Allowance for loan losses
    
    
    (107,381
    )
    
    
    (96,318
    )
    
    
    (96,918
    )Net loans
    
    
    9,244,785
    
    
    
    7,910,439
    
    
    
    8,032,141Premises and equipment, net
    
    
    186,970
    
    
    
    163,428
    
    
    
    170,648Accrued interest receivable
    
    
    63,517
    
    
    
    55,952
    
    
    
    65,174Goodwill
    
    
    648,775
    
    
    
    568,936
    
    
    
    571,853Other intangible assets
    
    
    44,021
    
    
    
    41,411
    
    
    
    39,597Other assets
    
    
    445,243
    
    
    
    397,492
    
    
    
    404,188$
    14,946,052
    
    
    $
    13,657,118
    
    
    $
    13,798,205Liabilities and Shareholders EquityLiabilitiesDepositsNoninterest-bearing
    
    $
    1,508,370
    
    
    $
    1,222,467
    
    
    $
    1,237,877Interest-bearing
    
    
    7,617,649
    
    
    
    6,590,443
    
    
    
    6,433,067Total deposits
    
    
    9,126,019
    
    
    
    7,812,910
    
    
    
    7,670,944Federal funds purchased and repurchase agreements
    
    
    1,336,114
    
    
    
    1,753,660
    
    
    
    1,583,495Other short-term borrowings
    
    
    44,649
    
    
    
    51,648
    
    
    
    43,516Long-term debt
    
    
    2,751,268
    
    
    
    2,543,532
    
    
    
    2,972,270Accrued interest payable
    
    
    46,202
    
    
    
    31,365
    
    
    
    31,943Other liabilities
    
    
    137,353
    
    
    
    85,783
    
    
    
    102,577Total liabilities
    
    
    13,441,605
    
    
    
    12,278,898
    
    
    
    12,404,745Shareholders equityPreferred stock-no par value; authorized 10,000,000 shares; issued and outstanding none
    
    
    
    
    
    
    
    
    
    
    Common stock-par value $1 per share; authorized 200,000,000 shares; issued and
outstanding 74,574,907, 70,894,247, and 71,252,346 shares, respectively
    
    
    74,575
    
    
    
    70,894
    
    
    
    71,252Surplus
    
    
    1,148,311
    
    
    
    1,048,649
    
    
    
    1,056,185Retained earnings
    
    
    338,880
    
    
    
    276,080
    
    
    
    288,002Guarantee of employee stock ownership plan debt and nonvested restricted stock
    
    
    (3,192
    )
    
    
    (3,881
    )
    
    
    (3,483
    )Common stock held in trust for deferred compensation
    
    
    (1,396
    )
    
    
    (901
    )
    
    
    (901
    )Deferred compensation payable in common stock
    
    
    1,396
    
    
    
    901
    
    
    
    901Accumulated other comprehensive loss, net of tax
    
    
    (54,127
    )
    
    
    (13,522
    )
    
    
    (18,496
    )Total shareholders equity
    
    
    1,504,447
    
    
    
    1,378,220
    
    
    
    1,393,460$
    14,946,052
    
    
    $
    13,657,118
    
    
    $
    13,798,205
  1




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(in thousands, except per share data) (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Interest IncomeInterest and fees on loans
    
    $
    149,788
    
    
    $
    103,398
    
    
    $
    406,108
    
    
    $
    261,763Interest and dividends on securities:Taxable
    
    
    41,657
    
    
    
    41,594
    
    
    
    135,109
    
    
    
    114,488Exempt from federal income taxes
    
    
    2,973
    
    
    
    2,141
    
    
    
    8,030
    
    
    
    5,806Total interest and dividends on securities
    
    
    44,630
    
    
    
    43,735
    
    
    
    143,139
    
    
    
    120,294Interest on short-term investments
    
    
    317
    
    
    
    85
    
    
    
    638
    
    
    
    136Total interest income
    
    
    194,735
    
    
    
    147,218
    
    
    
    549,885
    
    
    
    382,193Interest ExpenseInterest on deposits
    
    
    52,333
    
    
    
    34,353
    
    
    
    137,883
    
    
    
    87,918Interest on short-term borrowings
    
    
    12,813
    
    
    
    5,180
    
    
    
    34,907
    
    
    
    10,562Interest on long-term debt
    
    
    26,000
    
    
    
    15,601
    
    
    
    72,972
    
    
    
    44,996Total interest expense
    
    
    91,146
    
    
    
    55,134
    
    
    
    245,762
    
    
    
    143,476Net Interest Income
    
    
    103,589
    
    
    
    92,084
    
    
    
    304,123
    
    
    
    238,717Provision for Loan Losses
    
    
    8,853
    
    
    
    9,440
    
    
    
    29,759
    
    
    
    24,158Net interest income after provision for loan losses
    
    
    94,736
    
    
    
    82,644
    
    
    
    274,364
    
    
    
    214,559Noninterest Income
    
    
    16,428
    
    
    
    48,266
    
    
    
    80,170
    
    
    
    105,795Noninterest Expenses
    
    
    81,035
    
    
    
    69,858
    
    
    
    227,080
    
    
    
    181,595Income before income taxes and discontinued
operations
    
    
    30,129
    
    
    
    61,052
    
    
    
    127,454
    
    
    
    138,759Income taxes
    
    
    9,039
    
    
    
    18,316
    
    
    
    40,840
    
    
    
    42,480Income from continuing operations
    
    
    21,090
    
    
    
    42,736
    
    
    
    86,614
    
    
    
    96,279Discontinued operations, net of income tax
    
    
    
    
    
    
    (165
    )
    
    
    (396
    )
    
    
    (165
    )Net Income
    
    $
    21,090
    
    
    $
    42,571
    
    
    $
    86,218
    
    
    $
    96,114Average Common Shares Outstanding, Basic
    
    
    74,273
    
    
    
    68,636
    
    
    
    72,921
    
    
    
    62,471Average Common Shares Outstanding, Diluted
    
    
    75,415
    
    
    
    70,343
    
    
    
    74,294
    
    
    
    64,020Per Common Share, BasicIncome from continuing operations
    
    $
    0.28
    
    
    $
    0.62
    
    
    $
    1.19
    
    
    $
    1.54Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.28
    
    
    $
    0.62
    
    
    $
    1.18
    
    
    $
    1.54Per Common Share, DilutedIncome from continuing operations
    
    $
    0.28
    
    
    $
    0.61
    
    
    $
    1.17
    
    
    $
    1.50Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.28
    
    
    $
    0.61
    
    
    $
    1.16
    
    
    $
    1.50Dividends per common share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.48
    
    
    $
    0.45
  2




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes
In Shareholders Equity and Comprehensive Income (Loss)
(in thousands, except share and per share data) (Unaudited)
 Retained
    
    
    AccumulatedShares of
    
    
    
    
    
    
    
    
    
    
    Earnings
    
    
    OtherCommon
    
    
    Common
    
    
    
    
    
    
    and
    
    
    ComprehensiveStock
    
    
    Stock
    
    
    Surplus
    
    
    Other*
    
    
    Loss
    
    
    TotalBalance, December 31, 2003
    
    
    59,064,375
    
    
    $
    59,064
    
    
    $
    712,788
    
    
    $
    214,184
    
    
    $
    (6,167
    )
    
    $
    979,869Prior period adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,591
    )
    
    
    (979
    )
    
    
    (7,570
    )Balance, December 31, 2003 (restated)
    
    
    59,064,375
    
    
    
    59,064
    
    
    
    712,788
    
    
    
    207,593
    
    
    
    (7,146
    )
    
    
    972,299Net income (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,114
    
    
    
    
    
    
    
    96,114Other comprehensive loss, net of
income tax of $3,360 (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,376
    )
    
    
    (6,376
    )Comprehensive income (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89,738Cash dividends declared
($0.45 per common share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,121
    )
    
    
    
    
    
    
    (30,121
    )Common stock activity:Acquisitions
    
    
    10,752,972
    
    
    
    10,753
    
    
    
    318,689
    
    
    
    241
    
    
    
    
    
    
    
    329,683Exercise of stock options, including
income tax benefit of $4,154
    
    
    777,285
    
    
    
    777
    
    
    
    11,817
    
    
    
    
    
    
    
    
    
    
    
    12,594Dividend reinvestment plan
    
    
    90,186
    
    
    
    90
    
    
    
    2,359
    
    
    
    
    
    
    
    
    
    
    
    2,449Restricted stock plan
    
    
    195,832
    
    
    
    196
    
    
    
    2,647
    
    
    
    (1,814
    )
    
    
    
    
    
    
    1,029Employee stock purchase plan
    
    
    6,991
    
    
    
    7
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    188Director compensation
    
    
    6,618
    
    
    
    7
    
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    190Common stock purchased by trust for
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (750
    )
    
    
    
    
    
    
    (750
    )Deferred compensation payable in common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    750Miscellaneous
    
    
    (12
    )
    
    
    
    
    
    
    (15
    )
    
    
    186
    
    
    
    
    
    
    
    171Balance, September 30, 2004 (restated)
    
    
    70,894,247
    
    
    $
    70,894
    
    
    $
    1,048,649
    
    
    $
    272,199
    
    
    $
    (13,522
    )
    
    $
    1,378,220Balance, December 31, 2004
    
    
    71,252,346
    
    
    $
    71,252
    
    
    $
    1,056,185
    
    
    $
    290,719
    
    
    $
    (17,553
    )
    
    $
    1,400,603Prior period adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,200
    )
    
    
    (943
    )
    
    
    (7,143
    )Balance, December 31, 2004 (restated)
    
    
    71,252,346
    
    
    
    71,252
    
    
    
    1,056,185
    
    
    
    284,519
    
    
    
    (18,496
    )
    
    
    1,393,460Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,218
    
    
    
    
    
    
    
    86,218Other comprehensive loss, net of
income tax of $20,781
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,631
    )
    
    
    (35,631
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,587Cash dividends declared ($0.48 per common
share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,340
    )
    
    
    
    
    
    
    (35,340
    )Common stock activity:Acquisitions
    
    
    2,339,878
    
    
    
    2,340
    
    
    
    75,011
    
    
    
    241
    
    
    
    
    
    
    
    77,592Exercise of stock options, including
income tax benefit of $3,937
    
    
    785,222
    
    
    
    785
    
    
    
    12,733
    
    
    
    
    
    
    
    
    
    
    
    13,518Dividend reinvestment plan
    
    
    97,480
    
    
    
    98
    
    
    
    2,551
    
    
    
    
    
    
    
    
    
    
    
    2,649Restricted stock plan
    
    
    76,326
    
    
    
    76
    
    
    
    1,060
    
    
    
    (131
    )
    
    
    
    
    
    
    1,005Employee stock purchase plan
    
    
    13,047
    
    
    
    13
    
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    352Director compensation
    
    
    10,608
    
    
    
    11
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    320Common stock purchased by trust for
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (495
    )
    
    
    
    
    
    
    (495
    )Deferred compensation payable in common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    
    
    
    
    495Miscellaneous
    
    
    
    
    
    
    
    
    
    
    123
    
    
    
    181
    
    
    
    
    
    
    
    304Balance, September 30, 2005
    
    
    74,574,907
    
    
    $
    74,575
    
    
    $
    1,148,311
    
    
    $
    335,688
    
    
    $
    (54,127
    )
    
    $
    1,504,447
 
 *
    
    Other includes guarantee of employee stock ownership plan debt, nonvested restricted stock, and deferred compensation.  3




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) (Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004(Restated)Cash Flows from Operating ActivitiesNet income
    
    $
    86,218
    
    
    $
    96,114Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation, amortization, and accretion, net
    
    
    35,150
    
    
    
    39,444Provision for loan losses
    
    
    29,759
    
    
    
    24,158Loss (gain) on sale of available for sale securities
    
    
    2,301
    
    
    
    (6,499
    )Gain on equity investments
    
    
    (2,615
    )
    
    
    (3,456
    )Loss (gain) on trading and certain derivative activities
    
    
    10,897
    
    
    
    (7,066
    )Gain on disposition of assets and liabilities
    
    
    
    
    
    
    (2,350
    )Gain on sale of loans
    
    
    (4,962
    )
    
    
    (5,035
    )Loss on disposition of premises and equipment
    
    
    
    
    
    
    245(Gain) loss on disposition of other real estate owned
    
    
    (309
    )
    
    
    969Contribution to foundation
    
    
    683
    
    
    
    Conservation grant of land
    
    
    
    
    
    
    3,350Impairment loss (recovery) from write-down of assets
    
    
    917
    
    
    
    (277
    )Impairment recovery from write-down of mortgage servicing rights
    
    
    
    
    
    
    (136
    )Loss on early extinguishment of debt
    
    
    2,015
    
    
    
    1,429Trading account assets, net
    
    
    (1,077
    )
    
    
    549Origination of loans held for sale
    
    
    (398,305
    )
    
    
    (440,780
    )Sale of loans held for sale and principal repayments
    
    
    364,886
    
    
    
    463,233Other assets, net
    
    
    (32,142
    )
    
    
    (9,684
    )Other liabilities, net
    
    
    54,918
    
    
    
    (9,637
    )Net cash provided by operating activities
    
    
    148,334
    
    
    
    144,571Cash Flows from Investing ActivitiesSale of securities available for sale
    
    
    1,757,698
    
    
    
    1,408,541Maturity, redemption, call, or principal repayments of securities available for sale
    
    
    847,622
    
    
    
    1,168,378Maturity, redemption, call, or principal repayments of securities held to maturity
    
    
    11,505
    
    
    
    14,797Purchase of securities available for sale
    
    
    (2,395,882
    )
    
    
    (2,919,502
    )Origination of loans held for investment, net of principal repayments
    
    
    (911,564
    )
    
    
    (838,421
    )Sale of other real estate owned
    
    
    6,241
    
    
    
    8,427Sale of premises and equipment
    
    
    3,661
    
    
    
    1,159Sale of long-lived assets held for sale
    
    
    
    
    
    
    908Purchase of premises and equipment
    
    
    (33,073
    )
    
    
    (16,944
    )Disposition of assets and liabilities, net
    
    
    
    
    
    
    (991
    )Cash equivalents acquired for branch acquisition
    
    
    
    
    
    
    6,919Cash equivalents acquired, net of payment for purchase acquisitions
    
    
    77,320
    
    
    
    241,731Net cash used for investing activities
    
    
    (636,472
    )
    
    
    (924,998
    )
  4




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows  Continued
(in thousands) (Unaudited)
 Nine Months Ended September 30,2005
    
    
    2004(Restated)Cash Flows from Financing ActivitiesDeposits, net
    
    
    1,120,218
    
    
    
    231,152Federal funds purchased and repurchase agreements, net
    
    
    (293,710
    )
    
    
    799,486Other short-term borrowings, net
    
    
    397
    
    
    
    (5,163
    )Issuance of long-term debt
    
    
    1,638,743
    
    
    
    796,134Payment of long-term debt
    
    
    (1,879,255
    )
    
    
    (998,045
    )Prepayment penalty on early extinguishment of debt
    
    
    (2,015
    )
    
    
    (1,429
    )Cash dividends paid on common stock
    
    
    (34,818
    )
    
    
    (28,413
    )Other common stock activity
    
    
    13,206
    
    
    
    11,438Net cash provided by financing activities
    
    
    562,766
    
    
    
    805,160Net change in cash and cash equivalents
    
    
    74,628
    
    
    
    24,733Cash and cash equivalents at beginning of year
    
    
    204,516
    
    
    
    186,242Cash and cash equivalents at end of period
    
    $
    279,144
    
    
    $
    210,975Supplemental Cash Flow DataInterest paid
    
    $
    220,764
    
    
    $
    121,720Income taxes paid
    
    
    30,226
    
    
    
    29,868Significant non-cash investing and financing transactions:Change in unrealized loss on available for sale securities
    
    
    (58,310
    )
    
    
    (9,737
    )Loans transferred to other real estate owned
    
    
    7,550
    
    
    
    5,280Security sales, redemptions and calls settled subsequent to period-end
    
    
    51
    
    
    
    Loans held for sale transferred to assets held for disposal
    
    
    
    
    
    
    56,616Business combinations:Fair value of assets acquired (includes cash and cash equivalents)
    
    
    513,291
    
    
    
    2,111,570Fair value of common stock issued and stock options recognized
    
    
    (77,592
    )
    
    
    (329,683
    )Basis of stock investment in acquiree, shares canceled effective with the
acquisition closing date
    
    
    
    
    
    
    (8,970
    )Cash paid
    
    
    (31,253
    )
    
    
    (4
    )Liabilities assumed
    
    
    404,446
    
    
    
    1,772,913
  5




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 1  General
  Nature of Operations
  Accounting Estimates and Assumptions
  Principles of Consolidation
   Critical Accounting Policies
  6




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  Allowance for Loan Losses
 Hedging Activities:
 Fair Value of Certain Financial Instruments:
   7




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
   Income Taxes
 Accounting for Acquisitions and Goodwill Impairment th
    8




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  Reclassifications
  Restatement
      9




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
    Impact to Consolidated Balance Sheets(In thousands)(Unaudited)September 30,
    
    September 30,
    
    December 31,2005
    
    2004
    
    2004As
    
    
    
    
    
    AsAs
    
    Previously
    
    As
    
    Previously
    
    AsReported
    
    Reported
    
    Restated
    
    Reported
    
    RestatedOther assets
    
    $
    445,243
    
    
    $
    391,823
    
    
    $
    397,492
    
    
    $
    395,797
    
    
    $
    404,188Total assets
    
    
    14,946,052
    
    
    
    13,651,449
    
    
    
    13,657,118
    
    
    
    13,789,814
    
    
    
    13,798,205Interest-bearing deposits
    
    
    7,617,649
    
    
    
    6,589,002
    
    
    
    6,590,443
    
    
    
    6,427,660
    
    
    
    6,433,067Total deposits
    
    
    9,126,019
    
    
    
    7,811,469
    
    
    
    7,812,910
    
    
    
    7,665,537
    
    
    
    7,670,944Long-term debt
    
    
    2,751,268
    
    
    
    2,534,850
    
    
    
    2,543,532
    
    
    
    2,962,143
    
    
    
    2,972,270Total liabilities
    
    
    13,441,605
    
    
    
    12,268,775
    
    
    
    12,278,898
    
    
    
    12,389,211
    
    
    
    12,404,745Retained earnings
    
    
    338,880
    
    
    
    279,852
    
    
    
    276,080
    
    
    
    294,202
    
    
    
    288,002Accumulated other
comprehensive loss,
net of tax
    
    
    (54,127
    )
    
    
    (12,840
    )
    
    
    (13,522
    )
    
    
    (17,553
    )
    
    
    (18,496
    )Total shareholders equity
    
    
    1,504,447
    
    
    
    1,382,674
    
    
    
    1,378,220
    
    
    
    1,400,603
    
    
    
    1,393,460
 10




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Impact to Consolidated Statements of Income(In thousands, except share data) (Unaudited)Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    2004
    
    2005
    
    2004As
    
    
    
    
    
    
    
    
    
    AsAs
    
    Previously
    
    As
    
    As
    
    Previously
    
    AsReported
    
    Reported
    
    Restated
    
    Reported
    
    Reported
    
    RestatedInterest expense on deposits
    
    $
    52,333
    
    
    $
    27,345
    
    
    $
    34,353
    
    
    $
    137,883
    
    
    $
    66,798
    
    
    $
    87,918Interest expense on long-term debt
    
    
    26,000
    
    
    
    14,935
    
    
    
    15,601
    
    
    
    72,972
    
    
    
    42,670
    
    
    
    44,996Total interest expense
    
    
    91,146
    
    
    
    47,460
    
    
    
    55,134
    
    
    
    245,762
    
    
    
    120,030
    
    
    
    143,476Net interest income
    
    
    103,589
    
    
    
    99,758
    
    
    
    92,084
    
    
    
    304,123
    
    
    
    262,163
    
    
    
    238,717Net interest income after provision
for loan losses
    
    
    94,736
    
    
    
    90,318
    
    
    
    82,644
    
    
    
    274,364
    
    
    
    238,005
    
    
    
    214,559Noninterest income
    
    
    16,428
    
    
    
    24,083
    
    
    
    48,266
    
    
    
    80,170
    
    
    
    79,366
    
    
    
    105,795Income before income taxes
and discontinued operations
    
    
    30,129
    
    
    
    44,543
    
    
    
    61,052
    
    
    
    127,454
    
    
    
    135,776
    
    
    
    138,759Income taxes
    
    
    9,039
    
    
    
    13,363
    
    
    
    18,316
    
    
    
    40,840
    
    
    
    42,316
    
    
    
    42,480Income from continuing
operations
    
    
    21,090
    
    
    
    31,180
    
    
    
    42,736
    
    
    
    86,614
    
    
    
    93,460
    
    
    
    96,279Net income
    
    
    21,090
    
    
    
    31,015
    
    
    
    42,571
    
    
    
    86,218
    
    
    
    93,295
    
    
    
    96,114Per common share, basic:Income from continuing
operations
    
    $
    0.28
    
    
    $
    0.45
    
    
    $
    0.62
    
    
    $
    1.19
    
    
    $
    1.49
    
    
    $
    1.54Net income
    
    
    0.28
    
    
    
    0.45
    
    
    
    0.62
    
    
    
    1.18
    
    
    
    1.49
    
    
    
    1.54Per common share, diluted:Income from continuing
operations
    
    $
    0.28
    
    
    $
    0.44
    
    
    $
    0.61
    
    
    $
    1.17
    
    
    $
    1.46
    
    
    $
    1.50Net income
    
    
    0.28
    
    
    
    0.44
    
    
    
    0.61
    
    
    
    1.16
    
    
    
    1.46
    
    
    
    1.50
 11




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Impact to Consolidated Statements of ChangesIn Shareholders Equity and Comprehensive Income (Loss)(In thousands) (Unaudited)September 30,
    
    September 30, 20042005
    
    AsAs
    
    Previously
    
    AsReported
    
    Reported
    
    RestatedTotal shareholders equity, January 1
    
    $
    1,393,460
    
    
    $
    979,869
    
    
    $
    972,299Net income
    
    
    86,218
    
    
    
    93,295
    
    
    
    96,114Other comprehensive loss, net of tax
    
    
    (35,631
    )
    
    
    (6,673
    )
    
    
    (6,376
    )Total shareholders equity, September 30
    
    
    1,504,447
    
    
    
    1,382,674
    
    
    
    1,378,220
 Impact to Consolidated Statements of Cash Flows(In thousands) (Unaudited)Nine Months Ended September 30,2005
    
    2004AsAs
    
    Previously
    
    AsReported
    
    Reported
    
    RestatedCash Flows from Operating Activities:Net income
    
    $
    86,218
    
    
    $
    93,295
    
    
    $
    96,114Loss (gain) on trading and derivatives
    
    
    10,897
    
    
    
    (2,133
    )
    
    
    (7,066
    )Change in other assets, net
    
    
    (32,142
    )
    
    
    (11,798
    )
    
    
    (9,684
    )Cash flows from operating activities
    
    
    148,334
    
    
    
    144,571
    
    
    
    144,571
 Stock-Based Compensation
   12




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)(dollars in thousands, except per share data)Net IncomeNet income, as reported
    
    $
    21,090
    
    
    $
    42,571
    
    
    $
    86,218
    
    
    $
    96,114Deduct:Total stock-based employee compensation expense
determined under fair value based method for
all option awards, net of income tax
    
    
    646
    
    
    
    585
    
    
    
    1,927
    
    
    
    1,973Pro forma net income
    
    $
    20,444
    
    
    $
    41,986
    
    
    $
    84,291
    
    
    $
    94,141Basic Earnings Per ShareAs reported
    
    $
    0.28
    
    
    $
    0.62
    
    
    $
    1.18
    
    
    $
    1.54Pro forma
    
    
    0.28
    
    
    
    0.61
    
    
    
    1.16
    
    
    
    1.51Diluted Earnings Per ShareAs reported
    
    $
    0.28
    
    
    $
    0.61
    
    
    $
    1.16
    
    
    $
    1.50Pro forma
    
    
    0.27
    
    
    
    0.60
    
    
    
    1.13
    
    
    
    1.47
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Expected life (in years)
    
    
    6.43
    
    
    
    6.94
    
    
    
    7.03
    
    
    
    7.26Expected volatility
    
    
    34.08
    %
    
    
    35.25
    %
    
    
    34.44
    %
    
    
    34.70
    %Risk-free interest rate
    
    
    4.20
    
    
    
    3.84
    
    
    
    4.10
    
    
    
    3.79Expected dividend yield
    
    
    2.20
    
    
    
    2.20
    
    
    
    2.30
    
    
    
    2.10Weighted-average fair value of options granted
during the period
    
    $
    9.36
    
    
    $
    9.43
    
    
    $
    9.34
    
    
    $
    9.71
 Recently Adopted Accounting Pronouncements
 Accounting for Certain Loans or Debt Securities Acquired in a Transfer
  13




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Recently Issued Accounting Pronouncements
 Share-Based Payment
  
    
    Employee awards with cash-based settlement or repurchase features, such as a stock
appreciation right with a cash-settlement option;
    
    Awards for a fixed dollar amount settleable in the companys stock;
    
    Share-based awards with a net-settlement feature for an amount in excess of the minimum tax withholding; and
    
    Awards that vest or become exercisable based on the achievement of a condition other
than service, performance, or market condition.
  
    
    Share-based awards with net-settlement features for minimum tax withholdings;
    
    Awards that permit a cashless exercise using a broker unrelated to the employer; and
    
    Awards containing a put feature that give employees the right to require the company to
repurchase the shares at fair value, when the employee bears the risks and rewards normally
associated with ownership for six months or longer.
  Accounting for Nonmonetary Transactions
  Accounting Changes and Error Corrections
  14




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
   Meaning of Other-Than-Temporary Impairment
  15




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 2  Supplemental Financial Information to Consolidated Statements of Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    (Restated)Noninterest IncomeService charges on deposit accounts
    
    $
    12,245
    
    
    $
    9,950
    
    
    $
    30,801
    
    
    $
    26,781Debit card income
    
    
    1,770
    
    
    
    1,103
    
    
    
    4,937
    
    
    
    2,892Customer service fee income
    
    
    1,097
    
    
    
    683
    
    
    
    3,048
    
    
    
    2,155Total customer fee income
    
    
    15,112
    
    
    
    11,736
    
    
    
    38,786
    
    
    
    31,828Retail investment services
    
    
    2,054
    
    
    
    1,240
    
    
    
    4,811
    
    
    
    3,748Insurance income
    
    
    2,010
    
    
    
    1,132
    
    
    
    4,745
    
    
    
    3,169Trust and investment management income
    
    
    1,268
    
    
    
    824
    
    
    
    3,507
    
    
    
    2,781Benefits administration fees
    
    
    818
    
    
    
    613
    
    
    
    2,055
    
    
    
    1,701Total wealth management income
    
    
    6,150
    
    
    
    3,809
    
    
    
    15,118
    
    
    
    11,399Change in fair value of interest rate swaps
    
    
    (16,240
    )
    
    
    16,924
    
    
    
    (11,172
    )
    
    
    4,933Net cash settlement of interest rate swaps
    
    
    2,377
    
    
    
    7,259
    
    
    
    10,648
    
    
    
    21,496Gain on trading and certain other derivative activities
    
    
    403
    
    
    
    1,150
    
    
    
    275
    
    
    
    2,133Total (loss) gain on trading and derivative activities
    
    
    (13,460
    )
    
    
    25,333
    
    
    
    (249
    )
    
    
    28,562Bank-owned life insurance income
    
    
    2,835
    
    
    
    2,869
    
    
    
    8,355
    
    
    
    8,617Merchant processing income
    
    
    2,864
    
    
    
    2,528
    
    
    
    7,615
    
    
    
    6,972Mortgage banking income
    
    
    2,087
    
    
    
    1,514
    
    
    
    5,714
    
    
    
    4,694(Loss) gain on sale of available for sale securities
    
    
    (1,032
    )
    
    
    678
    
    
    
    (2,301
    )
    
    
    6,499Gain (loss) on equity investments
    
    
    254
    
    
    
    (367
    )
    
    
    2,615
    
    
    
    3,456Gain on disposition of assets and liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,350Other
    
    
    1,618
    
    
    
    166
    
    
    
    4,517
    
    
    
    1,418Total noninterest income
    
    $
    16,428
    
    
    $
    48,266
    
    
    $
    80,170
    
    
    $
    105,795Noninterest ExpensesSalaries and wages
    
    $
    31,494
    
    
    $
    24,727
    
    
    $
    83,551
    
    
    $
    63,503Employee benefits
    
    
    8,529
    
    
    
    7,431
    
    
    
    25,976
    
    
    
    21,380Occupancy
    
    
    7,387
    
    
    
    5,841
    
    
    
    20,309
    
    
    
    16,098Furniture and equipment
    
    
    5,779
    
    
    
    5,670
    
    
    
    17,335
    
    
    
    15,175Professional services
    
    
    6,125
    
    
    
    3,779
    
    
    
    15,696
    
    
    
    10,261Merchant processing expense
    
    
    2,327
    
    
    
    1,984
    
    
    
    6,170
    
    
    
    5,453Telecommunications
    
    
    1,533
    
    
    
    1,237
    
    
    
    4,243
    
    
    
    3,488Amortization of intangibles
    
    
    2,337
    
    
    
    1,839
    
    
    
    6,283
    
    
    
    4,229Merger-related costs
    
    
    981
    
    
    
    5,487
    
    
    
    3,480
    
    
    
    6,239Contribution to foundation
    
    
    
    
    
    
    
    
    
    
    683
    
    
    
    Impairment loss (recovery) from write-down of assets
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    (277
    )Conservation grant of land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,350Loss on early extinguishment of debt
    
    
    462
    
    
    
    
    
    
    
    2,015
    
    
    
    1,429Other
    
    
    14,081
    
    
    
    11,863
    
    
    
    40,422
    
    
    
    31,267Total noninterest expenses
    
    $
    81,035
    
    
    $
    69,858
    
    
    $
    227,080
    
    
    $
    181,595
 16




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 3
 Accumulated Other Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    (Restated)Unrealized (Losses) Gains on Available for Sale SecuritiesBalance at beginning of period
    
    $
    (27,029
    )
    
    $
    (47,848
    )
    
    $
    (18,496
    )
    
    $
    (7,146
    )Other comprehensive income (loss):Unrealized holding gains (losses) arising during the period
    
    
    (45,698
    )
    
    
    54,925
    
    
    
    (57,996
    )
    
    
    218Income tax (expense) benefit
    
    
    16,948
    
    
    
    (20,410
    )
    
    
    21,439
    
    
    
    (147
    )Less: Reclassification adjustment for losses (gains)
included in net income
    
    
    778
    
    
    
    (311
    )
    
    
    (314
    )
    
    
    (9,955
    )Income tax (benefit) expense
    
    
    (290
    )
    
    
    122
    
    
    
    76
    
    
    
    3,508(28,262
    )
    
    
    34,326
    
    
    
    (36,795
    )
    
    
    (6,376
    )Balance at end of period
    
    
    (55,291
    )
    
    
    (13,522
    )
    
    
    (55,291
    )
    
    
    (13,522
    )Unrealized Gains (Losses) on Cash Flow HedgesBalance at beginning of period
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    Other comprehensive income (loss):Unrealized (loss) gain on change in fair values
    
    
    1,950
    
    
    
    
    
    
    
    1,898
    
    
    
    Income tax benefit (expense)
    
    
    (753
    )
    
    
    
    
    
    
    (734
    )
    
    
    1,197
    
    
    
    
    
    
    
    1,164
    
    
    
    Balance at end of period
    
    
    1,164
    
    
    
    
    
    
    
    1,164
    
    
    
    $
    (54,127
    )
    
    $
    (13,522
    )
    
    $
    (54,127
    )
    
    $
    (13,522
    )Total other comprehensive income (loss)
    
    $
    (27,065
    )
    
    $
    34,326
    
    
    $
    (35,631
    )
    
    $
    (6,376
    )Net income
    
    
    21,090
    
    
    
    42,571
    
    
    
    86,218
    
    
    
    96,114Comprehensive income (loss)
    
    $
    (5,975
    )
    
    $
    76,897
    
    
    $
    50,587
    
    
    $
    89,738
 Note 4  Business Combinations
  Pointe Financial Corporation
   17




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  May 6, 2005Purchase price
    
    $
    97,926Fair value of net assets acquired, net of direct acquisition costs and deferred income taxes
    
    
    23,345Excess of purchase price over fair value of net assets acquired
    
    
    74,581Core deposit intangible
    
    
    6,689Goodwill
    
    $
    67,892
   Koss Olinger
  Bowditch Insurance Corporation
  18




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 5
 Gross Unrealized Losses on Investment Securities
  Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesSecurities Available for SaleDebt Securities:U.S. Treasury
    
    $
    40,477
    
    
    $
    974
    
    
    $
    129,014
    
    
    $
    3,955
    
    
    $
    169,491
    
    
    $
    4,929U.S. Government agencies
    
    
    507,185
    
    
    
    4,484
    
    
    
    219,880
    
    
    
    5,857
    
    
    
    727,065
    
    
    
    10,341Mortgage-backed securities
    
    
    1,441,470
    
    
    
    40,504
    
    
    
    985,239
    
    
    
    28,258
    
    
    
    2,426,709
    
    
    
    68,762State and municipals
    
    
    201,132
    
    
    
    2,201
    
    
    
    107,447
    
    
    
    2,567
    
    
    
    308,579
    
    
    
    4,768Corporate bonds
    
    
    68,208
    
    
    
    1,145
    
    
    
    22,081
    
    
    
    525
    
    
    
    90,289
    
    
    
    1,670Equity Securities:Federal Home Loan MortgageCorporation preferred stock
    
    
    11,215
    
    
    
    775
    
    
    
    
    
    
    
    
    
    
    
    11,215
    
    
    
    775Equity investments
    
    
    1,040
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    1,040
    
    
    
    86$
    2,270,727
    
    
    $
    50,169
    
    
    $
    1,463,661
    
    
    $
    41,162
    
    
    $
    3,734,388
    
    
    $
    91,331Securities Held to MaturityState and municipals
    
    $
    11,404
    
    
    $
    134
    
    
    $
    14,669
    
    
    $
    269
    
    
    $
    26,073
    
    
    $
    403
     19




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 6  Goodwill
  Carolina
    
    
    MercantileFirst Bank
    
    
    Bank
    
    
    Other
    
    
    TotalBalance, December 31, 2004
    
    $
    206,401
    
    
    $
    362,215
    
    
    $
    3,237
    
    
    $
    571,853Purchase accounting adjustments
    
    
    321
    
    
    
    76,601
    
    
    
    
    
    
    
    76,922Balance, September 30, 2005
    
    $
    206,722
    
    
    $
    438,816
    
    
    $
    3,237
    
    
    $
    648,775
  Note 7  Other Intangible Assets
  September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Core deposit intangible
    
    $
    58,895
    
    
    $
    52,206
    
    
    $
    52,206Less accumulated amortization
    
    
    (23,388
    )
    
    
    (16,979
    )
    
    
    (18,463
    )35,507
    
    
    
    35,227
    
    
    
    33,743Non-compete agreement intangible
    
    
    5,672
    
    
    
    5,672
    
    
    
    5,672Less accumulated amortization
    
    
    (2,098
    )
    
    
    (809
    )
    
    
    (1,099
    )3,574
    
    
    
    4,863
    
    
    
    4,573Customer list intangible
    
    
    5,613
    
    
    
    1,595
    
    
    
    1,595Less accumulated amortization
    
    
    (673
    )
    
    
    (274
    )
    
    
    (314
    )4,940
    
    
    
    1,321
    
    
    
    1,281$
    44,021
    
    
    $
    41,411
    
    
    $
    39,597
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Core deposit intangible
    
    $
    1,804
    
    
    $
    1,471
    
    
    $
    4,925
    
    
    $
    3,596Non-compete agreement intangible
    
    
    342
    
    
    
    328
    
    
    
    999
    
    
    
    514Customer list intangible
    
    
    191
    
    
    
    40
    
    
    
    359
    
    
    
    119Total amortization expense of intangible assets
    
    $
    2,337
    
    
    $
    1,839
    
    
    $
    6,283
    
    
    $
    4,229
 20




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  Non-Core
    
    
    Compete
    
    
    CustomerDeposit
    
    
    Agreement
    
    
    ListIntangible
    
    
    Intangible
    
    
    Intangible
    
    
    Total2005
    
    $
    6,681
    
    
    $
    1,315
    
    
    $
    552
    
    
    $
    8,5482006
    
    
    6,361
    
    
    
    1,314
    
    
    
    722
    
    
    
    8,3972007
    
    
    5,663
    
    
    
    1,206
    
    
    
    660
    
    
    
    7,5292008
    
    
    4,684
    
    
    
    527
    
    
    
    583
    
    
    
    5,7942009
    
    
    3,830
    
    
    
    209
    
    
    
    519
    
    
    
    4,558Aggregate total for all years thereafter
    
    
    13,213
    
    
    
    2
    
    
    
    2,263
    
    
    
    15,478$
    40,432
    
    
    $
    4,573
    
    
    $
    5,299
    
    
    $
    50,304
 Note 8
 Commitments and Contingent Liabilities
 Legal Proceedings
  Recourse Reserve
  Loan Commitments
    21




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  Outstanding Commitments(in thousands)September 30, 2005
    
    
    December 31, 2004Commitment on loans
    
    $
    2,637,854
    
    
    $
    2,145,325Commercial and standby letters of credit
    
    
    174,360
    
    
    
    135,178Unused credit card lines
    
    
    18,858
    
    
    
    17,550Documentary letters of credit
    
    
    1,226
    
    
    
    2,412Total
    
    $
    2,832,298
    
    
    $
    2,300,465
 Other Commitments
      22




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note 9
 Share Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    (Restated)NumeratorsIncome from continuing operations
    
    $
    21,090
    
    
    $
    42,736
    
    
    $
    86,614
    
    
    $
    96,279Discontinued operations, net of income tax
    
    
    
    
    
    
    (165
    )
    
    
    (396
    )
    
    
    (165
    )Net income
    
    $
    21,090
    
    
    $
    42,571
    
    
    $
    86,218
    
    
    $
    96,114BasicAverage common shares outstanding (denominator)
    
    
    74,272,867
    
    
    
    68,635,847
    
    
    
    72,921,265
    
    
    
    62,470,768Earnings per share:Income from continuing operations
    
    $
    0.28
    
    
    $
    0.62
    
    
    $
    1.19
    
    
    $
    1.54Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.28
    
    
    $
    0.62
    
    
    $
    1.18
    
    
    $
    1.54DilutedAverage common shares outstanding
    
    
    74,272,867
    
    
    
    68,635,847
    
    
    
    72,921,265
    
    
    
    62,470,768Average dilutive potential common shares
    
    
    1,141,999
    
    
    
    1,707,075
    
    
    
    1,373,162
    
    
    
    1,549,121Average diluted shares outstanding (denominator)
    
    
    75,414,866
    
    
    
    70,342,922
    
    
    
    74,294,427
    
    
    
    64,019,889Earnings per share:Income from continuing operations
    
    $
    0.28
    
    
    $
    0.61
    
    
    $
    1.17
    
    
    $
    1.50Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.28
    
    
    $
    0.61
    
    
    $
    1.16
    
    
    $
    1.50
  Number
    
    
    Range ofof Shares
    
    
    Exercise PricesFor the Three Months EndedSeptember 30, 2005
    
    
    532,702
    
    
    $
    28.80 to $31.96September 30, 2004
    
    
    171,525
    
    
    $
    28.30 to $31.26For the Nine Months EndedSeptember 30, 2005
    
    
    504,202
    
    
    $
    29.06 to $31.96September 30, 2004
    
    
    111,573
    
    
    $
    28.80 to $31.26
 Note
10  Disposition of Assets and Liabilities
  23




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  Note
11  Merger-related and Direct Acquisition Costs
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Merger-Related CostsCompensation-related expenses
    
    $
    2
    
    
    $
    1,334
    
    
    $
    606
    
    
    $
    1,819System conversion costs
    
    
    260
    
    
    
    1,327
    
    
    
    882
    
    
    
    1,350Travel
    
    
    52
    
    
    
    892
    
    
    
    488
    
    
    
    897Advertising
    
    
    425
    
    
    
    233
    
    
    
    425
    
    
    
    198Other
    
    
    242
    
    
    
    1,701
    
    
    
    1,079
    
    
    
    1,975$
    981
    
    
    $
    5,487
    
    
    $
    3,480
    
    
    $
    6,239Direct Acquisition CostsInvestment banking and professional fees
    
    $
    236
    
    
    $
    4,947
    
    
    $
    2,672
    
    
    $
    5,097Contract and lease terminations
    
    
    140
    
    
    
    7,299
    
    
    
    1,152
    
    
    
    7,617Severance
    
    
    29
    
    
    
    951
    
    
    
    312
    
    
    
    915$
    405
    
    
    $
    13,197
    
    
    $
    4,136
    
    
    $
    13,629
  Note
12  Early Extinguishment of Debt
  Note
13  Discontinued Operations
  24




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 Note
14  Business Segments
    Carolina
    
    
    Mercantile
    
    
    
    
    
    
    EliminatingFirst Bank
    
    
    Bank
    
    
    Other
    
    
    Entries
    
    
    TotalThree Months Ended September 30, 2005Net interest income
    
    $
    63,694
    
    
    $
    42,689
    
    
    $
    (2,794
    )
    
    $
    
    
    
    $
    103,589Provision for loan losses
    
    
    6,595
    
    
    
    2,268
    
    
    
    (10
    )
    
    
    
    
    
    
    8,853Noninterest income
    
    
    9,296
    
    
    
    5,323
    
    
    
    24,875
    
    
    
    (23,066
    )
    
    
    16,428Noninterest expenses
    
    
    45,661
    
    
    
    30,751
    
    
    
    27,689
    
    
    
    (23,066
    )
    
    
    81,035Merger-related costs (a)
    
    
    
    
    
    
    981
    
    
    
    
    
    
    
    
    
    
    
    981Amortization of intangibles (a)
    
    
    807
    
    
    
    1,494
    
    
    
    36
    
    
    
    
    
    
    
    2,337Income tax expense
    
    
    7,007
    
    
    
    4,977
    
    
    
    (2,945
    )
    
    
    
    
    
    
    9,039Discontinued operations, net of income tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    13,727
    
    
    
    10,016
    
    
    
    (2,653
    )
    
    
    
    
    
    
    21,090Nine Months Ended September 30, 2005Net interest income
    
    $
    190,216
    
    
    $
    121,573
    
    
    $
    (7,666
    )
    
    $
    
    
    
    $
    304,123Provision for loan losses
    
    
    24,005
    
    
    
    5,775
    
    
    
    (21
    )
    
    
    
    
    
    
    29,759Noninterest income
    
    
    49,840
    
    
    
    23,805
    
    
    
    72,923
    
    
    
    (66,398
    )
    
    
    80,170Noninterest expenses
    
    
    133,181
    
    
    
    84,816
    
    
    
    75,481
    
    
    
    (66,398
    )
    
    
    227,080Merger-related costs (a)
    
    
    
    
    
    
    3,480
    
    
    
    
    
    
    
    
    
    
    
    3,480Amortization of intangibles (a)
    
    
    2,428
    
    
    
    3,746
    
    
    
    109
    
    
    
    
    
    
    
    6,283Income tax expense
    
    
    27,284
    
    
    
    18,082
    
    
    
    (4,526
    )
    
    
    
    
    
    
    40,840Discontinued operations, net of income tax
    
    
    
    
    
    
    (396
    )
    
    
    
    
    
    
    
    
    
    
    (396
    )Net income
    
    
    55,586
    
    
    
    36,309
    
    
    
    (5,677
    )
    
    
    
    
    
    
    86,218September 30, 2005Total assets
    
    $
    9,460,845
    
    
    $
    5,746,042
    
    
    $
    1,727,995
    
    
    $
    (1,988,830
    )
    
    $
    14,946,052Total loans
    
    
    5,630,471
    
    
    
    3,811,687
    
    
    
    98
    
    
    
    (90,090
    )
    
    
    9,352,166Total deposits
    
    
    5,531,450
    
    
    
    3,656,087
    
    
    
    
    
    
    
    (61,518
    )
    
    
    9,126,019
 
  25




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 (Restated)Carolina
    
    
    Mercantile
    
    
    
    
    
    
    EliminatingFirst Bank
    
    
    Bank
    
    
    Other
    
    
    Entries
    
    
    TotalThree Months Ended September 30, 2004Net interest income
    
    $
    61,065
    
    
    $
    33,202
    
    
    $
    (2,183
    )
    
    $
    
    
    
    $
    92,084Provision for loan losses
    
    
    8,574
    
    
    
    874
    
    
    
    (8
    )
    
    
    
    
    
    
    9,440Noninterest income
    
    
    36,641
    
    
    
    13,373
    
    
    
    16,846
    
    
    
    (18,594
    )
    
    
    48,266Noninterest expenses
    
    
    41,407
    
    
    
    24,480
    
    
    
    22,565
    
    
    
    (18,594
    )
    
    
    69,858Merger-related costs (a)
    
    
    1
    
    
    
    5,409
    
    
    
    77
    
    
    
    
    
    
    
    5,487Amortization of intangibles (a)
    
    
    810
    
    
    
    993
    
    
    
    36
    
    
    
    
    
    
    
    1,839Income tax expense
    
    
    14,341
    
    
    
    6,367
    
    
    
    (2,392
    )
    
    
    
    
    
    
    18,316Discontinued operations, net of
income tax
    
    
    
    
    
    
    (165
    )
    
    
    
    
    
    
    
    
    
    
    (165
    )Net income
    
    
    33,384
    
    
    
    14,689
    
    
    
    (5,502
    )
    
    
    
    
    
    
    42,571Nine Months Ended September 30, 2004Net interest income
    
    $
    176,254
    
    
    $
    66,939
    
    
    $
    (4,476
    )
    
    $
    
    
    
    $
    238,717Provision for loan losses
    
    
    19,817
    
    
    
    4,319
    
    
    
    22
    
    
    
    
    
    
    
    24,158Noninterest income
    
    
    78,188
    
    
    
    23,219
    
    
    
    55,697
    
    
    
    (51,309
    )
    
    
    105,795Noninterest expenses
    
    
    122,216
    
    
    
    48,806
    
    
    
    61,882
    
    
    
    (51,309
    )
    
    
    181,595Merger-related costs (a)
    
    
    766
    
    
    
    5,396
    
    
    
    77
    
    
    
    
    
    
    
    6,239Amortization of intangibles (a)
    
    
    2,416
    
    
    
    1,634
    
    
    
    179
    
    
    
    
    
    
    
    4,229Income tax expense
    
    
    34,390
    
    
    
    11,294
    
    
    
    (3,204
    )
    
    
    
    
    
    
    42,480Discontinued operations, net of
income tax
    
    
    
    
    
    
    (165
    )
    
    
    
    
    
    
    
    
    
    
    (165
    )Net income
    
    
    78,019
    
    
    
    25,574
    
    
    
    (7,479
    )
    
    
    
    
    
    
    96,114September 30, 2004Total assets
    
    $
    9,153,877
    
    
    $
    4,836,271
    
    
    $
    1,622,785
    
    
    $
    (1,955,815
    )
    
    $
    13,657,118Total loans
    
    
    4,929,374
    
    
    
    3,167,361
    
    
    
    1,297
    
    
    
    (91,275
    )
    
    
    8,006,757Total deposits
    
    
    4,751,931
    
    
    
    3,105,176
    
    
    
    
    
    
    
    (44,197
    )
    
    
    7,812,910
 
 (a)
    
    Included in noninterest expenses. Note 15  Derivative Financial Instruments
   26




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##### Table of Contents



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
  September 30, 2005
    
    
    December 31, 2004 (Restated)Fair Value
    
    
    Notional
    
    
    Fair Value
    
    
    NotionalAsset
    
    
    Liability
    
    
    Amount
    
    
    Asset
    
    
    Liability
    
    
    AmountCash Flow HedgesInterest rate swaps associated with
borrowing activities
    
    $
    2,249
    
    
    $
    
    
    
    $
    283,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest rate swaps associated with
lending activities
    
    
    
    
    
    
    351
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    Fair Value HedgesInterest rate swaps associated with
borrowing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest rate swaps associated with
deposit taking activities
    
    
    719
    
    
    
    8,845
    
    
    
    99,526
    
    
    
    364
    
    
    
    5,737
    
    
    
    154,721Other DerivativesFuture contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    20,000Options, interest rate swaps and other
    
    
    8,260
    
    
    
    41,493
    
    
    
    1,516,979
    
    
    
    13,071
    
    
    
    32,606
    
    
    
    1,371,974$
    11,228
    
    
    $
    50,689
    
    
    $
    2,049,505
    
    
    $
    13,441
    
    
    $
    38,343
    
    
    $
    1,546,695
  Note 16  Management Opinion
  27




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
       28




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##### Table of Contents



Impact of Restatement on Income before Taxes
    
    
    Impact of Restatement on Net IncomePre-Tax
    
    
    % of Pre-Tax
    
    
    
    
    
    
    
    
    
    
    % of NetImpact
    
    
    Income
    
    
    Income
    
    
    After Tax
    
    
    Net Income
    
    
    Incometo Income
    
    
    before
    
    
    before
    
    
    Impact to
    
    
    before
    
    
    beforebefore taxes
    
    
    Restatement
    
    
    Restatement
    
    
    Net Income
    
    
    Restatement
    
    
    RestatementQ1-01
    
    $
    515
    
    
    $
    13,195
    
    
    
    3.90
    %
    
    $
    330
    
    
    $
    8,632
    
    
    
    3.82
    %Q2-01
    
    
    (716
    )
    
    
    15,193
    
    
    
    (4.71
    )
    
    
    (472
    )
    
    
    9,644
    
    
    
    (4.89
    )Q3-01
    
    
    2,181
    
    
    
    17,631
    
    
    
    12.37
    
    
    
    1,396
    
    
    
    11,000
    
    
    
    12.69Q4-01
    
    
    (1,532
    )
    
    
    19,377
    
    
    
    (7.91
    )
    
    
    (1,045
    )
    
    
    12,616
    
    
    
    (8.28
    )2001
    
    
    448
    
    
    
    65,396
    
    
    
    0.69
    
    
    
    209
    
    
    
    41,892
    
    
    
    0.50Q1-02
    
    
    (527
    )
    
    
    21,940
    
    
    
    (2.40
    )
    
    
    (358
    )
    
    
    13,107
    
    
    
    (2.73
    )Q2-02
    
    
    2,835
    
    
    
    23,983
    
    
    
    11.82
    
    
    
    1,903
    
    
    
    15,339
    
    
    
    12.41Q3-02
    
    
    4,301
    
    
    
    22,746
    
    
    
    18.91
    
    
    
    2,986
    
    
    
    14,776
    
    
    
    20.21Q4-02
    
    
    205
    
    
    
    24,117
    
    
    
    0.85
    
    
    
    144
    
    
    
    15,936
    
    
    
    0.902002
    
    
    6,814
    
    
    
    92,786
    
    
    
    7.34
    
    
    
    4,675
    
    
    
    59,158
    
    
    
    7.90Q1-03
    
    
    (1,731
    )
    
    
    30,967
    
    
    
    (5.59
    )
    
    
    (1,178
    )
    
    
    20,045
    
    
    
    (5.88
    )Q2-03
    
    
    (397
    )
    
    
    34,852
    
    
    
    (1.14
    )
    
    
    (270
    )
    
    
    22,699
    
    
    
    (1.19
    )Q3-03
    
    
    (8,121
    )
    
    
    34,018
    
    
    
    (23.87
    )
    
    
    (5,685
    )
    
    
    23,893
    
    
    
    (23.79
    )Q4-03
    
    
    (6,203
    )
    
    
    40,493
    
    
    
    (15.32
    )
    
    
    (4,342
    )
    
    
    28,421
    
    
    
    (15.28
    )2003
    
    
    (16,452
    )
    
    
    140,330
    
    
    
    (11.72
    )
    
    
    (11,475
    )
    
    
    95,058
    
    
    
    (12.07
    )Q1-04
    
    
    9,814
    
    
    
    46,311
    
    
    
    21.19
    
    
    
    6,843
    
    
    
    32,293
    
    
    
    21.19Q2-04
    
    
    (23,340
    )
    
    
    44,922
    
    
    
    (51.96
    )
    
    
    (15,580
    )
    
    
    29,987
    
    
    
    (51.96
    )Q3-04
    
    
    16,509
    
    
    
    44,543
    
    
    
    37.06
    
    
    
    11,556
    
    
    
    31,015
    
    
    
    37.26Q4-04
    
    
    (3,760
    )
    
    
    40,488
    
    
    
    (9.29
    )
    
    
    (2,428
    )
    
    
    25,822
    
    
    
    (9.40
    )2004
    
    
    (777
    )
    
    
    176,264
    
    
    
    (0.44
    )
    
    
    391
    
    
    
    119,117
    
    
    
    0.33Q1-05
    
    
    (18,124
    )
    
    
    52,172
    
    
    
    (34.74
    )
    
    
    (12,143
    )
    
    
    34,559
    
    
    
    (35.14
    )Q2-05
    
    
    21,243
    
    
    
    42,034
    
    
    
    50.54
    
    
    
    14,339
    
    
    
    28,373
    
    
    
    50.542005
    
    
    3,119
    
    
    
    94,206
    
    
    
    3.31
    
    
    
    2,196
    
    
    
    62,932
    
    
    
    3.49Cumulative Impact
to prior periods
    
    $
    (6,848
    )
    
    $
    568,982
    
    
    
    (1.20
    )%
    
    $
    (4,004
    )
    
    $
    378,157
    
    
    
    (1.06
    )%
  29




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Website Availability of Reports Filed with the Securities and Exchange Commission
  Forward-Looking Statements
  
    
    risks from changes in economic, monetary policy, and industry conditions;
    
    changes in interest rates, deposit rates, the net interest margin, and funding sources;
    
    market risk (including net interest income at risk analysis and economic value of equity risk analysis) and inflation;
    
    risks inherent in making loans, including repayment risks and value of collateral;
    
    loan growth, the adequacy of the allowance for loan losses, provision for loan losses,
and the assessment of problem loans (including loans acquired via acquisition);
    
    level, composition, and repricing characteristics of the securities portfolio;
    
    deposit growth, change in the mix or type of deposit products;
    
    fluctuations in consumer spending;
    
    competition in the banking industry and demand for our products and services;
    
    continued availability of senior management;
    
    technological changes;
    
    ability to increase market share;
    
    income and expense projections;
    
    risks associated with income taxes, including the potential for adverse adjustments;
    
    acquisitions, greater than expected deposit attrition or customer loss, inaccuracy of
related cost savings estimates, inaccuracy of estimates of financial results, and
unanticipated integration issues;
    
    significant delay or inability to execute strategic initiatives designed to grow revenues;
    
    changes in accounting policies and practices;
    
    changes in the evaluation of the effectiveness of our hedging strategies;
    
    changes in regulatory actions, including the potential for adverse adjustments;
    
    changes, costs, and effects of litigation, and environmental remediation; and
    
    recently-enacted or proposed legislation.
  30




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Non-GAAP Financial Information
  Overview
  
    
    Carolina First Bank, the largest South Carolina-headquartered commercial bank, operates
in South Carolina, North Carolina, and on the Internet under the brand name, Bank CaroLine;
and
    
    Mercantile Bank operates in Florida.
      31




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32




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Critical Accounting Policies and Estimates
  Allowance for Loan Losses
    Hedging Activities
  33




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##### Table of Contents



Fair Value of Certain Financial Instruments
      Income Taxes
  34




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##### Table of Contents



Accounting for Acquisitions and Goodwill Impairment
     Derivative Financial Instruments
  Customer Hedging Programs
  35




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Fair Value Hedges
    36




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Cash Flow Hedges
  Held for Trading
  Mortgage Loan Commitments and Forward Sales Commitments
   37




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Credit Risk of Derivative Financial Instruments
    Acquisitions
  38




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Table 1
Summary of Completed Acquisitions
(dollars in thousands)
 Purchase
    
    IdentifiableAcquisition
    
    Total
    
    Shares
    
    Price Paid
    
    IntangibleDate
    
    Assets
    
    Issued
    
    in Cash
    
    Assets
    
    GoodwillBank AcquisitionsPointeBoca Raton, Florida
    
    
    5/6/05
    
    
    $
    432,550
    (1)
    
    
    2,193,941
    
    
    $
    24,495
    
    
    $
    6,689
    (2)
    
    $
    67,892
    (2)CNB FloridaLake City, Florida
    
    
    7/16/04
    
    
    
    839,148
    (1)
    
    
    5,312,974
    
    
    
    
    
    
    
    11,312
    (2)
    
    
    117,367
(2)Florida BanksJacksonville, Florida
    
    
    7/16/04
    
    
    
    1,023,290
    (1)
    
    
    5,418,890
    
    
    
    
    
    
    
    5,982
    (2)
    
    
    138,735
(2)Insurance Agency/Other AcquisitionsKoss OlingerGainesville, Florida
    
    
    4/4/05
    
    
    
    287
    (1)
    
    
    56,398
    (3)
    
    
    4,718
    
    
    
    1,742
    (2)
    
    
    4,388
(2)Bowditch Insurance CorporationJacksonville, Florida
    
    
    6/6/05
    
    
    
    713
    (1)
    
    
    87,339
    (4)
    
    
    2,040
    
    
    
    2,276
    (2)
    
    
    3,228
(2)Summit Title, LLCHendersonville, North Carolina
    
    
    4/12/04
    
    
    
    86
    (1)
    
    
    10,571
    (5)
    
    
    
    
    
    
    55
    (2)
    
    
    211
(2)
 
 (1)
    
    Book value at the acquisition date.(2)
    
    Carrying amount (identifiable intangible assets are not reported net of accumulated
amortization) at September 30, 2005.(3)
    
    In addition, TSFG agreed to issue earn-out shares on May 17, 2010 based on earnings
achievement. The base earn-out shares would have a total value of $3 million for achievement
of the minimum performance target, with potential additional earn-out shares based on
achievement of higher performance levels.(4)
    
    In addition, TSFG agreed to issue annual earn-out shares for each of May 31, 2006,
2007, 2008, and 2009, based on targeted earnings achievement. The shares would have a maximum
total value of approximately $1.9 million.(5)
    
    In addition, TSFG agreed to issue annual earn-out shares, valued at the time of
issuance at $66,906, for each of April 12, 2006, 2007, and 2008, based on revenue retention
and targeted earnings achievement.   39




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Table 2
Summary of Bank Acquisitions  Geographic Markets
 NumberAcquisition
    
    ofDate
    
    Branches
    
    Geographic MarketsPointe
    
    5/6/05
    
    
    10
    
    
    Broward County (Ft. Lauderdale), Miami-Dade County,Palm Beach CountyCNB Florida
    
    7/16/04
    
    
    16
    
    
    Duval County (Jacksonville), Baker County (Mcclenny, Glenn St. Mary),Bradford County (Starke), Columbia County (Ft. White), UnionCounty (Lake Butler), Suwannee County (Live Oak), St. Johns County(St. Augustine), and Alachua County (Gainesville)Florida Banks
    
    7/16/04
    
    
    7
    
    
    Tampa, Jacksonville, Alachua County (Gainesville), Broward County(Ft. Lauderdale), Pinellas County (Largo), Marion County (Ocala),and West Palm Beach Florida markets
 Balance Sheet Review
 Loans
    40




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##### Table of Contents



Table 3
Loan Portfolio Composition
(dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Commercial, financial and agricultural
    
    $
    1,902,483
    
    
    $
    1,531,101
    
    
    $
    1,584,198Real estate  construction (1)
    
    
    1,328,658
    
    
    
    981,188
    
    
    
    1,007,061Real estate  residential mortgages (1-4 family)
    
    
    1,457,711
    
    
    
    1,288,299
    
    
    
    1,278,310Commercial secured by real estate (1)
    
    
    3,447,238
    
    
    
    3,077,947
    
    
    
    3,109,242Consumer
    
    
    1,156,941
    
    
    
    1,106,289
    
    
    
    1,128,946Loans held for investment
    
    
    9,293,031
    
    
    
    7,984,824
    
    
    
    8,107,757Loans held for sale
    
    
    59,135
    
    
    
    21,933
    
    
    
    21,302Total loans
    
    
    9,352,166
    
    
    
    8,006,757
    
    
    
    8,129,059Allowance for loan losses
    
    
    (107,381
    )
    
    
    (96,318
    )
    
    
    (96,918
    )Total net loans
    
    $
    9,244,785
    
    
    $
    7,910,439
    
    
    $
    8,032,141Percentage of Loans Held for InvestmentCommercial, financial and agricultural
    
    
    20.5
    %
    
    
    19.2
    %
    
    
    19.5
    %Real estate  construction (1)
    
    
    14.3
    
    
    
    12.3
    
    
    
    12.4Real estate  residential mortgages (1-4 family)
    
    
    15.7
    
    
    
    16.1
    
    
    
    15.8Commercial secured by real estate (1)
    
    
    37.1
    
    
    
    38.5
    
    
    
    38.4Consumer
    
    
    12.4
    
    
    
    13.9
    
    
    
    13.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    These categories include loans to businesses other than real estate companies where
owner-occupied real estate is pledged on loans to finance operations, equipment, and
facilities. 41




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##### Table of Contents



Table 4
Loan Portfolio Composition Based on Loan Purpose
(dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Commercial LoansCommercial and industrial
    
    $
    2,373,454
    
    
    $
    2,047,973
    
    
    $
    2,077,646Owner-occupied real estate (1)
    
    
    821,426
    
    
    
    881,546
    
    
    
    825,582Commercial real estate
    
    
    3,803,047
    
    
    
    3,150,075
    
    
    
    3,246,7296,997,927
    
    
    
    6,079,594
    
    
    
    6,149,957Consumer LoansIndirect-sales finance
    
    
    891,127
    
    
    
    758,622
    
    
    
    790,372Direct retail
    
    
    549,061
    
    
    
    460,459
    
    
    
    466,484Home equity
    
    
    570,921
    
    
    
    519,601
    
    
    
    535,9882,011,109
    
    
    
    1,738,682
    
    
    
    1,792,844Mortgage Loans
    
    
    283,995
    
    
    
    166,548
    
    
    
    164,956Total loans held for investment
    
    $
    9,293,031
    
    
    $
    7,984,824
    
    
    $
    8,107,757Percentage of Loans Held for InvestmentCommercial and industrial
    
    
    25.5
    %
    
    
    25.6
    %
    
    
    25.6
    %Owner-occupied real estate (1)
    
    
    8.8
    
    
    
    11.0
    
    
    
    10.3Commercial real estate
    
    
    40.9
    
    
    
    39.5
    
    
    
    40.0Consumer
    
    
    21.7
    
    
    
    21.8
    
    
    
    22.1Mortgage
    
    
    3.1
    
    
    
    2.1
    
    
    
    2.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    In Table 3, these loans are included in the Real estate  construction and
Commercial secured by real estate categories, which also include loans to non-real estate
industry borrowers. Commercial and industrial loans
 Owner-occupied real estate loans
 Commercial real estate loans
 Indirect-sales finance loans
 42




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##### Table of Contents



Direct
retail consumer loans
 Home
equity loans
 Mortgage
loans
   43




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##### Table of Contents



Table 5
Commercial Real Estate Loans
(dollars in thousands)
 September 30, 2005
    
    
    December 31, 2004% of
    
    
    
    
    
    
    % ofBalance
    
    
    Total
    
    
    Balance
    
    
    TotalCommercial Real Estate Loans by Geographic DiversificationWestern North Carolina (Hendersonville/Asheville)
    
    $
    718,478
    
    
    
    18.9
    %
    
    $
    545,533
    
    
    
    16.8
    %Tampa Bay Florida
    
    
    430,452
    
    
    
    11.3
    
    
    
    330,130
    
    
    
    10.2North Coastal South Carolina (Myrtle Beach)
    
    
    381,362
    
    
    
    10.0
    
    
    
    376,494
    
    
    
    11.6Upstate South Carolina (Greenville)
    
    
    373,195
    
    
    
    9.8
    
    
    
    358,693
    
    
    
    11.0Midlands South Carolina (Columbia)
    
    
    339,787
    
    
    
    9.0
    
    
    
    291,139
    
    
    
    9.0Northeast Florida (Jacksonville)
    
    
    299,324
    
    
    
    7.9
    
    
    
    244,989
    
    
    
    7.5Central Florida (Orlando)
    
    
    267,772
    
    
    
    7.1
    
    
    
    245,398
    
    
    
    7.6South Coastal South Carolina (Charleston)
    
    
    255,573
    
    
    
    6.7
    
    
    
    264,178
    
    
    
    8.1South Florida (Ft. Lauderdale)
    
    
    217,907
    
    
    
    5.7
    
    
    
    102,969
    
    
    
    3.2Alachua Florida (Gainesville)
    
    
    160,500
    
    
    
    4.2
    
    
    
    151,233
    
    
    
    4.7Greater South Charlotte South Carolina (Rock Hill)
    
    
    116,089
    
    
    
    3.1
    
    
    
    110,965
    
    
    
    3.4North Central Florida
    
    
    123,162
    
    
    
    3.2
    
    
    
    105,409
    
    
    
    3.2Marion, Florida
    
    
    119,446
    
    
    
    3.1
    
    
    
    91,349
    
    
    
    2.8Other (1)
    
    
    
    
    
    
    
    
    
    
    28,250
    
    
    
    0.9Total commercial real estate loans
    
    $
    3,803,047
    
    
    
    100.0
    %
    
    $
    3,246,729
    
    
    
    100.0
    %Commercial Real Estate Loans by Product TypeCommercial construction/development
    
    $
    1,328,717
    
    
    
    34.9
    %
    
    $
    965,838
    
    
    
    29.7
    %Mixed use
    
    
    411,393
    
    
    
    10.8
    
    
    
    313,612
    
    
    
    9.71-4 family residential investment property
    
    
    325,136
    
    
    
    8.5
    
    
    
    328,558
    
    
    
    10.1Retail
    
    
    283,893
    
    
    
    7.5
    
    
    
    266,584
    
    
    
    8.2Undeveloped land
    
    
    262,976
    
    
    
    6.9
    
    
    
    301,165
    
    
    
    9.3Residential construction
    
    
    242,876
    
    
    
    6.4
    
    
    
    152,988
    
    
    
    4.7Hotel/motel
    
    
    215,291
    
    
    
    5.7
    
    
    
    242,525
    
    
    
    7.5Multi-family residential
    
    
    188,017
    
    
    
    4.9
    
    
    
    171,929
    
    
    
    5.3Other (1)
    
    
    544,748
    
    
    
    14.4
    
    
    
    503,530
    
    
    
    15.5Total commercial real estate loans
    
    $
    3,803,047
    
    
    
    100.0
    %
    
    $
    3,246,729
    
    
    
    100.0
    %
 
 (1)
    
    Other includes all loans in categories smaller than the lowest percentages shown above.Note: At September 30, 2005 and December 31, 2004, the average loan size for commercial real estate loans totaled $411,000 and $370,000, respectively.   44




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Credit Quality
  Table 6
Credit Quality Indicators            
(dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Loans held for investment
    
    $
    9,293,031
    
    
    $
    7,984,824
    
    
    $
    8,107,757Allowance for loan losses
    
    
    107,381
    
    
    
    96,318
    
    
    
    96,918Nonaccrual
loans  commercial (1)
    
    
    27,480
    
    
    
    51,881
    
    
    
    38,015Nonaccrual loans  consumer
    
    
    2,929
    
    
    
    2,239

    
    
    
    2,312Nonaccrual
loans  mortgage (2)
    
    
    3,299
    
    
    
    3,594
    
    
    
    4,755Restructured loans still accruing interest
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    33,708
    
    
    
    57,714
    
    
    
    45,082Foreclosed property (other real estate owned and personal
property repossessions)
    
    
    11,839
    
    
    
    8,859
    
    
    
    10,894Total nonperforming assets
    
    $
    45,547
    
    
    $
    66,573
    
    
    $
    55,976Loans past due 90 days or more (mortgage and consumer
with interest accruing) (2)
    
    $
    1,598
    
    
    $
    2,374
    
    
    $
    3,764Total nonperforming assets as a percentage of loans held for
investment and foreclosed property
    
    
    0.49
    %
    
    
    0.83
    %
    
    
    0.69
    %Allowance for loan losses to nonperforming loans
    
    
    3.19
    x
    
    
    1.67
    x
    
    
    2.15
    x
 
 (1)
    
    At September 30, 2005 and December 31, 2004, nonaccrual loans  commercial included $1.9 million and $4.7 million, respectively, in restructured loans.(2)
    
    Effective September 30, 2004, TSFG began placing residential mortgage loans in nonaccrual status when they become 150 days delinquent. Previously, these loans were not placed
in nonaccrual status (unless impairment was evident), but any associated accrued interest was reserved.   45




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Table 7
 Impaired Loans
 (dollars in thousands)
 At and For the
    
    At and For theNine Months
    
    Year EndedEnded September 30,
    
    December 31,2005
    
    2004
    
    2004Impaired loans
    
    $
    20,674
    
    
    $
    51,881
    
    
    $
    28,836Average investment in impaired loans
    
    
    26,804
    
    
    
    49,703
    
    
    
    47,791Related allowance
    
    
    4,238
    
    
    
    15,001
    
    
    
    11,129Foregone interest
    
    
    921
    
    
    
    2,074
    
    
    
    1,935
 Allowance for Loan Losses
      46




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##### Table of Contents



Table 8
 Summary of Loan Loss Experience
 (dollars in thousands)
 At and For
    
    
    At and ForThe Nine Months
    
    
    The Year EndedEnded September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Allowance for loan losses, beginning of year
    
    $
    96,918
    
    
    $
    73,287
    
    
    $
    73,287Purchase accounting adjustments
    
    
    3,741
    
    
    
    20,682
    
    
    
    20,682Allowance adjustment for loans sold
    
    
    
    
    
    
    (506
    )
    
    
    (506
    )Net charge-offs:Loans charged-off
    
    
    (28,499
    )
    
    
    (24,259
    )
    
    
    (37,003
    )Loans recovered
    
    
    5,462
    
    
    
    2,956
    
    
    
    5,471(23,037
    )
    
    
    (21,303
    )
    
    
    (31,532
    )Additions to allowance through provision expense
    
    
    29,759
    
    
    
    24,158
    
    
    
    34,987Allowance for loan losses, end of period
    
    $
    107,381
    
    
    $
    96,318
    
    
    $
    96,918Average loans held for investment
    
    $
    8,681,649
    
    
    $
    6,523,832
    
    
    $
    6,909,545Loans held for investment, end of period
    
    
    9,293,031
    
    
    
    7,984,824
    
    
    
    8,107,757Net charge-offs as a percentage of average loans held for
investment (annualized)
    
    
    0.35
    %
    
    
    0.44
    %
    
    
    0.46
    %Allowance for loan losses as a percentage of loans held
for investment
    
    
    1.16
    
    
    
    1.21
    
    
    
    1.20Allowance for loan losses to nonperforming loans
    
    
    3.19
    x
    
    
    1.67
    x
    
    
    2.15
    x
 47




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##### Table of Contents



Securities
  Table 9
 Investment Securities Portfolio Composition
 (dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Trading(at fair value)U.S. Treasury
    
    $
    22
    
    
    $
    
    
    
    $
    U.S. Government agencies
    
    
    137
    
    
    
    
    
    
    
    State and municipal
    
    
    1,243
    
    
    
    
    
    
    
    1,402
    
    
    
    
    
    
    
    Available for Sale(at fair value)U.S. Treasury
    
    
    171,623
    
    
    
    240,445
    
    
    
    234,538U.S. Government agencies
    
    
    740,888
    
    
    
    908,324
    
    
    
    930,046Mortgage-backed securities
    
    
    2,494,747
    
    
    
    2,565,161
    
    
    
    2,502,440State and municipal
    
    
    351,732
    
    
    
    234,409
    
    
    
    272,535Other investments:Corporate bonds
    
    
    114,677
    
    
    
    143,041
    
    
    
    141,970Federal Home Loan Bank (FHLB) stock
    
    
    68,836
    
    
    
    60,137
    
    
    
    72,733Federal National Mortgage Association preferred stock
    
    
    
    
    
    
    52,792
    
    
    
    50,062Federal Home Loan Mortgage Corporation preferred stock
    
    
    11,215
    
    
    
    11,981
    
    
    
    11,990Community bank stocks
    
    
    10,825
    
    
    
    12,787
    
    
    
    14,899Other equity investments
    
    
    4,075
    
    
    
    3,777
    
    
    
    3,6303,968,618
    
    
    
    4,232,854
    
    
    
    4,234,843Held to Maturity(at amortized cost)State and municipal
    
    
    63,477
    
    
    
    75,531
    
    
    
    75,145Other investments
    
    
    100
    
    
    
    100
    
    
    
    10063,577
    
    
    
    75,631
    
    
    
    75,245Total
    
    $
    4,033,597
    
    
    $
    4,308,485
    
    
    $
    4,310,088Total securities as a percentage of total assets
    
    
    27.0
    %
    
    
    31.5
    %
    
    
    31.2
    %Percentage of Total Securities PortfolioU.S. Treasury
    
    
    4.3
    %
    
    
    5.6
    %
    
    
    5.4
    %U.S. Government agencies
    
    
    18.4
    
    
    
    21.1
    
    
    
    21.6Mortgage-backed securities
    
    
    61.8
    
    
    
    59.5
    
    
    
    58.0State and municipal
    
    
    10.3
    
    
    
    7.2
    
    
    
    8.1Other investments
    
    
    5.2
    
    
    
    6.6
    
    
    
    6.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  48




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##### Table of Contents



Community Bank Stocks.
 Intangible Assets
  Deposits
  49




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##### Table of Contents



Table 10
 Type of Deposits
 (dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004(Restated)
    
    
    (Restated)Noninterest-bearing demand deposits
    
    $
    1,508,370
    
    
    $
    1,222,467
    
    
    $
    1,237,877Interest-bearing checking
    
    
    1,062,531
    
    
    
    819,126
    
    
    
    816,933Money market accounts
    
    
    2,559,559
    
    
    
    2,777,402
    
    
    
    2,704,287Savings accounts
    
    
    190,832
    
    
    
    208,283
    
    
    
    192,769Total transaction accounts
    
    
    5,321,292
    
    
    
    5,027,278
    
    
    
    4,951,866Time deposits under $100,000
    
    
    1,231,875
    
    
    
    878,730
    
    
    
    856,386Time deposits of $100,000 or more
    
    
    1,217,049
    
    
    
    719,887
    
    
    
    645,820Customer deposits (1)
    
    
    7,770,216
    
    
    
    6,625,895
    
    
    
    6,454,072Brokered deposits
    
    
    1,355,803
    
    
    
    1,187,015
    
    
    
    1,216,872Total deposits
    
    $
    9,126,019
    
    
    $
    7,812,910
    
    
    $
    7,670,944Percentage of DepositsNoninterest-bearing demand deposits
    
    
    16.5
    %
    
    
    15.6
    %
    
    
    16.1
    %Interest-bearing checking
    
    
    11.6
    
    
    
    10.5
    
    
    
    10.6Money market accounts
    
    
    28.1
    
    
    
    35.5
    
    
    
    35.3Savings accounts
    
    
    2.1
    
    
    
    2.7
    
    
    
    2.5Total transaction accounts
    
    
    58.3
    
    
    
    64.3
    
    
    
    64.5Time deposits under $100,000
    
    
    13.5
    
    
    
    11.3
    
    
    
    11.2Time deposits of $100,000 or more
    
    
    13.3
    
    
    
    9.2
    
    
    
    8.4Customer deposits(1)
    
    
    85.1
    
    
    
    84.8
    
    
    
    84.1Brokered deposits
    
    
    14.9
    
    
    
    15.2
    
    
    
    15.9Total deposits
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 (1)
    
    TSFG defines customer deposits as total deposits less brokered deposits.     50




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##### Table of Contents



Elevate
  Borrowed Funds
  Table 11
 Type of Borrowings
 (dollars in thousands)
 September 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2004(Restated)
    
    
    (Restated)Short-Term BorrowingsFederal funds purchased and repurchase agreements
    
    $
    1,336,114
    
    
    $
    1,753,660
    
    
    $
    1,583,495Federal Home Loan Bank (FHLB) advances
    
    
    
    
    
    
    
    
    
    
    Commercial paper
    
    
    33,579
    
    
    
    39,742
    
    
    
    29,405Treasury, tax and loan note
    
    
    11,070
    
    
    
    11,906
    
    
    
    14,111Lines of credit with unaffiliated banks and other
    
    
    
    
    
    
    
    
    
    
    1,380,763
    
    
    
    1,805,308
    
    
    
    1,627,011Long-Term BorrowingsRepurchase agreements
    
    
    1,619,893
    
    
    
    1,246,134
    
    
    
    1,665,134FHLB advances
    
    
    882,147
    
    
    
    1,047,173
    
    
    
    1,057,167Subordinated notes
    
    
    155,695
    
    
    
    155,695
    
    
    
    155,695Mandatorily redeemable preferred stock of subsidiary
    
    
    89,800
    
    
    
    89,800
    
    
    
    89,800Note payable
    
    
    873
    
    
    
    907
    
    
    
    900Employee stock ownership plan note payable
    
    
    575
    
    
    
    875
    
    
    
    800Purchase accounting premiums, net of amortization
    
    
    2,285
    
    
    
    2,948
    
    
    
    2,7742,751,268
    
    
    
    2,543,532
    
    
    
    2,972,270Total borrowings
    
    $
    4,132,031
    
    
    $
    4,348,840
    
    
    $
    4,599,281Brokered deposits
    
    
    1,355,803
    
    
    
    1,187,015
    
    
    
    1,216,872Total wholesale borrowings
    
    $
    5,487,834
    
    
    $
    5,535,855
    
    
    $
    5,816,153Total wholesale borrowings as a percentage of total assets
    
    
    36.7
    %
    
    
    40.5
    %
    
    
    42.2
    %
  51




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##### Table of Contents



Capital Resources and Dividends
      52




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##### Table of Contents



Table 12
Capital Ratios
 WellCapitalizedSeptember 30, 2005
    
    RequirementTSFGTotal risk-based capital
    
    
    10.42
    %
    
    
    n/aTier 1 risk-based capital
    
    
    8.86
    
    
    
    n/aLeverage ratio
    
    
    7.20
    
    
    
    n/aCarolina First BankTotal risk-based capital
    
    
    10.51
    %
    
    
    10.00
    %Tier 1 risk-based capital
    
    
    8.26
    
    
    
    6.00Leverage ratio
    
    
    6.35
    
    
    
    5.00Mercantile BankTotal risk-based capital
    
    
    10.71
    %
    
    
    10.00
    %Tier 1 risk-based capital
    
    
    7.77
    
    
    
    6.00Leverage ratio
    
    
    6.69
    
    
    
    5.00
    Earnings Review
 Net Interest Income
  53




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##### Table of Contents



Table
13
Comparative Average Balances  Yields and Costs
(dollars in thousands)
 Three Months Ended September 30,2005
    
    
    
    
    
    
    
    
    
    
    2004 (Restated)Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateAssetsEarning assetsLoans (1)
    
    $
    9,138,137
    
    
    $
    149,788
    
    
    
    6.50
    %
    
    $
    7,617,721
    
    
    $
    103,398
    
    
    
    5.40
    %Investment securities, taxable (2)
    
    
    3,883,705
    
    
    
    41,657
    
    
    
    4.26
    
    
    
    4,015,616
    
    
    
    41,594
    
    
    
    4.12Investment securities, nontaxable (2) (3)
    
    
    406,767
    
    
    
    4,574
    
    
    
    4.46
    
    
    
    297,505
    
    
    
    3,294
    
    
    
    4.40Federal funds sold and interest-bearing
bank balances
    
    
    34,146
    
    
    
    317
    
    
    
    3.68
    
    
    
    33,001
    
    
    
    85
    
    
    
    1.02Total earning assets
    
    
    13,462,755
    
    
    $
    196,336
    
    
    
    5.79
    
    
    
    11,963,843
    
    
    $
    148,371
    
    
    
    4.93Non-earning assets
    
    
    1,482,396
    
    
    
    
    
    
    
    
    
    
    
    1,210,001Total assets
    
    $
    14,945,151
    
    
    
    
    
    
    
    
    
    
    $
    13,173,844Liabilities and Shareholders EquityLiabilitiesInterest-bearing liabilitiesInterest-bearing depositsInterest-bearing checking
    
    $
    979,487
    
    
    $
    2,533
    
    
    
    1.03
    
    
    $
    789,141
    
    
    $
    954
    
    
    
    0.48Savings
    
    
    193,518
    
    
    
    151
    
    
    
    0.31
    
    
    
    214,171
    
    
    
    159
    
    
    
    0.30Money market
    
    
    2,690,104
    
    
    
    16,819
    
    
    
    2.48
    
    
    
    2,688,311
    
    
    
    11,206
    
    
    
    1.66Time deposits, excluding brokered deposits
    
    
    2,254,868
    
    
    
    17,863
    
    
    
    3.14
    
    
    
    1,628,548
    
    
    
    8,684
    
    
    
    2.12Total interest-bearing customer deposits (4)
    
    
    6,117,977
    
    
    
    37,366
    
    
    
    2.42
    
    
    
    5,320,171
    
    
    
    21,003
    
    
    
    1.57Brokered deposits
    
    
    1,353,364
    
    
    
    14,967
    
    
    
    4.39
    
    
    
    1,201,513
    
    
    
    13,350
    
    
    
    4.42Total interest-bearing deposits
    
    
    7,471,341
    
    
    
    52,333
    
    
    
    2.78
    
    
    
    6,521,684
    
    
    
    34,353
    
    
    
    2.10Borrowings
    
    
    4,372,294
    
    
    
    38,813
    
    
    
    3.52
    
    
    
    4,101,587
    
    
    
    20,781
    
    
    
    2.02Total interest-bearing liabilities
    
    
    11,843,635
    
    
    $
    91,146
    
    
    
    3.05
    
    
    
    10,623,271
    
    
    $
    55,134
    
    
    
    2.06Noninterest-bearing liabilitiesNoninterest-bearing deposits
    
    
    1,446,396
    
    
    
    
    
    
    
    
    
    
    
    1,160,947Other noninterest-bearing liabilities
    
    
    146,980
    
    
    
    
    
    
    
    
    
    
    
    108,163Total liabilities
    
    
    13,437,011
    
    
    
    
    
    
    
    
    
    
    
    11,892,381Shareholders equity
    
    
    1,508,140
    
    
    
    
    
    
    
    
    
    
    
    1,281,463Total liabilities and shareholders equity
    
    $
    14,945,151
    
    
    
    
    
    
    
    
    
    
    $
    13,173,844Net interest income (tax equivalent)
    
    
    
    
    
    $
    105,190
    
    
    
    3.10
    %
    
    
    
    
    
    $
    93,237
    
    
    
    3.10
    %Less: tax-equivalent adjustment (3)
    
    
    
    
    
    
    1,601
    
    
    
    
    
    
    
    
    
    
    
    1,153Net interest income
    
    
    
    
    
    $
    103,589
    
    
    
    
    
    
    
    
    
    
    $
    92,084Total cost of customer deposits (5)
    
    
    7,564,373
    
    
    
    37,366
    
    
    
    1.96
    
    
    
    6,481,118
    
    
    
    21,003
    
    
    
    1.29Total cost of wholesale borrowings (6)
    
    
    5,725,658
    
    
    
    53,780
    
    
    
    3.73
    
    
    
    5,303,100
    
    
    
    34,131
    
    
    
    2.56
 
 (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)
    
    TSFG defines interest-bearing customer deposits as total interest-bearing deposits less brokered deposits.(5)
    
    Customer deposits include total deposits less brokered deposits.(6)
    
    Wholesale borrowings include borrowings and brokered deposits.  54




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##### Table of Contents



Table 13 (Continued)
Comparative Average Balances  Yields and Costs
(dollars in thousands)
 Nine Months Ended September 30,2005
    
    
    
    
    
    
    
    
    
    
    2004 (Restated)Average
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    RateAssetsEarning assetsLoans (1)
    
    $
    8,712,435
    
    
    $
    406,108
    
    
    
    6.23
    %
    
    $
    6,543,119
    
    
    $
    261,763
    
    
    
    5.34
    %Investment securities, taxable (2)
    
    
    4,163,502
    
    
    
    135,109
    
    
    
    4.34
    
    
    
    3,830,130
    
    
    
    114,488
    
    
    
    3.99Investment securities, nontaxable (2) (3)
    
    
    373,550
    
    
    
    12,354
    
    
    
    4.42
    
    
    
    266,233
    
    
    
    8,932
    
    
    
    4.48Federal funds sold and interest-bearing
bank balances
    
    
    28,972
    
    
    
    638
    
    
    
    2.94
    
    
    
    19,125
    
    
    
    136
    
    
    
    0.95Total earning assets
    
    
    13,278,459
    
    
    $
    554,209
    
    
    
    5.58
    
    
    
    10,658,607
    
    
    $
    385,319
    
    
    
    4.83Non-earning assets
    
    
    1,440,313
    
    
    
    
    
    
    
    
    
    
    
    1,047,889Total assets
    
    $
    14,718,772
    
    
    
    
    
    
    
    
    
    
    $
    11,706,496Liabilities and Shareholders EquityLiabilitiesInterest-bearing liabilitiesInterest-bearing depositsInterest-bearing checking
    
    $
    913,217
    
    
    $
    5,437
    
    
    
    0.80
    
    
    $
    710,107
    
    
    $
    2,635
    
    
    
    0.50Savings
    
    
    193,432
    
    
    
    450
    
    
    
    0.31
    
    
    
    178,121
    
    
    
    480
    
    
    
    0.36Money market
    
    
    2,703,538
    
    
    
    45,814
    
    
    
    2.27
    
    
    
    2,418,749
    
    
    
    28,124
    
    
    
    1.55Time deposits, excluding brokered deposits
    
    
    1,952,399
    
    
    
    40,932
    
    
    
    2.80
    
    
    
    1,419,157
    
    
    
    24,537
    
    
    
    2.31Total interest-bearing customer deposits (4)
    
    
    5,762,586
    
    
    
    92,633
    
    
    
    2.15
    
    
    
    4,726,134
    
    
    
    55,776
    
    
    
    1.58Brokered deposits
    
    
    1,347,749
    
    
    
    45,250
    
    
    
    4.49
    
    
    
    901,177
    
    
    
    32,142
    
    
    
    4.76Total interest-bearing deposits
    
    
    7,110,335
    
    
    
    137,883
    
    
    
    2.59
    
    
    
    5,627,311
    
    
    
    87,918
    
    
    
    2.09Borrowings
    
    
    4,668,277
    
    
    
    107,879
    
    
    
    3.09
    
    
    
    3,901,828
    
    
    
    55,558
    
    
    
    1.90Total interest-bearing liabilities
    
    
    11,778,612
    
    
    $
    245,762
    
    
    
    2.79
    
    
    
    9,529,139
    
    
    $
    143,476
    
    
    
    2.01Noninterest-bearing liabilitiesNoninterest-bearing deposits
    
    
    1,342,135
    
    
    
    
    
    
    
    
    
    
    
    977,332Other noninterest-bearing liabilities
    
    
    146,393
    
    
    
    
    
    
    
    
    
    
    
    109,986Total liabilities
    
    
    13,267,140
    
    
    
    
    
    
    
    
    
    
    
    10,616,457Shareholders equity
    
    
    1,451,632
    
    
    
    
    
    
    
    
    
    
    
    1,090,039Total liabilities and shareholders equity
    
    $
    14,718,772
    
    
    
    
    
    
    
    
    
    
    $
    11,706,496Net interest income (tax equivalent)
    
    
    
    
    
    $
    308,447
    
    
    
    3.11
    %
    
    
    
    
    
    $
    241,843
    
    
    
    3.03
    %Less: tax-equivalent adjustment (3)
    
    
    
    
    
    
    4,324
    
    
    
    
    
    
    
    
    
    
    
    3,126Net interest income
    
    
    
    
    
    $
    304,123
    
    
    
    
    
    
    
    
    
    
    $
    238,717Total cost of customer deposits (5)
    
    
    7,104,721
    
    
    
    92,633
    
    
    
    1.74
    
    
    
    5,703,466
    
    
    
    55,776
    
    
    
    1.31Total cost of wholesale borrowings(6)
    
    
    6,016,026
    
    
    
    153,129
    
    
    
    3.40
    
    
    
    4,803,005
    
    
    
    87,700
    
    
    
    2.44
 
 (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)
    
    TSFG defines interest-bearing customer deposits as total interest-bearing deposits less brokered deposits.(5)
    
    Customer deposits include total deposits less brokered deposits.(6)
    
    Wholesale borrowings include borrowings and brokered deposits.  55




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Provision for Loan Losses
  56




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Noninterest Income
  Table 14
Components of Noninterest Income
(dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Service charges on deposit accounts
    
    $
    12,245
    
    
    $
    9,950
    
    
    $
    30,801
    
    
    $
    26,781Debit card income
    
    
    1,770
    
    
    
    1,103
    
    
    
    4,937
    
    
    
    2,892Customer service fee income
    
    
    1,097
    
    
    
    683
    
    
    
    3,048
    
    
    
    2,155Total customer fee income
    
    
    15,112
    
    
    
    11,736
    
    
    
    38,786
    
    
    
    31,828Retail investment services
    
    
    2,054
    
    
    
    1,240
    
    
    
    4,811
    
    
    
    3,748Insurance income
    
    
    2,010
    
    
    
    1,132
    
    
    
    4,745
    
    
    
    3,169Trust and investment management income
    
    
    1,268
    
    
    
    824
    
    
    
    3,507
    
    
    
    2,781Benefits administration fees
    
    
    818
    
    
    
    613
    
    
    
    2,055
    
    
    
    1,701Total wealth management income
    
    
    6,150
    
    
    
    3,809
    
    
    
    15,118
    
    
    
    11,399Change in fair value of interest rate swaps
    
    
    (16,240
    )
    
    
    16,924
    
    
    
    (11,172
    )
    
    
    4,933Net cash settlement of interest rate swaps
    
    
    2,377
    
    
    
    7,259
    
    
    
    10,648
    
    
    
    21,496(Loss) gain on trading and certain derivative activities
    
    
    403
    
    
    
    1,150
    
    
    
    275
    
    
    
    2,133Total (loss) gain on trading and derivative activities
    
    
    (13,460
    )
    
    
    25,333
    
    
    
    (249
    )
    
    
    28,562Bank-owned life insurance income
    
    
    2,835
    
    
    
    2,869
    
    
    
    8,355
    
    
    
    8,617Merchant processing income
    
    
    2,864
    
    
    
    2,528
    
    
    
    7,615
    
    
    
    6,972Mortgage banking income
    
    
    2,087
    
    
    
    1,514
    
    
    
    5,714
    
    
    
    4,694(Loss) gain on sale of available for sale securities
    
    
    (1,032
    )
    
    
    678
    
    
    
    (2,301
    )
    
    
    6,499Gain on equity investments
    
    
    254
    
    
    
    (367
    )
    
    
    2,615
    
    
    
    3,456Gain on disposition of assets and liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,350Other
    
    
    1,618
    
    
    
    166
    
    
    
    4,517
    
    
    
    1,418Total noninterest income
    
    $
    16,428
    
    
    $
    48,266
    
    
    $
    80,170
    
    
    $
    105,795
  57




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58




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Noninterest Expenses
   59




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Table 15
Components of Noninterest Expenses
(dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Salaries and wages
    
    $
    31,350
    
    
    $
    24,553
    
    
    $
    83,222
    
    
    $
    63,388Employee benefits
    
    
    8,529
    
    
    
    7,431
    
    
    
    25,976
    
    
    
    21,380Occupancy
    
    
    7,387
    
    
    
    5,841
    
    
    
    20,309
    
    
    
    16,098Furniture and equipment
    
    
    5,779
    
    
    
    5,670
    
    
    
    17,335
    
    
    
    15,175Professional services
    
    
    6,125
    
    
    
    3,779
    
    
    
    15,696
    
    
    
    10,261Merchant processing expense
    
    
    2,327
    
    
    
    1,984
    
    
    
    6,170
    
    
    
    5,453Telecommunications
    
    
    1,533
    
    
    
    1,237
    
    
    
    4,243
    
    
    
    3,488Amortization of intangibles
    
    
    2,337
    
    
    
    1,839
    
    
    
    6,283
    
    
    
    4,229Merger-related costs
    
    
    981
    
    
    
    5,487
    
    
    
    3,480
    
    
    
    6,239Impairment (recovery) from write-down of assets
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    (277
    )Charitable contribution to foundation
    
    
    
    
    
    
    
    
    
    
    683
    
    
    
    Conservation grant of land
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,350Loss on early extinguishment of debt
    
    
    462
    
    
    
    
    
    
    
    2,015
    
    
    
    1,429Employment contract payments
    
    
    144
    
    
    
    174
    
    
    
    329
    
    
    
    115Other
    
    
    14,081
    
    
    
    11,863
    
    
    
    40,422
    
    
    
    31,267Total noninterest expenses
    
    $
    81,035
    
    
    $
    69,858
    
    
    $
    227,080
    
    
    $
    181,595
      60




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Income Taxes
  Discontinued Operations
  Third Quarter Results
    61




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Risk Management
   62




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Market Risk and Asset/Liability Management
 Market Risk Management.
 
    
    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.
     
    
    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
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
    
    actions taken by TSFG to counter such changing market conditions.
 Interest Sensitivity Analysis.
 
    
    a static balance sheet;
    
    as assets and liabilities mature or reprice they are reinvested at current rates and
keep the same characteristics (i.e., remain as they were either variable or fixed rate);
    
    mortgage backed securities prepayments are based on historical industry data;
    
    loan prepayments are based upon historical bank specific analysis;
    
    deposit retention and average lives are based on historical bank specific analysis;
    
    whether callable assets and liabilities are called are based on the implied forward
yield curve for each interest rate scenario; and
    
    management takes no action to counter any change.
  Table 16
 Interest
Rate Risk Analysis  Net Interest Income
 Annualized Hypothetical Percentage Change inInterest Rate Scenario
    
    Net Interest Income when Compared with Base Case2.00% (1)
    
    5.83%1.00 (1)
    
    2.98Flat (Base Case)
    
    (1.00) (1)
    
    (5.64)Forward Yield Curve(2)
    
    1.26
 
 (1)
    
    The increase 100 and 200 basis points and decrease 100 basis points interest rate
scenarios assume a simultaneous and parallel change in interest rates along the entire yield
curve.(2)
    
    The forward yield curve represents market expectations for interest rates and does
not assume an instantaneous shift in all yield curves.  Table 17
 Interest Rate Shock Analysis  Economic Value of Equity
 Annualized Hypothetical Percentage Change inInterest Rate Scenario
    
    Economic Value of Equity when Compared with Base Case2.00% (1)
    
    (0.46)%1.00 (1)
    
    3.07Flat (Base Case)
    
    (1.00) (1)
    
    (4.91)
 64




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(1)
    
    The increase 100 and 200 basis points and decrease 100 basis points interest rate
scenarios assume a simultaneous and parallel change in interest rates along the entire yield
curve. 
    
    Changes from the June 30, 2005 scenario results were due primarily to the reduction in
investment securities and wholesale borrowings that occurred during the quarter and the
resulting new balance sheet mix. Another component of the change in sensitivity for
September 30, 2005 was the change in the absolute level of interest rate as compared to
June 30, 2005. In addition, TSFG continually refines the modeling process through the use
of more precise model assumptions. Specific model assumption refinements for the September
30, 2005 quarter include an improvement in the cashflows for loans with varying payment
schedules.
  
    
    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;
    
    the flat scenarios are base case and are not indicative of historical results;
    
    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.
 Derivatives and Hedging Activities.
   Economic Risk
  65




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Credit Risk
  Liquidity Risk
  Operational Risk
    Compliance and Litigation Risks
    Off-Balance Sheet Arrangements
  66




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Lending Commitments.
    Derivatives.
 Liquidity
   67




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Table 18
 Contractual Obligations
 (dollars in thousands)
 Payments Due by PeriodRemainder
    
    
    2006
    
    
    2008of
    
    
    and
    
    
    and
    
    
    AfterTotal
    
    
    2005
    
    
    2007
    
    
    2009
    
    
    2009Time deposits
    
    $
    3,804,727
    
    
    $
    673,749
    
    
    $
    1,908,267
    
    
    $
    233,996
    
    
    $
    988,715Short-term borrowings
    
    
    1,380,763
    
    
    
    1,380,763
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    2,751,268
    
    
    
    5,251
    
    
    
    17,370
    
    
    
    183,678
    
    
    
    2,544,969Operating leases
    
    
    164,472
    
    
    
    4,143
    
    
    
    30,529
    
    
    
    26,460
    
    
    
    103,340Total contractual cash obligations
    
    $
    8,101,230
    
    
    $
    2,063,906
    
    
    $
    1,956,166
    
    
    $
    444,134
    
    
    $
    3,637,024
       68




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Recently Adopted Accounting Pronouncements
 Accounting for Certain Loans or Debt Securities Acquired in a Transfer
  Recently Issued Accounting Pronouncements
 Share-Based Payment
  
    
    Employee awards with cash-based settlement or repurchase features, such as a stock
appreciation right with a cash-settlement option;
    
    Awards for a fixed dollar amount settleable in the companys stock;
    
    Share-based awards with a net-settlement feature for an amount in excess of the minimum tax withholding; and
    
    Awards that vest or become exercisable based on the achievement of a condition other
than service, performance, or market condition.
  
    
    Share-based awards with net-settlement features for minimum tax withholdings;
    
    Awards that permit a cashless exercise using a broker unrelated to the employer; and
    
    Awards containing a put feature that give employees the right to require the company to
repurchase the shares at fair value, when the employee bears the risks and rewards normally
associated with ownership for six months or longer.
  Accounting for Nonmonetary Transactions
  69




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Accounting Changes and Error Corrections
   Meaning of Other-Than-Temporary Impairment
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
  70




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Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Accounting for
Derivative Instruments and Hedging Activities (SFAS 133)
 Changes in Internal Controls over Financial Reporting
   
    
    Enhancing risk management policies and procedures related to reviewing derivative transactions;
    
    Reviewing policies and procedures related to the initiation and subsequent review of hedge strategies;
    
    Engaging a third party consultant to provide ongoing expertise related to hedge
documentation at inception and ongoing monitoring and to assist management in
evaluating the appropriateness of the accounting for these transactions in
accordance with Generally Accepted Accounting Principles;
    
    Changing policies and procedures to limit the Companys use of the short-cut
method.
  71




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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
 Total
    
    
    MaximumNumber of
    
    
    Number ofShares Purchased
    
    
    Shares thatTotal
    
    
    Average
    
    
    as Part
    
    
    May Yet BeNumber
    
    
    Price
    
    
    of Publicly
    
    
    Purchasedof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    Under Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    Programs(2)July 1, 2005 to July 31, 2005
    
    
    1,897
    (1)
    
    $
    29.41
    
    
    
    
    
    
    
    1,289,502August 1, 2005 to August 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,289,502September 1, 2005 to September 30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,289,502Total
    
    
    1,897
    
    
    $
    29.41
    
    
    
    
    
    
    
    1,289,502
 
 (1)
    
    These shares were canceled in connection with option exercises. Pursuant to TSFGs
stock option plans, participants may exercise stock options by surrendering shares of TSFG
common stock the participants already own as payment of the option exercise price. Shares
surrendered by participants of the plan are repurchased pursuant to the terms of the
applicable stock option plan and not pursuant to publicly announced share repurchase programs.(2)
    
    In February of 2003, TSFG announced a stock repurchase program authorizing TSFG to
repurchase up to 1 million shares of its common stock. In April of 2003, TSFG announced a
stock repurchase program authorizing TSFG to repurchase up to 1 million shares of its common
stock. Neither of these stock repurchase programs has an expiration date, and each respective
program will expire upon completion of repurchases totaling the amount authorized to
repurchase. At September 30, 2005, there are 289,502 shares remaining under the February 2003
authorization and 1 million shares under the April 2003 authorization. 
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Securities Holders
  
 Item 5. Other Information
  72




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Item 6. Exhibits
 31.1
    
    Certificate of the Principal Executive Officer pursuant to Rule 13a-14a/15(d)-14(a) of
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of the Principal Financial Officer pursuant to Rule 13a-14a/15(d)-14(a) of
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 Note for non-filed versions of this Form 10-Q
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SIGNATURES
  The South Financial Group, Inc.Date: November 14, 2005
    /s/ Timothy K. SchoolsTimothy K. SchoolsExecutive Vice President
(Principal Accounting and Chief Financial Officer) 74