UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



|X | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period endedJune 30, 2005
|- | -----------------------------------------------------------------------------------------------------------------------------------

| | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition periodfrom ____ to ____
| | -----------------------------------------------------------------------------------------------------------------------------------



Commission file number 0-15083



The South Financial Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)





|                               | South Carolina                  | 57-0824914                        | 
|------------------------------ | ------------------------------- | --------------------------------- | 
|                               | (State or Other Jurisdiction of | (IRS Employer Identification No.)
|Incorporation or Organization) |                                
|                               |                                 |                                   | 



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



(864) 255-7900

Registrant's telephone number, including area code



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesXNo



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YesXNo



The number of outstanding shares of the issuer's $1.00 par value common stock as of August 2, 2005 was 74,454,986.









PART I. FINANCIAL
INFORMATION

Item 1. Financial
Statements

THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIESConsolidated Balance
Sheets(in thousands, except share data) (Unaudited)

|                                                                    | June 30, | December 31,   |  
|------------------------------------------------------------------- | -------- | -------------- | -
|
|Assets                                                              |          |                |  
|Cash and due from banks                                             |          | $      269,996 |  
|Interest-bearing bank balances                                      |          | 21,643         |  
|Securities                                                          |         
|Trading                                                             |          | 20             |  
|Available for sale                                                  |          | 4,260,671      |  
|Held to maturity (market value $66,045, $80,450 and $76,552,        |         
|respectively                                                        |          | 65,276         |  
|                                                                    |          |                |  
|Total securities                                                    |          | 4,325,967      |  
|                                                                    |          |                |  
|Loans                                                               |         
|Loans held for sale                                                 |          | 41,427         |  
|Loans held for investment                                           |          | 8,966,337      |  
|Allowance for loan losses                                           |          | (105,552       | )
|                                                                    |          |                |  
|Net loans                                                           |          | 8,902,212      |  
|                                                                    |          |                |  
|Premises and equipment, net                                         |          | 183,189        |  
|Accrued interest receivable                                         |          | 69,714         |  
|Goodwill                                                            |          | 647,183        |  
|Other intangible assets                                             |          | 46,358         |  
|Other assets                                                        |          | 412,819        |  
|                                                                    |          |                |  
|                                                                    |          | $ 14,879,081   |  
|                                                                    |          |                |  
|                                                                    |         
|Liabilities and Shareholders' Equity                                |         
|Liabilities                                                         |         
|Deposits                                                            |         
|Noninterest-bearing                                                 |          | $   1,466,803  |  
|Interest-bearing                                                    |          | 7,403,743      |  
|                                                                    |          |                |  
|Total deposits                                                      |          | 8,870,546      |  
|Federal funds purchased and repurchase agreements                   |          | 1,328,931      |  
|Other short-term borrowings                                         |          | 113,798        |  
|Long-term debt                                                      |          | 2,891,308      |  
|Accrued interest payable                                            |          | 39,922         |  
|Other liabilities                                                   |          | 112,149        |  
|                                                                    |          |                |  
|Total liabilities                                                   |          | 13,356,654     |  
|                                                                    |          |                |  
|Shareholders' equity                                                |         
|Preferred 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 74,348,330, 59,796,124, and 71,252,346       |         
|shares, respectively                                                |          | 74,348         |  
|Surplus                                                             |          | 1,143,654      |  
|Retained earnings                                                   |          | 333,747        |  
|Guarantee of employee stock ownership plan debt and nonvested       |         
|restricted stock                                                    |          | (3,611         | )
|Common stock held in trust for deferred compensation                |          | (1,388         | )
|Deferred compensation payable in common stock                       |          | 1,388          |  
|Accumulated other comprehensive loss, net of tax                    |          | (25,711        | )
|                                                                    |          |                |  
|Total shareholders' equity                                          |          | 1,522,427      |  
|                                                                    |          |                |  
|                                                                    |          | $ 14,879,081   |  
|                                                                    |          |                |  

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

1



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                            Consolidated Statements of Income
                                    (in thousands, except per share data) (Unaudited)

|                                                    | Three Months EndedJune 30, | Six Months EndedJune 30, |   |        
|--------------------------------------------------- | -------------------------- | ------------------------ | - | -------
|
|Interest Income                                     |                            |                          |   |        
|Interest and fees on loans                          |                            |                          | $ | 134,842
|Interest and dividends on securities:               |                            |                         
|Taxable                                             |                            |                          |   | 47,304 
|Exempt from federal income taxes                    |                            |                          |   | 2,595  
|                                                    |                            |                          |   |        
|Total interest and dividends on securities          |                            |                          |   | 49,899 
|Interest on short-term investments                  |                            |                          |   | 160    
|                                                    |                            |                          |   |        
|Total interest income                               |                            |                          |   | 184,901
|                                                    |                            |                          |   |        
|Interest Expense                                    |                            |                         
|Interest on deposits                                |                            |                          |   | 40,953 
|Interest on short-term borrowings                   |                            |                          |   | 11,983 
|Interest on long-term debt                          |                            |                          |   | 25,112 
|                                                    |                            |                          |   |        
|Total interest expense                              |                            |                          |   | 78,048 
|                                                    |                            |                          |   |        
|Net Interest Income                                 |                            |                          |   | 106,853
|Provision for Loan Losses                           |                            |                          |   | 9,944  
|                                                    |                            |                          |   |        
|Net interest income after provision for loan losses |                            |                          |   | 96,909 
|Noninterest Income                                  |                            |                          |   | 24,660 
|Noninterest Expenses                                |                            |                          |   | 79,535 
|                                                    |                            |                          |   |        
|Income before income taxes and discontinued         |                            |                         
|operations                                          |                            |                          |   | 42,034 
|Income taxes                                        |                            |                          |   | 13,661 
|                                                    |                            |                          |   |        
|Income from continuing operations                   |                            |                          |   | 28,373 
|Discontinued operations, net of income tax          |                            |                          |   | --     
|                                                    |                            |                          |   |        
|Net Income                                          |                            |                          | $ | 28,373 
|                                                    |                            |                          |   |        
|                                                    |                            |                         
|Average Common Shares Outstanding, Basic            |                            |                          |   | 73,083 
|Average Common Shares Outstanding, Diluted          |                            |                          |   | 74,421 
|Per Common Share, Basic                             |                            |                         
|Income from continuing operations                   |                            |                          | $ | 0.39   
|Discontinued operations                             |                            |                          |   | --     
|                                                    |                            |                          |   |        
|Net income                                          |                            |                          | $ | 0.39   
|                                                    |                            |                          |   |        
|Per Common Share, Diluted                           |                            |                         
|Income from continuing operations                   |                            |                          | $ | 0.38   
|Discontinued operations                             |                            |                          |   | --     
|                                                    |                            |                          |   |        
|Net income                                          |                            |                          | $ | 0.38   
|                                                    |                            |                          |   |        
|                                                    |                            |                         
|Dividends per common share                          |                            |                          | $ | 0.16   
|                                                    |                            |                          |   |        

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

2



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                       Consolidated Statements of Changes
                             In Shareholders' Equity and Comprehensive Income (Loss)
                           (in thousands, except share and per share data) (Unaudited)

|                                     | Shares ofCommonStock | CommonStock | Surplus | RetainedEarningsandOther* | AccumulatedOtherComprehensiveIncome(Loss) | Total
|------------------------------------ | -------------------- | ----------- | ------- | ------------------------- | ----------------------------------------- | -----
|Balance, December 31, 2003           |                      |             |         | 59,064,375                |                                           | $    
|Net income                           |                      |             |         | --                        |                                           |      
|Other comprehensive loss, net of     |                      |            
|income tax of $23,718                |                      |             |         | --                        |                                           |      
|                                     |                      |             |         |                           |                                           |      
|Comprehensive income                 |                      |             |         | --                        |                                           |      
|                                     |                      |             |         |                           |                                           |      
|Cash dividends declared              |                      |            
|($0.30 per common share)             |                      |             |         | --                        |                                           |      
|Common stock activity:               |                      |            
|Acquisitions                         |                      |             |         | 21,108                    |                                           |      
|Exercise of stock options, including |                      |            
|income tax benefit of $2,667         |                      |             |         | 440,596                   |                                           |      
|Restricted stock plan                |                      |             |         | 202,289                   |                                           |      
|Dividend reinvestment plan           |                      |             |         | 58,687                    |                                           |      
|Employee stock purchase plan         |                      |             |         | 4,371                     |                                           |      
|Director compensation                |                      |             |         | 4,710                     |                                           |      
|Common stock purchased by trust for  |                      |            
|deferred compensation                |                      |             |         | --                        |                                           |      
|Deferred compensation payable in     |                      |            
|common stock                         |                      |             |         | --                        |                                           |      
|Miscellaneous                        |                      |             |         | (12                       | )                                         |      
|                                     |                      |             |         |                           |                                           |      
|Balance, June 30, 2004               |                      |             |         | 59,796,124                |                                           | $    
|                                     |                      |             |         |                           |                                           |      
|                                     |                      |            
|                                     |                      |            
|Balance, December 31, 2004           |                      |             |         | 71,252,346                |                                           | $    
|Net income                           |                      |             |         | --                        |                                           |      
|Other comprehensive loss, net of     |                      |            
|income tax of $4,709                 |                      |             |         | --                        |                                           |      
|                                     |                      |             |         |                           |                                           |      
|Comprehensive income                 |                      |             |         | --                        |                                           |      
|                                     |                      |             |         |                           |                                           |      
|Cash dividends declared ($0.32 per   |                      |            
|common share)                        |                      |             |         | --                        |                                           |      
|Common stock activity:               |                      |            
|Acquisitions                         |                      |             |         | 2,339,878                 |                                           |      
|Exercise of stock options, including |                      |            
|income tax benefit of $2,871         |                      |             |         | 598,133                   |                                           |      
|Restricted stock plan                |                      |             |         | 76,661                    |                                           |      
|Dividend reinvestment plan           |                      |             |         | 65,665                    |                                           |      
|Employee stock purchase plan         |                      |             |         | 8,809                     |                                           |      
|Director compensation                |                      |             |         | 6,838                     |                                           |      
|Common stock purchased by trust for  |                      |            
|deferred compensation                |                      |             |         | --                        |                                           |      
|Deferred compensation payable in     |                      |            
|common stock                         |                      |             |         | --                        |                                           |      
|Miscellaneous                        |                      |             |         | --                        |                                           |      
|                                     |                      |             |         |                           |                                           |      
|Balance, June 30, 2005               |                      |             |         | 74,348,330                |                                           | $    
|                                     |                      |             |         |                           |                                           |      

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

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

3



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                       Consolidated Statements of Cash Flows
                                            (in thousands) (Unaudited)

|                                                                            | Six Months Ended June 30, | 
|--------------------------------------------------------------------------- | ------------------------- | 
|
|Cash Flows from Operating Activities                                        |                           | 
|Net income                                                                  |                           | 
|Adjustments to reconcile net income to net cash provided by                 |                           | 
|operating activities                                                        |                           | 
|Depreciation, amortization, and accretion, net                              |                           | 
|Provision for loan losses                                                   |                           | 
|Loss (gain) on sale of available for sale securities                        |                           | 
|Gain on equity investments                                                  |                           | 
|Loss (gain) on trading and derivative activities                            |                           | 
|Gain on disposition of assets and liabilities                               |                           | 
|Gain on sale of loans                                                       |                           | 
|(Gain) loss on disposition of premises and equipment                        |                           | 
|(Gain) loss on disposition of other real estate owned                       |                           | 
|Contribution to foundation                                                  |                           | 
|Conservation grant of land                                                  |                           | 
|Impairment loss (recovery) from write-down of assets                        |                           | 
|Impairment recovery from write-down of mortgage servicing rights            |                           | 
|Loss on early extinguishment of debt                                        |                           | 
|Trading account assets, net                                                 |                           | 
|Origination of loans held for sale                                          |                           | 
|Sale of loans held for sale and principal repayments                        |                           | 
|Other assets, net                                                           |                           | 
|Other liabilities, net                                                      |                           | 
|                                                                            |                           | 
|Net cash provided by operating activities                                   |                           | 
|                                                                            |                           | 
|                                                                            |                           | 
|Cash Flows from Investing Activities                                        |                           | 
|Sale of securities available for sale                                       |                           | 
|Maturity, redemption, call, or principal repayments of securities available |                           | 
|for sale                                                                    |                           | 
|Maturity, redemption, call, or principal repayments of securities held to   |                           | 
|maturity                                                                    |                           | 
|Purchase of securities available for sale                                   |                           | 
|Origination of loans held for investment, net of principal repayments       |                           | 
|Sale of other real estate owned                                             |                           | 
|Sale of premises and equipment                                              |                           | 
|Sale of long-lived assets held for sale                                     |                           | 
|Purchase of premises and equipment                                          |                           | 
|Disposition of assets and liabilities, net                                  |                           | 
|Cash equivalents acquired, net of payment for purchase acquisitions         |                           | 
|                                                                            |                           | 
|Net cash used for investing activities                                      |                           | 
|                                                                            |                           | 

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

4



THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                     Consolidated Statements of Cash Flows - Continued
                                                (in thousands) (Unaudited)

|                                                                       | Six Months Ended June 30, | 
|---------------------------------------------------------------------- | ------------------------- | 
|
|Cash Flows from Financing Activities                                   |                           | 
|Deposits, net                                                          |                           | 
|Federal funds purchased and repurchase agreements, net                 |                           | 
|Other short-term borrowings, net                                       |                           | 
|Issuance of long-term debt                                             |                           | 
|Payment of long-term debt                                              |                           | 
|Prepayment penalty on early extinguishment of debt                     |                           | 
|Cash dividends paid on common stock                                    |                           | 
|Other common stock activity                                            |                           | 
|                                                                       |                           | 
|Net cash provided by financing activities                              |                           | 
|                                                                       |                           | 
|Net change in cash and cash equivalents                                |                           | 
|Cash and cash equivalents at beginning of year                         |                           | 
|                                                                       |                           | 
|Cash and cash equivalents at end of period                             |                           | 
|                                                                       |                           | 
|                                                                       |                           | 
|Supplemental Cash Flow Data                                            |                           | 
|Interest paid                                                          |                           | 
|Income taxes paid                                                      |                           | 
|Significant non-cash investing and financing transactions:             |                           | 
|Change in unrealized loss on available for sale securities             |                           | 
|Loans transferred to other real estate owned                           |                           | 
|Security sales, redemptions and calls settled subsequent to period-end |                           | 
|Security purchases settled subsequent to period-end                    |                           | 
|Business combinations:                                                 |                           | 
|Fair value of assets acquired (includes cash and cash equivalents)     |                           | 
|Fair value of common stock issued and stock options recognized         |                           | 
|Cash paid                                                              |                           | 
|                                                                       |                           | 
|Liabilities assumed                                                    |                           | 
|                                                                       |                           | 

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

5



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

# Note 1  General

The
foregoing unaudited consolidated financial statements and notes are presented in
accordance with the instructions for the Securities and Exchange Commission Quarterly
Report on Form 10-Q. TSFG refers to The South Financial Group, Inc. and
subsidiaries, except where the context requires otherwise. The information contained in
the notes to consolidated financial statements included in TSFGs Annual Report on
Form 10-K for the year ended December 31, 2004 should be referred to in connection with
the reading of these unaudited interim consolidated financial statements.

Nature of Operations

TSFG
is a financial holding company headquartered in Greenville, South Carolina that offers a
broad range of financial products and services, including banking, treasury management,
insurance, investments, wealth management, mortgage, and trust services to consumers and
commercial customers. It has two bank subsidiaries, Carolina First Bank, a South Carolina
banking corporation headquartered in Greenville, South Carolina, and Mercantile Bank, a
Florida banking corporation headquartered in Jacksonville, Florida. It also owns several
non-bank subsidiaries. At June 30, 2005, TSFG operated through 77 branch offices in South
Carolina, 65 branch offices in Florida, and 25 branch offices in North Carolina. In South
Carolina, the branches are primarily located in the states largest metropolitan
areas. The Florida operations are principally concentrated in the Jacksonville, Orlando,
Tampa Bay, Southeast Florida, and Gainesville areas. The North Carolina branches are
primarily located in the Hendersonville and Asheville areas of western North Carolina and
in the Wilmington area of eastern North Carolina.

Accounting Estimates and
Assumptions

The
preparation of the consolidated financial statements and accompanying notes requires
management of TSFG to make a number of estimates and assumptions relating to reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ significantly from these
estimates and assumptions. Material estimates that are particularly susceptible to
significant change relate to the determination of the allowance for loan losses, fair
value of certain financial instruments (securities, derivatives, and privately held
investments), income tax assets or liabilities, and accounting for acquisitions, including
the fair value determinations, the analysis of goodwill and other intangibles for
impairment and the analysis of valuation allowances in the initial accounting of loans
acquired. To a lesser extent, significant estimates are also associated with the
determination of contingent liabilities, stock-based compensation, and the assessment of
hedge effectiveness of derivatives and other hedging instruments.

Principles of
Consolidation

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

TSFG
determines whether it has a controlling financial interest in an entity by first
evaluating whether the entity is a voting interest entity or a variable interest entity
under U.S. generally accepted accounting principles (GAAP). Voting interest
entities are entities in which the total equity investment at risk is sufficient to enable
each entity to finance itself independently and provides the equity holders with the
obligation to absorb losses, the right to receive residual returns, and the right to make
decisions about the entitys activities. TSFG consolidates voting interest entities
in which it has at least majority of the voting interest. As defined in GAAP, variable
interest entities (VIEs) are entities that lack one or more of the
characteristics of a voting interest entity described above. A controlling financial
interest in an entity is present when an enterprise has a variable interest, or
combination of variable interests, that will absorb a majority of the entitys
expected losses, receive a majority of the entitys expected residual returns, or
both. The enterprise with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE. The following TSFG subsidiaries, South Financial
Capital Trust I, TSFG Capital Trust 2002-A, South Financial Capital Trust II, South
Financial Capital Trust III, MountainBank Capital Trust I, Florida Banks Capital Trust I,
Florida Banks Capital Trust II, Florida Banks Statutory Trust I, Florida Banks Statutory
Trust II, and Florida Banks Statutory Trust III, are VIEs for which TSFG is not the
primary beneficiary. Accordingly, the accounts of these entities are not included in
TSFGs consolidated financial statements.

6



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

Reclassifications

Certain
prior year amounts have been reclassified to conform to the 2005 presentations. Such
reclassifications had no effect on net income, total assets, total liabilities or
shareholders equity.

Stock-Based Compensation

At
June 30, 2005, TSFG had several stock-based employee compensation plans, which are
described more fully in Note 29 to the Consolidated Financial Statements in TSFGs
Annual Report on Form 10-K for the year ended December 31, 2004. TSFG accounts for its
option plans under the recognition and measurement principles of Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to Employees,
and related Interpretations (APB Opinion 25). No stock-based employee
compensation cost is reflected in net income related to these plans, as all options
granted under those plans had an exercise price equal to or greater than the market value
of the underlying common stock on the date of grant. Under the fair value method, fair
value is measured on the date of grant using an option-pricing model with market
assumptions. This amount is amortized on a straight-line basis over the vesting period.
TSFG uses the Black-Scholes option-pricing model. Option pricing models require the use of
highly subjective assumptions, including but not limited to, expected stock price
volatility, forfeiture rates, and interest rates, which if changed can materially affect
fair value estimates. Accordingly, the model does not necessarily provide a reliable
single measure of the fair value of TSFGs stock options.

The
following table provides pro forma net income and earnings per share information, as if
TSFG had applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based Compensation
(SFAS 123) to stock-based employee compensation option plans for the periods
presented. For purposes of the pro forma disclosures below, the calculated compensation
expense for all options outstanding has been allocated over the vesting periods.

|                                                | Three Months EndedJune 30, | Six Months Ended,June 30, |   |       
|----------------------------------------------- | -------------------------- | ------------------------- | - | ------
|
|(dollars in thousands, except per share data)  
|Net Income                                      |                            |                           |   |       
|Net income, as reported                         |                            |                           | $ | 28,373
|Deduct:                                         |                            |                          
|Total stock-based employee compensation expense |                            |                          
|determined under fair value based method for    |                            |                          
|all option awards, net of income tax            |                            |                           |   | 626   
|                                                |                            |                           |   |       
|Pro forma net income                            |                            |                           | $ | 27,747
|                                                |                            |                           |   |       
|                                                |                            |                          
|Basic Earnings Per Share                        |                            |                          
|As reported                                     |                            |                           | $ | 0.39  
|Pro forma                                       |                            |                           |   | 0.38  
|                                                |                            |                          
|Diluted Earnings Per Share                      |                            |                          
|As reported                                     |                            |                           | $ | 0.38  
|Pro forma                                       |                            |                           |   | 0.37  

7



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

The
following is a summary of TSFGs weighted-average assumptions used to estimate the
weighted-average per share fair value of options granted on the date of grant using the
Black-Scholes option-pricing model:

|                                               | Three Months EndedJune 30, | Six Months EndedJune 30, |   |   
|---------------------------------------------- | -------------------------- | ------------------------ | - | --
|
|Expected life (in years)                       |                            |                          |   | 7 
|Expected volatility                            |                            |                          |   | 34
|Risk-free interest rate                        |                            |                          |   | 4 
|Expected dividend yield                        |                            |                          |   | 2 
|Weighted-average fair value of options granted |                            |                         
|during the period                              |                            |                          | $ | 9 

# Recently Adopted
Accounting Pronouncements

Accounting
for Certain Loans or Debt Securities Acquired in a Transfer

Effective
January 1, 2005, TSFG adopted Statement of Position No. 03-3 (SOP 03-3),
Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which
prohibits carryover or creation of valuation allowances in the initial accounting of all
loans acquired in a transfer that are within the scope of this SOP. The prohibition of the
valuation allowance carryover applies to the purchase of loans (including loans acquired
in a business combination) with evidence of deterioration of credit quality since
origination, for which its probable, at acquisition, that the investor will be
unable to collect all contractually required payments. The initial adoption of this
standard did not have an impact on the financial condition or results of operations of
TSFG. See Note 4 for information on the acquisition of Pointe Financial Corporation.

# Recently Issued
Accounting Pronouncements

Share-Based
Payment

In
December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123R (SFAS 123R),
Share-Based Payment, which requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based compensation
issued to employees. SFAS 123R is an amendment of Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, and its related implementation guidance. SFAS 123R does not change the
accounting guidance provided in SFAS 123 for share-based payment transactions with parties
other than employees. Under SFAS 123R, classification of an award will affect the
measurement of compensation cost. Liability-classified awards are remeasured to fair value
at each balance-sheet date until the award is settled. Liability-classified awards include
the following:

| |  |  | 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.

8



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

Equity-classified
awards are measured at grant-date fair value, amortized over the subsequent vesting
period, and are not subsequently remeasured. Equity-classified awards include the
following:

| |  |  | 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.

Effective
April 21, 2005, the Securities and Exchange Commission (SEC) issued an
amendment to Rule 4-01(a)(1) of Regulation S-X delaying the effective date for public
entities that do not file as small business issuers to the first annual period beginning
after June 15, 2005 instead of SFAS 123Rs original effective date, which was as of
the beginning of the first interim reporting period beginning after June 15, 2005. TSFG
plans to adopt this standard on January 1, 2006 and is evaluating the impact on
TSFGs 2006 results of operations.

Accounting
for Nonmonetary Transactions

In
December 2004, the FASB issued Statement of Financial Accounting Standards No. 153
(SFAS 153), Exchanges of Nonmonetary Assets-an amendment of APB Opinion
No. 29, which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS 153 is effective for nonmonetary transactions occurring in
fiscal years beginning after June 15, 2005.

Accounting
Changes and Error Corrections

In
May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS
154), Accounting Changes and Error Correctionsa replacement of APB Opinion No.
20 and FASB Statement No. 3, which eliminates the requirement to reflect changes in
accounting principles as cumulative adjustments to net income in the period of the change
and requires retrospective application to prior periods financial statements of
voluntary changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. If it is impracticable
to determine the cumulative effect of the change to all prior periods, SFAS 154 requires
that the new accounting principle be adopted prospectively. For new accounting
pronouncements, the transition guidance in the pronouncement should be followed.
Retrospective application refers to the application of a different accounting principle to
previously issued financial statements as if that principle had always been used.

SFAS
154 did not change the guidance for reporting corrections of errors, changes in estimates
or for justification of a change in accounting principle on the basis of preferability.
SFAS 154 is effective for accounting changes made in fiscal years beginning after December
15, 2005.

9



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 2 
Supplemental Financial Information to Consolidated Statements of Income

The
following presents the details for noninterest income and noninterest expense (in
thousands):

|                                                     | Three Months EndedJune 30, | Six Months EndedJune 30, |   |          
|---------------------------------------------------- | -------------------------- | ------------------------ | - | ---------
|
|Noninterest Income                                   |                            |                          |   |          
|Service charges on deposit accounts                  |                            | $   9,979                |   | $   8,718
|Debit card income                                    |                            | 1,652                    |   | 975      
|Customer service fee income                          |                            | 1,120                    |   | 800      
|                                                     |                            |                          |   |          
|Total customer fee income                            |                            | 12,751                   |   | 10,493   
|                                                     |                            |                          |   |          
|                                                     |                           
|Brokerage income                                     |                            | 1,317                    |   | 1,312    
|Trust income                                         |                            | 1,078                    |   | 1,030    
|                                                     |                            |                          |   |          
|Total brokerage and trust income                     |                            | 2,395                    |   | 2,342    
|                                                     |                            |                          |   |          
|                                                     |                           
|Bank-owned life insurance income                     |                            | 2,759                    |   | 3,458    
|Merchant processing income                           |                            | 2,713                    |   | 2,431    
|Mortgage banking income                              |                            | 2,140                    |   | 1,625    
|Insurance income                                     |                            | 1,449                    |   | 1,015    
|Benefits administration fees                         |                            | 650                      |   | 461      
|(Loss) gain on sale of available for sale securities |                            | (1,503                   | ) | 607      
|Gain on equity investments                           |                            | 650                      |   | 1,013    
|(Loss) gain on trading and derivative activities     |                            | (1,032                   | ) | 2,352    
|Gain on disposition of assets and liabilities        |                            | --                       |   | --       
|Other                                                |                            | 1,688                    |   | 198      
|                                                     |                            |                          |   |          
|Total noninterest income                             |                            | $ 24,660                 |   | $ 25,995 
|                                                     |                            |                          |   |          
|                                                     |                           
|Noninterest Expenses                                 |                           
|Salaries and wages                                   |                            | $ 27,480                 |   | $ 19,917 
|Employee benefits                                    |                            | 8,423                    |   | 7,034    
|Occupancy                                            |                            | 6,823                    |   | 5,185    
|Furniture and equipment                              |                            | 6,023                    |   | 4,890    
|Professional services                                |                            | 5,135                    |   | 3,400    
|Merchant processing expense                          |                            | 2,211                    |   | 1,910    
|Telecommunications                                   |                            | 1,384                    |   | 1,106    
|Amortization of intangibles                          |                            | 2,140                    |   | 1,195    
|Merger-related costs                                 |                            | 2,194                    |   | 575      
|Contribution to foundation                           |                            | --                       |   | --       
|Impairment loss (recovery) from write-down of assets |                            | 917                      |   | (277     
|Conservation grant of land                           |                            | --                       |   | --       
|Loss on early extinguishment of debt                 |                            | 2,981                    |   | --       
|Other                                                |                            | 13,824                   |   | 9,531    
|                                                     |                            |                          |   |          
|Total noninterest expenses                           |                            | $ 79,535                 |   | $ 54,466 
|                                                     |                            |                          |   |          

10



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 3  Accumulated Other Comprehensive Income (Loss)

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

|                                                            | Three Months EndedJune 30, | Six Months EndedJune 30, |   |        
|----------------------------------------------------------- | -------------------------- | ------------------------ | - | -------
|
|Unrealized (Losses) Gains on Available for Sale Securities  |                            |                          |   |        
|Balance at beginning of period                              |                            |                          | $ | (66,807
|Other comprehensive income (loss):                          |                            |                         
|Unrealized holding gains (losses) arising during the period |                            |                          |   | 62,374 
|Income tax (expense) benefit                                |                            |                          |   | (23,071
|Less: Reclassification adjustment for losses (gains)        |                            |                         
|included in net income                                      |                            |                          |   | 853    
|Income tax (benefit) expense                                |                            |                          |   | (331   
|                                                            |                            |                          |   |        
|                                                            |                            |                          |   | 39,825 
|                                                            |                            |                          |   |        
|Balance at end of period                                    |                            |                          |   | (26,982
|                                                            |                            |                          |   |        
|                                                            |                            |                         
|Unrealized Gains (Losses) on Cash Flow Hedges               |                            |                         
|Balance at beginning of period                              |                            |                          |   | 1,830  
|Other comprehensive income (loss):                          |                            |                         
|Unrealized (loss) gain on change in fair values             |                            |                          |   | (757   
|Income tax benefit (expense)                                |                            |                          |   | 265    
|Less: Amortization of terminated swaps                      |                            |                          |   | (104   
|Income tax expense                                          |                            |                          |   | 37     
|                                                            |                            |                          |   |        
|                                                            |                            |                          |   | (559   
|                                                            |                            |                          |   |        
|Balance at end of period                                    |                            |                          |   | 1,271  
|                                                            |                            |                          |   |        
|                                                            |                            |                          | $ | (25,711
|                                                            |                            |                          |   |        

# Note 4  Business
Combinations

Pointe Financial
Corporation

On
May 6, 2005, TSFG acquired Pointe Financial Corporation (Pointe), a bank
holding company headquartered in Boca Raton, Florida. Pointe operated through 10 branch
offices in Dade, Broward, and Palm Beach counties. This acquisition builds on TSFGs
existing Florida franchise. In connection with this acquisition, Pointe's banking subsidiary Pointe Bank was merged into
Mercantile Bank. TSFG added approximately $312 million in loans and $329 million in
deposits as a result of this acquisition.

The
aggregate purchase price for Pointe was $97.9 million, which consisted of 2,193,941 shares
of TSFG common stock valued at $67.5 million, $24.5 million cash, and outstanding employee
and director stock options valued at $5.9 million.

11



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

The
Pointe purchase price and the amount of the purchase price allocated to goodwill and other
intangible assets are presented below (in thousands). TSFG obtained third-party valuations
of certain assets and liabilities by the end of the second quarter; however,
managements comprehensive analyses of those valuations are not complete. Therefore,
the estimated fair values of the assets acquired and the liabilities assumed at the
purchase price date are subject to adjustment in the third quarter of 2005 as well as
within one year of the acquisition as additional fair value information becomes available.

|                                                                                             | May 6, 2005
|-------------------------------------------------------------------------------------------- | -----------
|                                                                                             |            
|Purchase price                                                                               |            
|Fair value of net assets acquired, net of direct acquisition costs and deferred income taxes |            
|                                                                                             |            
|Excess of purchase price over fair value of net assets acquired                              |            
|Core deposit intangible                                                                      |            
|                                                                                             |            
|Goodwill                                                                                     |            
|                                                                                             |            

The
core deposit intangible asset is amortized over 10 years based on the estimated lives of
the associated deposits. The core deposit intangible valuations and amortization periods
are based on a historical study of the deposits acquired. All intangible assets were
assigned to Mercantile Bank. The goodwill will not be amortized but will be tested at
least annually for impairment in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS
142). The total amount of goodwill expected to be deductible for income tax purposes
is $9.7 million.

An
evaluation of the loans acquired from Pointe revealed no loans that fall under the scope
of SOP 03-3. In performing the evaluation, several loans were identified with evidence of
deterioration of credit quality since origination by Pointe. However, it was determined
that it was not probable, at acquisition date, that TSFG would be unable to collect all
contractually required payments on these loans.

Koss Olinger

On
April 4, 2005, TSFG acquired the Koss Olinger group of companies, a wealth management
group based in Gainesville, Florida. TSFG issued 56,398 shares of common stock valued at
$1.5 million and paid $4.5 million cash, acquired net tangible assets totaling $287,000,
recorded a customer list intangible asset of $1.7 million, and recorded goodwill of $4.6
million. The customer list intangible is amortized over its estimated useful life of 19
years based on the declining balance method. In addition, TSFG agreed to issue earnout
shares valued and payable on May 17, 2010, based on earnings achievement. If issued, the
earnout shares would increase goodwill. TSFG intends to use Koss Olinger as an additional
source of noninterest income. In the third quarter 2005, TSFG expects to pay out a
post-closing adjustment in accordance with the purchase agreement of approximately
$220,000, which will increase goodwill.

Bowditch Insurance
Corporation

On
June 6, 2005, TSFG acquired Bowditch Insurance Corporation (Bowditch), an
independent insurance agency based in Jacksonville, Florida. TSFG issued 87,339 shares of
TSFG common stock valued at $2.4 million and paid $2.0 million cash, acquired tangible
assets totaling $648,000, assumed liabilities totaling $662,000, recorded a customer list
intangible asset of $2.3 million, and recorded goodwill of $3.1 million. The customer list
intangible is amortized over its estimated useful life of 17 years based on the declining
balance method. In addition, TSFG agreed to issue annual earnouts, approximately 50% in
cash and 50% in shares of common stock valued at the time of issuance for each of May 31,
2006, 2007, 2008 and 2009. These earnout payments are based on earnings achievement and,
if paid, would increase goodwill. TSFG intends to use Bowditch as an additional source of
noninterest income.

The
pro-forma impact of these purchases as though the business combination had been completed
as of the beginning of the periods presented would not have a material effect on the
results of operations as reported and has not been included.

12



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 5  Gross
Unrealized Losses on Investment Securities

Gross
unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been
in an unrealized loss position, at June 30, 2005, were as follows (in thousands):

|                              | Less than 12 Months | 12 Months or Longer | Total |                 |  |             
|----------------------------- | ------------------- | ------------------- | ----- | --------------- |  | ------------
|
|Securities Available for Sale |                     |                     |       |                 |  |             
|U.S. Treasury                 |                     | $   141,470         |       | $       2,600   |  | $     32,008
|U.S. Government agencies      |                     | 107,783             |       | 236             |  | 223,010     
|Mortgage-backed securities    |                     | 1,443,847           |       | 19,646          |  | 986,477     
|State and municipals          |                     | 116,936             |       | 805             |  | 107,211     
|Corporate bonds               |                     | 37,055              |       | 383             |  | 26,125      
|Federal Home Loan Mortgage    |                    
|Corporation preferred stock   |                     | 11,365              |       | 625             |  | --          
|Equity investments            |                     | 1,004               |       | 55              |  | --          
|                              |                     |                     |       |                 |  |             
|                              |                     | $1,859,460          |       | $     24,350    |  | $1,374,831  
|                              |                     |                     |       |                 |  |             
|                              |                    
|Securities Held to Maturity   |                    
|State and municipals          |                     | $            --     |       | $            -- |  | $     22,976
|                              |                     |                     |       |                 |  |             

At
June 30, 2005, TSFG had 889 individual investments that were in an unrealized loss
position. The unrealized losses on investments summarized above, except for equity
investments, were attributable to increases in interest rates, rather than credit quality.
Nearly all of these securities are rated AAA so the credit risk is minimal. TSFG believes
it has the ability to hold its debt securities until a market price recovery or maturity,
and therefore these investments are not considered impaired on an other-than-temporary
basis.

TSFGs
investments in Federal Home Loan Mortgage Corporation preferred stock (perpetual
preferred stock) have no contractual maturity. Therefore the ability to hold these
securities by itself does not provide evidence that a decline in market value is
temporary. At June 30, 2005, TSFGs unrealized losses in its perpetual preferred
stock investments are not considered impaired on an other-than-temporary basis. TSFG will
continue to consider whether it has the ability and intent to hold these investments until
a market price recovery and whether evidence indicating the cost of these investments is
recoverable outweighs evidence to the contrary. As the forecasted market price recovery
period lengthens, the uncertainties inherent in the estimate increase, impacting the
reliability of that estimate. To be included in assessment of recoverability, market price
recoveries must reasonably be expected to occur within an acceptable forecast period.
Ultimately, a lack of objective evidence to support recovery of these securities
cost over a reasonable period of time could result in an other-than-temporary impairment
charge.

At
June 30, 2005, TSFGs unrealized losses in its equity investments are not considered
impaired on an other-than-temporary basis due to the lack of severity and duration of the
impairments.

At
June 30, 2005, TSFG had $71.8 million of investments in member bank stocks included in
available for sale securities under the cost method of accounting. TSFG also uses the cost
method of accounting for privately held, nonmarketable securities in which TSFGs
percentage ownership and degree of management influence is considered minimal. These cost
method investments totaled $3.9 million included in available for sale securities and $8.7
million included in other assets. At June 30, 2005, equity method investments totaling
$9.4 million were included in other assets.

13



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 6  Goodwill

The
following summarizes the changes in the carrying amount of goodwill related to each of
TSFGs business segments (in thousands) at and for the six months ended June 30,
2005:

|                                | CarolinaFirst Bank | MercantileBank | Other | Total   
|------------------------------- | ------------------ | -------------- | ----- | --------
|Balance, December 31, 2004      |                    | $206,401       |       | $362,215
|Purchase accounting adjustments |                    | 321            |       | 75,009  
|                                |                    |                |       |         
|Balance, June 30, 2005          |                    | $206,722       |       | $437,224
|                                |                    |                |       |         

# Note 7  Other
Intangible Assets

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

|                                 | June 30, | December 31, |  
|-------------------------------- | -------- | ------------ | -
|
|Core deposit intangible          |          |              | $
|Less accumulated amortization    |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|Non-compete agreement intangible |          |              |  
|Less accumulated amortization    |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|Customer list intangible         |          |              |  
|Less accumulated amortization    |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|                                 |          |              |  
|                                 |          |              | $
|                                 |          |              |  

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

|                                                | Three Months EndedJune 30, | Six Months EndedJune 30, |  |       
|----------------------------------------------- | -------------------------- | ------------------------ |  | ------
|
|Core deposit intangible                         |                            | $1,684                   |  | $1,062
|Non-compete agreement intangible                |                            | 328                      |  | 93    
|Customer list intangible                        |                            | 128                      |  | 40    
|                                                |                            |                          |  |       
|Total amortization expense of intangible assets |                            | $2,140                   |  | $1,195
|                                                |                            |                          |  |       

14



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

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

|                                         | CoreDepositIntangible | Non-CompeteAgreementIntangible | CustomerListIntangible | Total 
|---------------------------------------- | --------------------- | ------------------------------ | ---------------------- | ------
|2005                                     |                       | $  6,681                       |                        | $1,315
|2006                                     |                       | 6,361                          |                        | 1,314 
|2007                                     |                       | 5,663                          |                        | 1,206 
|2008                                     |                       | 4,684                          |                        | 527   
|2009                                     |                       | 3,830                          |                        | 209   
|Aggregate total for all years thereafter |                       | 13,213                         |                        | 2     
|                                         |                       |                                |                        |       
|                                         |                       | $40,432                        |                        | $4,573
|                                         |                       |                                |                        |       

# Note 8  Commitments and Contingent Liabilities

Legal Proceedings

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

Recourse Reserve

As
part of its acquisition of Florida Banks, Inc. (Florida Banks), TSFG acquired
a recourse reserve associated with loans previously sold from Florida Banks
wholesale mortgage operation. The associated recourse obligation requires the repurchase
of loans at par plus accrued interest and ancillary charges from the buyer, upon the
occurrence of certain events, such as the breach of warranties made with regard to the
loans at the time of sale. At June 30, 2005, the estimated recourse reserve liability,
included in other liabilities, totaled $7.1 million. TSFG will continue to evaluate the
reserve level and may make adjustments as more information becomes known. There can be no
guarantee that any liability or cost arising out of this matter will not exceed any
established reserves.

15



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

# Note 9  Share
Information

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

|                                                 | Three Months EndedJune 30, | Six Months EndedJune 30, |   |           
|------------------------------------------------ | -------------------------- | ------------------------ | - | ----------
|
|Numerators                                       |                            |                          |   |           
|Income from continuing operations                |                            |                          | $ | 28,373    
|Discontinued operations, net of income tax       |                            |                          |   | --        
|                                                 |                            |                          |   |           
|Net income                                       |                            |                          | $ | 28,373    
|                                                 |                            |                          |   |           
|Basic                                            |                            |                         
|Average common shares outstanding (denominator)  |                            |                          |   | 73,083,009
|Earnings per share:                              |                            |                         
|Income from continuing operations                |                            |                          | $ | 0.39      
|Discontinued operations                          |                            |                          |   | --        
|                                                 |                            |                          |   |           
|Net income                                       |                            |                          | $ | 0.39      
|                                                 |                            |                          |   |           
|Diluted                                          |                            |                         
|Average common shares outstanding                |                            |                          |   | 73,083,009
|Average dilutive potential common shares         |                            |                          |   | 1,338,094 
|                                                 |                            |                          |   |           
|Average diluted shares outstanding (denominator) |                            |                          |   | 74,421,103
|                                                 |                            |                          |   |           
|Earnings per share:                              |                            |                         
|Income from continuing operations                |                            |                          | $ | 0.38      
|Discontinued operations                          |                            |                          |   | --        
|                                                 |                            |                          |   |           
|Net income                                       |                            |                          | $ | 0.38      
|                                                 |                            |                          |   |           

The
following options were outstanding at the period end presented but were excluded from the
calculation of diluted earnings per share because the exercise price was greater than the
average market price of the common shares:

|                           | Numberof Shares |  | Range ofExercise Prices
|-------------------------- | --------------- |  | -----------------------
|For the Three Months Ended |                 |  |                        
|June 30, 2005              | 1,209,506       |  | $27.50 to $31.96       
|June 30, 2004              | 209,624         |  | $28.03 to $31.26       
|                          
|For the Six Months Ended  
|June 30, 2005              | 525,979         |  | $29.93 to $31.96       
|June 30, 2004              | 112,893         |  | $28.80 to $31.26       

16



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 10  Disposition of Assets and Liabilities

In
March 2005, TSFG sold the former Beacon Manufacturing Company facility (Beacon
property) in Swannanoa, North Carolina, which was acquired as part of its
acquisition of MountainBank Financial Corporation (MBFC), to an independent
third party. MBFC had acquired this facility through a foreclosure proceeding in June
2003. In September 2003, a fire and apparent vandalism resulted in virtually the complete
destruction of the facility, as well as a release of fuel oil and other materials. In
accordance with the sale contract, TSFG has no future obligations for environmental
remediation costs related to this matter. During the first quarter of 2005, in connection
with this sale of other real estate owned (with a book value included in other assets of
$300,000), TSFG received cash of $200,000, recorded a loan held for investment of
$800,000, and recognized a gain on sale of other real estate owned (included in other
noninterest income) of $700,000.

# Note 11  Merger-related and Direct Acquisition Costs

In
connection with acquisitions, TSFG recorded pre-tax merger-related costs, included in
noninterest expenses, and direct acquisition costs, included in goodwill. The
merger-related and direct acquisition costs were recorded as incurred. The following
summarizes these charges (in thousands):

|                                         | Three Months EndedJune 30, | Six Months EndedJune 30, |   |      
|---------------------------------------- | -------------------------- | ------------------------ | - | -----
|
|Merger-Related Costs                     |                            |                          |   |      
|Compensation-related expenses            |                            |                          | $ | 397  
|System conversion costs                  |                            |                          |   | 607  
|Travel                                   |                            |                          |   | 434  
|Other                                    |                            |                          |   | 756  
|                                         |                            |                          |   |      
|                                         |                            |                          | $ | 2,194
|                                         |                            |                          |   |      
|                                         |                            |                         
|Direct Acquisition Costs                 |                            |                         
|Investment banking and professional fees |                            |                          | $ | 2,412
|Contract and lease terminations          |                            |                          |   | 654  
|Severance                                |                            |                          |   | 201  
|                                         |                            |                          |   |      
|                                         |                            |                          | $ | 3,267
|                                         |                            |                          |   |      

At
June 30, 2005, the accruals of merger-related costs and direct acquisition costs totaled
$304,000 and $183,000, respectively and were included in other liabilities. At June 30,
2004, the accrual of merger-related costs totaled $1.1 million, and the accrual of direct
acquisition costs totaled $300,000.

# Note 12  Early
Extinguishment of Debt

During
the three and six months ended June 30, 2005, TSFG recognized a loss on the early
extinguishment of debt of $3.0 million and $1.6 million, respectively. The loss for the
second quarter 2005 related to costs to terminate certain structured repurchase agreement
borrowings totaling $593.9 million. The terminated borrowings had variable interest rates
that were scheduled to convert to pre-established fixed rates after the expiration of an
initial lock-out period. At the time of termination, the interest rates on
these repurchase agreements ranged from 2.12% to 3.21%. The second quarter 2005 loss was
offset by a gain for the first quarter 2005 related to prepayment discounts on Federal
Home Loan Bank advances totaling $345.0 million with fixed interest rates ranging from
1.84% to 3.57%. In March 2004, TSFG recognized a loss of $1.4 million on the early
extinguishment of debt related to prepayment penalties for repurchase agreement borrowings
totaling $185.0 million with variable interest rates that could have changed to fixed at
periods ranging from 6 months to 18 months. The fixed rates on these repurchase agreements
ranged from 1.54% to 2.99%.

17



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

# Note 13  Discontinued Operations

As
part of its bank acquisition process, TSFG evaluates whether the products and services
offered by the acquired institution provide the proper balance of profitability and risk.
Based on this assessment of Florida Banks, TSFG decided in the third quarter 2004 to
discontinue the wholesale mortgage operations, which was substantially completed in the
first quarter 2005. Since these assets and liabilities were recorded at their net
realizable value at the acquisition date, the disposal did not result in a gain or loss
for financial reporting purposes. For the six months ending June 30, 2005, the pre-tax
loss related to the wholesale mortgage operations totaled $612,000 and the after-tax loss
of $396,000 was recognized as discontinued operations in the consolidated statement of
income.

# Note 14  Business
Segments

TSFG
has two principal operating subsidiaries, Carolina First Bank and Mercantile Bank, which
are evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and assess performance. Both of these subsidiaries, by virtue of exceeding
certain quantitative thresholds, are reportable segments. The reportable segments engage
in general banking business focusing on commercial, consumer and mortgage lending to small
and middle market businesses and consumers in their market areas. The reportable segments
also provide demand transaction accounts and time deposit accounts to businesses and
individuals. Carolina First Bank offers products and services primarily to customers in
South Carolina, North Carolina and on the Internet. Mercantile Bank offers products and
services primarily to customers in its market areas in Florida. Revenues for Carolina
First Bank and Mercantile Bank are derived primarily from interest and fees on loans,
interest and gains/losses on investment securities, customer fee income, mortgage banking
income, brokerage and trust income, merchant processing income, insurance income and
bank-owned life insurance. No single customer accounts for a significant amount of the
revenues of either reportable segment.

TSFG
evaluates performance based on budget to actual comparisons and segment profits. The
accounting policies of the reportable segments are the same as those described in
TSFGs Annual Report on Form 10-K for the year ended December 31, 2004.

18



# THE SOUTH FINANCIAL
GROUP, INC. AND SUBSIDIARIESNotes to Consolidated
Financial Statements (Unaudited)

Segment
information (in thousands) is shown in the table below. The Other column
includes all other business activities that did not meet the quantitative thresholds and
therefore are not shown as a reportable segment.

|                                           | CarolinaFirst Bank | MercantileBank | Other | EliminatingEntries | Total
|------------------------------------------ | ------------------ | -------------- | ----- | ------------------ | -----
|Three Months Ended June 30, 2005           |                    |                |       |                    |      
|Net interest income                        |                    |                | $     | 66,322             |      
|Provision for loan losses                  |                    |                |       | 8,162              |      
|Noninterest income                         |                    |                |       | 14,749             |      
|Noninterest expenses                       |                    |                |       | 45,614             |      
|Merger-related costs (a)                   |                    |                |       | --                 |      
|Amortization of intangibles (a)            |                    |                |       | 810                |      
|Income tax expense                         |                    |                |       | 9,008              |      
|Net income                                 |                    |                |       | 18,287             |      
|                                           |                    |               
|Six Months Ended June 30, 2005             |                    |               
|Net interest income                        |                    |                | $     | 133,419            |      
|Provision for loan losses                  |                    |                |       | 17,410             |      
|Noninterest income                         |                    |                |       | 32,015             |      
|Noninterest expenses                       |                    |                |       | 87,520             |      
|Merger-related costs (a)                   |                    |                |       | --                 |      
|Amortization of intangibles (a)            |                    |                |       | 1,621              |      
|Income tax expense                         |                    |                |       | 19,820             |      
|Discontinued operations, net of income tax |                    |                |       | --                 |      
|Net income                                 |                    |                |       | 40,684             |      
|                                           |                    |               
|June 30, 2005                              |                    |               
|Total assets                               |                    |                | $     | 9,612,485          |      
|Total loans                                |                    |                |       | 5,437,538          |      
|Total deposits                             |                    |                |       | 5,366,053          |      
|                                           |                    |               

(a) - Included in noninterest expenses.

19



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

|                                 | CarolinaFirst Bank | MercantileBank | Other | EliminatingEntries | Total
|-------------------------------- | ------------------ | -------------- | ----- | ------------------ | -----
|Three Months Ended June 30, 2004 |                    |                |       |                    |      
|Net interest income              |                    |                | $     | 62,435             |      
|Provision for loan losses        |                    |                |       | 5,116              |      
|Noninterest income               |                    |                |       | 20,399             |      
|Noninterest expenses             |                    |                |       | 39,171             |      
|Merger-related costs (a)         |                    |                |       | 575                |      
|Amortization of intangibles (a)  |                    |                |       | 803                |      
|Income tax expense               |                    |                |       | 12,818             |      
|Net income                       |                    |                |       | 25,729             |      
|                                 |                    |               
|Six Months Ended June 30, 2004   |                    |               
|Net interest income              |                    |                | $     | 126,845            |      
|Provision for loan losses        |                    |                |       | 11,243             |      
|Noninterest income               |                    |                |       | 42,401             |      
|Noninterest expenses             |                    |                |       | 80,809             |      
|Merger-related costs (a)         |                    |                |       | 765                |      
|Amortization of intangibles (a)  |                    |                |       | 1,606              |      
|Income tax expense               |                    |                |       | 24,493             |      
|Net income                       |                    |                |       | 52,701             |      
|                                 |                    |               
|June 30, 2004                    |                    |               
|Total assets                     |                    |                | $     | 8,949,809          |      
|Total loans                      |                    |                |       | 4,723,504          |      
|Total deposits                   |                    |                |       | 4,842,175          |      

(a)  Included in noninterest expenses.

Note 15  Management
Opinion

The
consolidated financial statements in this report are unaudited, and the consolidated
balance sheet at December 31, 2004 is derived from TSFGs consolidated audited
financial statements. In the opinion of management, all adjustments necessary to present a
fair statement of the results for the interim periods have been made. All such adjustments
are of a normal, recurring nature.

20



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

The
following discussion and analysis are presented to assist in understanding the financial
condition, changes in financial condition, results of operations, and cash flows of The
South Financial Group, Inc. and its subsidiaries (collectively, TSFG), except
where the context requires otherwise. TSFG may also be referred to herein as
we, us, or our. This discussion should be read in
conjunction with the consolidated financial statements appearing in this report as well as
the Annual Report of TSFG on Form 10-K for the year ended December 31, 2004. Results of
operations for the six months ended June 30, 2005 are not necessarily indicative of
results that may be attained for any other period. Percentage calculations contained
herein have been calculated based upon actual, not rounded, results.

TSFG
primarily operates through two wholly-owned subsidiary banks, Carolina First Bank and
Mercantile Bank, which are collectively referred to as the Subsidiary Banks.

Website Availability of Reports Filed with the Securities and Exchange Commission

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

Forward-Looking Statements

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

| |  | 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 regulatory actions, including the
potential for adverse adjustments;                                                                                                                          
| |  | changes, costs, and effects of litigation, and
environmental remediation; and                                                                                                                            
| |  | recently-enacted or proposed legislation.                                                                                                                                                                

21



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

Non-GAAP Financial
Information

This
report also contains financial information determined by methods other than in accordance
with Generally Accepted Accounting Principles (GAAP). TSFGs management
uses these non-GAAP measures to analyze TSFGs performance. In particular, TSFG
presents certain designated net interest income amounts on a tax-equivalent basis (in
accordance with common industry practice). Management believes that the presentation of
net interest income on a tax-equivalent basis aids in the comparability of net interest
income arising from both taxable and tax-exempt sources. TSFG also presents loan and
deposit growth, excluding loans/deposits acquired net of dispositions (referred to herein
as organic growth). In discussing its deposits, TSFG presents customer
deposits, which are defined by TSFG as total deposits less brokered deposits.
Wholesale borrowings include short-term and long-term borrowings and brokered deposits.
These disclosures should not be viewed as a substitute for GAAP measures, and furthermore,
TSFGs non-GAAP measures may not necessarily be comparable to non-GAAP performance
measures of other companies.

Overview

TSFG,
founded in 1986, is a financial holding company that operates primarily in fast-growing
banking markets in the Southeast. TSFG had $14.9 billion in total assets with 167 branch
offices in South Carolina, Florida, and North Carolina at June 30, 2005. TSFG operates
primarily through two subsidiary banks:

| |  | Carolina First Bank, the largest South Carolina-headquartered commercial bank, which
operates in South Carolina, North Carolina, and on the Internet under the brand name, Bank
CaroLine; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mercantile Bank, which operates in Florida.                                                                                                                                                  

As
of June 30, 2005, approximately 40% of TSFGs total customer deposits were in
Florida.

TSFG
uses a super-community bank strategy and targets small and middle market businesses and
retail consumers by offering a broad range of financial products and services, including
banking, treasury management, mortgage, wealth management, insurance, investments, and
trust services.

TSFG
has pursued a strategy of growth through internal expansion and the acquisition of
financial institutions and branch locations in selected market areas. In addition, TSFG
has expanded through non-bank acquisitions of insurance and wealth management agencies.
TSFG seeks to expand selectively in fast-growing markets in the Southeast, concentrating
its growth in metropolitan statistical areas (MSAs). TSFG will continue to
consider acquisitions that meet its acquisition criteria of strategic franchise
enhancement, accretion to cash operating earnings per share within 12 months, and
consistency with three-year performance goals.

During
the first half of 2005, TSFG completed three acquisitions and opened three de novo
branches. Non-banking acquisitions include the Koss Olinger group of companies, a wealth
management advisory firm operating in North Florida, and Bowditch Insurance Corporation, a
property and casualty company operating in Jacksonville, Florida. On May 6, 2005, TSFG
completed its acquisition of Pointe Financial Corporation (Pointe), a bank
holding company headquartered in Boca Raton, Florida. In July 2004, TSFG completed its
acquisitions of CNB Florida Bancshares, Inc. (CNB Florida) and Florida Banks,
Inc. (Florida Banks). These acquisitions added to TSFGs growth and were
included in the results for the periods subsequent to the acquisition dates.

For
the first six months of 2005, net income totaled $62.9 million, up 1%, from $62.3 million
for the first six months of 2004. For the first six months of 2005, net income per diluted
share totaled $0.85, a 16.7% decrease from $1.02 per diluted share for the first six
months of 2004. For the same period, average diluted shares outstanding increased 21.2%,
principally as a result of the acquisitions of Pointe, CNB Florida, and Florida Banks.
Results during the first half of 2005 were driven by increased levels of deposits and
loans, improving credit quality measures, higher noninterest income from fee-based
businesses, a declining net interest margin, and higher noninterest expenses.

22



For
the first six months of 2005, net interest income, TSFGs primary source of revenue,
accounted for 80.7% of total revenues. Net interest income is the difference between the
interest earned on assets, primarily loans and securities, and the interest paid for
liabilities to support such assets, primarily deposits and borrowed funds. Net interest
income for the first six months of 2005 increased 29.8% over the corresponding period in
2004 due to 32.0% average earning asset growth, partially offset by a 2005 decline in the
net interest margin. Organic loan growth, growth from acquisitions and higher average
investment securities contributed to the increase in average earning assets. The net
interest margin declined during the first two quarters of 2005, primarily from the
continued flattening of the yield curve and narrowing interest rate spreads for investment
securities relative to wholesale borrowing costs. TSFG reduced its level of investment
securities to $4.3 billion at June 30, 2005 from $4.8 billion at March 31, 2005 in an
effort to reduce its reliance on wholesale borrowings. Investment securities totaled $4.3
billion at December 31, 2004. The anticipated lower level of average investment securities
for the remainder of 2005 is expected to reduce net interest income in the near term.

Noninterest
income decreased to $50.4 million for the first six months of 2005, down 8.8% from $55.3
million for the first six months of 2004. Gains on asset sales declined to $1.1 million
(gains on sale of securities) for the first six months of 2005 from $12.0 million (gains
on sale of securities and gain on disposition of assets) for the first six months of 2004.
TSFG benefited from 17.8% growth in customer fee income and growth from many of its
fee-based businesses, as well as the acquisitions that closed in the second quarter 2005
and third quarter 2004.

For
the first six months of 2005, noninterest expenses totaled $146.0 million, up from $111.7
million in the corresponding period for 2004. Noninterest expenses for the first six
months of 2005 included $2.5 million in merger-related costs and a $1.6 million loss on
early extinguishment of debt. In addition to these items, noninterest expense levels
increased largely from the 5 acquisitions completed during the last year (see
Acquisitions) and growth and investment in fee-based businesses. Personnel
expense, the largest component, accounted for 47.6% of total noninterest expenses.

TSFGs
loan growth continued during the first six months of 2005. Loans held for investment at
June 30, 2005 increased 43.5% over June 30, 2004. Excluding net acquired loans held for
investment of $1.8 billion, organic loan growth for the period from June 30, 2004 to June
30, 2005 was 14.7% (based on period-end balances). Growth in loans was concentrated in
commercial loans and reflected an increasing percentage of variable rate loans.

TSFG
is focused on enhancing its funding through customer deposit growth. Total customer
deposits at June 30, 2005 increased 35.0% over June 30, 2004. Excluding acquired customer
deposits of $1.9 billion, organic customer deposit growth for this period totaled 8.0%
(based on period-end balances). During the first half of 2005, annualized total customer
deposit growth totaled 33.3%. Organic customer deposit growth during the first half of
2005 (which excludes $328.6 million of acquired deposits during the period) totaled 23.0%
annualized. In addition, noninterest-bearing deposits increased at an annualized rate of
37.3% during the first half of 2005. Organic noninterest-bearing deposits increased at an
annualized rate of 18.8% for the first half of 2005 (which excludes $113.8 million of
noninterest-bearing deposits acquired from Pointe).

During
the second quarter 2005, TSFG began repositioning its balance sheet, by reducing
investment securities and wholesale borrowing. TSFG took these steps to reduce interest
rate risk in a rising rate environment and reduce wholesale borrowings. In connection with
these actions, TSFG reported second quarter 2005 losses on investment securities sales and
prepayment penalties on early extinguishment of debt. TSFG ended the quarter with
investment securities to total assets of 29% at June 30, 2005, down from 33% at March 31,
2005, and wholesale borrowings (including brokered deposits) to total assets of 38% at
June 30, 2005, down from 43% at March 31, 2005. In the near-term, TSFG intends to pay down
wholesale borrowing by allowing investment securities to mature without reinvestment and
continuing its focus on growing customer deposits.

At
June 30, 2005, nonperforming assets as a percentage of loans held for investment and
foreclosed property declined to 0.61%, compared with 0.92% at June 30, 2004, although this
ratio is up slightly from the end of the first quarter 2005. Net loan charge-offs as a
percentage of average loans held for investment totaled 0.38% for the first six months of
2005, compared with 0.39% for the first half of 2004. This ratio improved to 0.32% in the
second quarter of 2005, from 0.45% for the first quarter 2005. TSFGs provision for
loan losses increased to $20.9 million for the six months ended June 30, 2005 from $14.7
million for the six months ended June 30, 2004, primarily as a result of the increased
provision associated with loan growth and net charge-offs.

23



TSFGs
tangible equity to tangible asset ratio, while unchanged at 5.84% for both June 30, 2005
and June 30, 2004, improved from 5.49% at March 31, 2005, primarily from an improvement in
the net unrealized loss on available for sale securities.

Critical Accounting
Policies and Estimates

TSFGs
accounting policies are in accordance with accounting principles generally accepted in the
United States and with general practice within the banking industry. TSFG makes a number
of estimates and assumptions relating to reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during periods
presented. Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses, fair value of certain
financial instruments (securities, derivatives, and privately held investments), income
tax assets or liabilities, and accounting for acquisitions, including the fair value
determinations, the analysis of goodwill impairment and the analysis of valuation
allowances in the initial accounting of loans acquired. To a lesser extent, significant
estimates are also associated with the determination of contingent liabilities,
stock-based compensation, and assessment of hedge effectiveness of derivatives and other
hedging instruments. Different assumptions in the application of these policies could
result in material changes in TSFGs consolidated financial statements.

Allowance
for Loan Losses

The
allowance for loan losses (Allowance) represents managements estimate of
probable losses inherent in the lending portfolio. See Balance Sheet Review 
Allowance for Loan Losses for additional discussion, including the methodology for
analyzing the adequacy of the Allowance. This methodology relies upon managements
judgment in segregating the portfolio into risk-similar segments, computing specific
allocations for impaired loans, and setting the amounts within the probable loss range
(from 95% to 105% of the adjusted historical loss ratio). Managements judgments
evolve from an assessment of various issues, including but not limited to the pace of loan
growth, emerging portfolio concentrations, risk management system, entry into new markets,
new product offerings, loan portfolio quality trends, lending policy changes, changes in
loan review and board oversight activities, changes in regulations and other external
factors affecting loan portfolio quality, and uncertainty in current economic and business
conditions.

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

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

Fair
Value of Certain Financial Instruments

Fair
value is defined as the amount at which a financial instrument could be liquidated in a
transaction between willing, unrelated parties in a normal business transaction. Fair
value is based on quoted market prices for the same or similar instruments, adjusted for
any differences in terms. If market values are not readily available, then the fair value
is estimated. For example, when TSFG has an investment in a privately held company,
TSFGs management evaluates the fair value of these investments based on the
investees ability to generate cash through its operations, obtain alternative
financing, and subjective factors. Modeling techniques, such as discounted cash flow
analyses, which use assumptions for interest rates, credit losses, prepayments, and
discount rates, are also used to estimate fair value if market values are not readily
available for certain financial instruments.

TSFG
carries its securities available for sale and derivatives classified as cash flow hedges
at fair value, and adjustments for unrealized gains or losses, net of the income tax
effect, are made to accumulated other comprehensive income, a separate component of
shareholders equity. Instruments held for trading, including trading securities and
derivative financial instruments used in trading activities, are carried at fair value,
and adjustments for realized and unrealized gains or losses are included in earnings.
Derivatives classified as fair value hedges are recorded at fair value. The changes in the
fair value along with the gain or loss on the hedged asset or liability that is
attributable to the hedge risk are included in earnings.

24



TSFG
periodically evaluates declines in the market value below cost of any available for sale
or held to maturity security for other-than-temporary impairment and, if necessary,
charges the unrealized loss to operations and establishes a new cost basis. Evidence in
this assessment includes the reasons for the impairment, the severity and duration of the
impairment, changes in value subsequent to period-end, and forecasted performance of the
investee. Impairment is considered other-than-temporary unless the holder of the security
has both the intent and ability to hold the security until the fair value recovers and
evidence supporting the recovery outweighs evidence to the contrary. However, for equity
securities, which typically do not have a contractual maturity with a specified cash flow
on which to rely, the ability to hold an equity security indefinitely, by itself, does not
allow for avoidance of other-than-temporary impairment.

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

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

Income
Taxes

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

No
assurance can be given that either the tax returns submitted by management or the income
tax reported on the consolidated financial statements will not be adjusted by either
adverse rulings by the U.S. Tax Court, changes in the tax code, or assessments made by the
Internal Revenue Service. TSFG is subject to potential adverse adjustments, including but
not limited to: an increase in the statutory federal or state income tax rates, the
permanent nondeductibility of amounts currently considered deductible either now or in
future periods, and the dependency on the generation of future taxable income, including
capital gains, in order to ultimately realize deferred income tax assets. Historically,
TSFGs estimated income taxes reported on its consolidated financial statements have
been materially correct and we do not believe that it is reasonably likely that such
estimates/assumptions will change in the future; however, such changes are difficult to
predict.

Accounting
for Acquisitions and Goodwill Impairment

TSFG
has grown its operations, in part, through bank and non-bank acquisitions. Since 2000, and
in accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible
Assets, TSFG has used the purchase method of accounting to account for acquisitions.
Under this method, TSFG is required to record assets acquired and liabilities assumed at
their fair value, which in many instances involves estimates based on third party,
internal, or other valuation techniques. These estimates also include the establishment of
various accruals for planned facilities dispositions and employee benefit related
considerations, among other acquisition-related items. The analysis of valuation
allowances in the initial accounting of loans acquired pursuant to Statement of Position
03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities
Acquired in a Transfer, also requires significant judgment and estimates. In
addition, purchase acquisitions typically result in goodwill or other intangible assets,
which are subject to annual impairment tests, or more often, if events or circumstances
indicate that there may be impairment. These tests, which TSFG has performed annually as
of June 30th since 2002, use estimates such as projected cash flows, discount rates, time
periods, and comparable market values in their calculations. Furthermore, the
determination of which intangible assets have finite lives is subjective, as well as the
determination of the amortization period for such intangible assets.

25



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

The
valuations as of June 30, 2005 indicated that no impairment charges were required as of
that test date. There have been no events or circumstances since June 30, 2005 that
indicate there may be impairment.

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

Please
see the Annual Report of TSFG on Form 10-K for the year ended December 31, 2004, Item 8,
Note 1 to the Consolidated Financial Statements for a description of TSFGs
significant accounting policies.

26



Acquisitions

The
following table summarizes TSFGs acquisitions completed during the six months ended
June 30, 2005 and during 2004. All of the transactions were accounted for using the
purchase method of accounting. TSFGs consolidated financial statements include the
results of the acquired companys operations since the acquisition date.

|Table 1                           |  |  |  |  |  |  |  |  |  |  |  | 
|--------------------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Summary of Completed Acquisitions |  |  |  |  |  |  |  |  |  |  | 
|(dollars in thousands)            |  |  |  |  |  |  |  |  |  |  |  | 

|                                    | AcquisitionDate | TotalAssets | SharesIssued | PurchasePrice Paidin Cash | IdentifiableIntangibleAssets | Goodwill
|----------------------------------- | --------------- | ----------- | ------------ | ------------------------- | ---------------------------- | --------
|Bank Acquisitions                   |                 |             |              |                           |                              |         
|Pointe                              |                 |            
|Boca Raton, Florida                 |                 |             | 5/6/05       |                           |                              | $       
|                                    |                 |            
|CNB Florida                         |                 |            
|Lake City, Florida                  |                 |             | 7/16/04      |                           |                              |         
|                                    |                 |            
|Florida Banks                       |                 |            
|Jacksonville, Florida               |                 |             | 7/16/04      |                           |                              |         
|                                    |                 |            
|Insurance Agency/Other Acquisitions |                 |            
|Koss Olinger                        |                 |            
|Gainesville, Florida                |                 |             | 4/4/05       |                           |                              |         
|                                    |                 |            
|Bowditch Insurance Corporation      |                 |            
|Jacksonville, Florida               |                 |             | 6/6/05       |                           |                              |         
|                                    |                 |            
|Summit Title, LLC                   |                 |            
|Hendersonville, North Carolina      |                 |             | 4/12/04      |                           |                              |         

|(1) | Book value at the acquisition date.                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Carrying amount (identifiable intangible assets are not reported net of
          accumulated amortization) at June 30, 2005.                                                                                                                                                                                                    
|(3) | In addition, TSFG
          agreed to issue earnout shares on May 17, 2010 based on earnings achievement.
          The base earnout shares would have a total value of $3 million for achievement of the minimum performance target, with
potential additional earnout shares based on achievement of higher performance levels.
|(4) | In addition, TSFG agreed to issue annual earnout shares for each of May 31,
               2006, 2007, 2008, and 2009, based on earnings achievement. The shares would have
               a maximum total value of approximately $1.9 million.                                                                                  
|(5) | In addition, TSFG agreed to issue annual earnout shares, valued at the time of
               issuance at $66,906, for each of April 12, 2006, 2007, and 2008, based on
               revenue retention and earnings achievement.                                                                                               

On
October 31, 2002, TSFG acquired substantially all of the assets and deposits of Rock Hill
Bank & Trust (Rock Hill Bank), which was a wholly-owned subsidiary of
RHBT Financial Corporation. Under the asset sale agreement, Rock Hill Bank received shares of TSFG common stock
and the right to receive a cash earnout essentially equal to 30% of the net improvement in
the aggregate charge-offs and reserves in a specified loan pool and 50% of net amounts
recovered under RHBTs blanket bond insurance policy with respect to such loans. As
of June 30, 2005, TSFG had incurred no obligation under the cash earnout associated with
the net improvements in the specified loan pool and in 2003 paid $1.3 million associated
with the net amounts recovered under RHBTs blanket bond insurance policy with
respect to such loans. In the first six months of 2005, TSFG was paid an additional
$225,000 under RHBTs blanket bond insurance policy, half of which will be paid to
RHBT, after netting out approximately $55,000 in expenses. No further payments are
expected under RHBTs blanket bond insurance policy.

27



As
part of its acquisition strategy, TSFG considers acquisitions in targeted Southeastern
markets that meet its acquisition criteria. Table 2 summarizes the geographic focus for
TSFGs bank acquisitions completed during the first six months of 2005 and during
2004.

|Table 2                                           |             |  |          |  |                   
|------------------------------------------------- | ----------- |  | -------- |  | ------------------
|Summary of Bank Acquisitions - Geographic Markets
|                                                  |             |  |          |  |                   
|                                                  |             |  | Number   |  |                   
|                                                  | Acquisition |  | of       |  |                   
|                                                  | Date        |  | Branches |  | Geographic Markets

|Pointe        | 5/6/05  |  | 10 |  | Broward County (Ft. Lauderdale), Miami-Dade County, Palm Beach County
|------------- | ------- |  | -- |  | ---------------------------------------------------------------------
|CNB Florida   | 7/16/04 |  | 16 |  | Duval County (Jacksonville), Baker County (Mcclenny, Glenn           
|              |         |  |    |  | St. Mary), Bradford County (Starke), Columbia County (Ft. White),    
|              |         |  |    |  | Union County (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

TSFG
focuses its lending activities on small and middle market businesses and individuals in
its geographic markets. At June 30, 2005, outstanding loans totaled $9.0 billion, which
equaled 101.5% of total deposits and 60.5% of total assets. The major components of the
loan portfolio were commercial loans, commercial real estate loans, consumer loans
(including both direct and indirect loans), and one-to-four family residential mortgage
loans. Substantially all loans were to borrowers located in TSFGs market areas in
South Carolina, Florida, and North Carolina. At June 30, 2005, less than 6% of the
portfolio was unsecured.

Loans
held for investment increased $2.7 billion, or 43.5%, to $9.0 billion at June 30, 2005
from $6.2 billion at June 30, 2004. This increase included $1.8 billion in net acquired
loans held for investment ($311.6 million from the acquisition of Pointe, $714.6 million
from the acquisition of CNB Florida, $772.3 million from the acquisition of Florida Banks,
and $2.0 million from a branch acquisition). Excluding net acquired loans held for
investment of $1.8 billion, organic loan growth for the period from June 30, 2004 to June
30, 2005 was 14.7% (based on period-end balances). Organic loan growth was concentrated in
commercial loans and reflected an increasing percentage of variable rate loans. TSFG
currently sells a majority of its residential mortgage loans at origination in the
secondary market. Loans held for sale increased $18.5 million to $41.4 million at June 30,
2005 from $22.9 million at June 30, 2004, primarily related to higher mortgage
originations.

Table
3 summarizes outstanding loans by collateral type for real estate secured loans and by
borrower type for all other loans. Collateral type represents the underlying assets
securing the loan, rather than the purpose of the loan.

28



|Table 3                    |  |  |  |  |  |  | 
|-------------------------- |  |  |  |  |  |  | 
|Loan Portfolio Composition |  |  |  |  |  |  | 
|(dollars in thousands)     |  |  |  |  |  |  | 

|                                                 | June 30, | December 31, |  
|------------------------------------------------ | -------- | ------------ | -
|
|Commercial, financial and agricultural           |          |              | $
|Real estate - construction (1)                   |          |              |  
|Real estate - residential mortgages (1-4 family) |          |              |  
|Commercial secured by real estate (1)            |          |              |  
|Consumer                                         |          |              |  
|                                                 |          |              |  
|Loans held for investment                        |          |              |  
|Loans held for sale                              |          |              |  
|Allowance for loan losses                        |          |              |  
|                                                 |          |              |  
|Total net loans                                  |          |              | $
|                                                 |          |              |  
|                                                 |          |             
|Percentage of Loans Held for Investment          |          |             
|Commercial, financial and agricultural           |          |              |  
|Real estate - construction (1)                   |          |              |  
|Real estate - residential mortgages (1-4 family) |          |              |  
|Commercial secured by real estate (1)            |          |              |  
|Consumer                                         |          |              |  
|                                                 |          |              |  
|Total                                            |          |              |  
|                                                 |          |              |  

|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



Table
4 provides a stratification of the loan portfolio by loan purpose. This presentation
differs from that in Table 3, which stratifies the portfolio by collateral type and
borrower type.

|Table 4                                          |  |  |  |  |  | 
|------------------------------------------------ |  |  |  |  |  | 
|Loan Portfolio Composition Based on Loan Purpose |  |  |  |  |  | 
|(dollars in thousands)                           |  |  |  |  |  | 

|                                        | June 30, | December 31, |  
|--------------------------------------- | -------- | ------------ | -
|
|Commercial Loans                        |          |              |  
|Commercial and industrial               |          |              | $
|Owner - occupied real estate (1)        |          |              |  
|Commercial real estate                  |          |              |  
|                                        |          |              |  
|                                        |          |              |  
|                                        |          |              |  
|                                        |          |             
|Consumer Loans                          |          |             
|Indirect - sales finance                |          |              |  
|Direct retail                           |          |              |  
|Home equity                             |          |              |  
|                                        |          |              |  
|                                        |          |              |  
|                                        |          |              |  
|                                        |          |             
|Mortgage Loans                          |          |              |  
|                                        |          |              |  
|                                        |          |             
|Total loans held for investment         |          |              | $
|                                        |          |              |  
|                                        |          |             
|Percentage of Loans Held for Investment |          |             
|Commercial and industrial               |          |              |  
|Owner - occupied real estate (1)        |          |              |  
|Commercial real estate                  |          |              |  
|Consumer                                |          |              |  
|Mortgage                                |          |              |  
|                                        |          |              |  
|Total                                   |          |              |  
|                                        |          |              |  

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

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

Commercial
real estate loans are loans to finance real properties that are acquired, developed,
or constructed for sale or lease to parties unrelated to the borrower. Included are loans
to acquire land for development, land development loans, construction loans, mini-perms
for cash flow stabilization periods, and permanent loans in situations where access to the
secondary market is limited due to loan size.

Indirect
 sales finance loans are loans to individuals to finance the purchase of motor
vehicles. They are closed at the auto dealership but approved in advance by TSFG for
immediate purchase. Loans are extended on new and used motor vehicles with terms varying
from two years up to six years.

30



Direct
retail consumer loans are loans to individuals to finance personal, family, or
household needs. Typical loans are loans to finance auto purchases, home repairs and
additions, and home purchases. TSFG employees located in its branches originate
substantially all of these loans.

Home
equity loans are loans to homeowners, secured primarily by junior mortgages on their
primary residences, to finance personal, family, or household needs. These loans may be in
the form of amortizing loans or lines of credit with terms up to 15 years.

Mortgage
loans are loans to individuals, secured by first mortgages on single-family
residences, to finance the acquisition of those residences. These loans, originated by
TSFGs mortgage lending division, do not qualify for immediate sale through our
normal channels but are judged sellable with seasoning. However, they are underwritten to
secondary market standards and are sold, from time to time, as they become sellable to
secondary market investors.

The
portfolios most significant concentration is in commercial real estate loans. Real
estate development and construction are major components of the economic activity that
occurs in TSFGs markets. By product type, commercial construction and development
loans represent the largest component of commercial real estate loans, and represent 33.0%
of the total commercial real estate loans at June 30, 2005, up from 29.7% at December 31,
2004. The risk attributable to the concentration in commercial real estate loans is
managed by focusing our lending on markets we are familiar with and on borrowers who have
proven track records and who we believe possess the financial means to weather adverse
market conditions. Consequently, although the analysis of reserve adequacy includes an
adjustment to account for the risk inherent in this concentration, management believes the
risk of loss in its commercial real estate loans is not materially greater than the risk
of loss in any other segment of the portfolio.

In
addition, management believes that diversification by geography, property type, and
borrower partially mitigates the risk of loss in its commercial real estate loan
portfolio. However, its concentration in the southeast, and in particular, its presence
along the coastlines of Florida and South Carolina, present some risk of weather-related
occurrences, which could adversely impact TSFG. Table 5 sorts the commercial real estate
portfolio by geography and property type.

31



|Table 5                      |  |  |  |  |  |  |  | 
|---------------------------- |  |  |  |  |  |  |  | 
|Commercial Real Estate Loans |  |  |  |  |  |  |  | 
|(dollars in thousands)       |  |  |  |  |  |  |  | 

|                                                           | June 30, 2005 | December 31, 2004 |   |          
|---------------------------------------------------------- | ------------- | ----------------- | - | ---------
|
|Commercial Real Estate Loans by Geographic Diversification |               |                   |   |          
|Western North Carolina (Hendersonville/Asheville)          |               |                   | $ | 648,146  
|Tampa Bay Florida                                          |               |                   |   | 390,468  
|Upstate South Carolina (Greenville)                        |               |                   |   | 384,070  
|North Coastal South Carolina (Myrtle Beach)                |               |                   |   | 374,032  
|Midlands South Carolina (Columbia)                         |               |                   |   | 304,664  
|Northeast Florida (Jacksonville)                           |               |                   |   | 275,825  
|South Coastal South Carolina (Charleston)                  |               |                   |   | 272,020  
|Central Florida (Orlando)                                  |               |                   |   | 271,149  
|South Florida (Ft. Lauderdale)                             |               |                   |   | 213,069  
|Alachua Florida (Gainesville)                              |               |                   |   | 162,665  
|Greater South Charlotte South Carolina (Rock Hill)         |               |                   |   | 131,465  
|North Central Florida                                      |               |                   |   | 123,711  
|Marion, Florida                                            |               |                   |   | 118,156  
|Other (1)                                                  |               |                   |   | --       
|                                                           |               |                   |   |          
|Total commercial real estate loans                         |               |                   | $ | 3,669,440
|                                                           |               |                   |   |          
|                                                           |               |                  
|Commercial Real Estate Loans by Product Type               |               |                  
|Commercial construction/development                        |               |                   | $ | 1,210,857
|Mixed use                                                  |               |                   |   | 389,456  
|1-4 family residential investment property                 |               |                   |   | 318,757  
|Retail                                                     |               |                   |   | 277,362  
|Undeveloped land                                           |               |                   |   | 262,278  
|Hotel/motel                                                |               |                   |   | 235,071  
|Residential construction                                   |               |                   |   | 219,345  
|Multi-family residential                                   |               |                   |   | 201,736  
|Other (1)                                                  |               |                   |   | 554,578  
|                                                           |               |                   |   |          
|Total commercial real estate loans                         |               |                   | $ | 3,669,440
|                                                           |               |                   |   |          

|(1)   | Other includes all loans in categories smaller than the lowest percentages shown
          above.                                          
|----- | -------------------------------------------------------------------------------------------------------------------------------------------
|Note: | At June 30, 2005 and December 31, 2004, the average loan size for commercial real estate
loans totaled $401,000 and $370,000, respectively.

Portfolio
risk is also managed by maintaining a house lending limit, which was $25 million on June
30, 2005, at a level significantly lower than the legal lending limit of both Carolina
First Bank and Mercantile Bank, and by requiring Board of Director approval to exceed it.
At June 30, 2005, five credit relationships totaling $164.6 million exceeded this $25
million limit, one at Mercantile Bank and four at Carolina First Bank. The 20 largest
credit relationships had an aggregate outstanding principal balance of $250.0 million, or
2.79% of total loans held for investment, at June 30, 2005, down from 4.1% at June 30,
2004.

TSFG
participates in shared national credits (multi-bank credit facilities of $20
million or more), primarily to borrowers who are headquartered or conduct business in or
near our markets. At June 30, 2005, the loan portfolio included commitments totaling
$507.6 million in shared national credits. Outstanding borrowings under these commitments
totaled $186.1 million. None of these credits were classified in the most recent report on
shared national credits prepared by the regulatory agencies.

32



Credit
Quality

A
willingness to take credit risk is inherent in the decision to grant credit. Prudent
risk-taking requires a credit risk management system based on sound policies and control
processes that ensure compliance with those policies. TSFGs credit risk management
system is defined by policies approved by the Board of Directors that govern the risk
underwriting, portfolio monitoring, and problem loan administration processes. Adherence
to underwriting standards is managed through a multi-layered credit approval process and
after-the-fact review by credit risk management of loans approved by lenders. Through
daily review by credit risk managers, monthly reviews of exception reports, and ongoing
analysis of asset quality trends, compliance with underwriting and loan monitoring
policies is closely supervised. The administration of problem loans is driven by policies
that require written plans for resolution and quarterly meetings with credit risk
management to review progress. Credit risk management activities are monitored by Credit
Committees of each banking subsidiarys Board of Directors, which meet monthly to
review credit quality trends, new large credits, loans to insiders, large problem credits,
credit policy changes, and reports on independent credit audits of branch offices. Table 6
below presents a summary of our credit quality indicators.

|Table 6                   |  |  |  |  |  | 
|------------------------- |  |  |  |  |  | 
|Credit Quality Indicators |  |  |  |  |  | 
|(dollars in thousands)    |  |  |  |  |  | 

|                                                             | June 30, | December 31, |  
|------------------------------------------------------------ | -------- | ------------ | -
|
|Loans held for investment                                    |          |              | $
|Allowance for loan losses                                    |          |              |  
|                                                             |          |             
|Nonaccrual loans - commercial (1)                            |          |              |  
|Nonaccrual loans - consumer                                  |          |              |  
|Nonaccrual loans - mortgage (2)                              |          |              |  
|Restructured loans still accruing interest                   |          |              |  
|                                                             |          |              |  
|Total nonperforming loans                                    |          |              |  
|Foreclosed property (other real estate owned and personal    |          |             
|property repossessions) (3)                                  |          |              |  
|                                                             |          |              |  
|Total nonperforming assets                                   |          |              | $
|                                                             |          |              |  
|                                                             |          |             
|Loans past due 90 days or more (mortgage and consumer        |          |             
|with interest accruing) (2)                                  |          |              | $
|                                                             |          |              |  
|                                                             |          |             
|Total nonperforming assets as a percentage of loans held for |          |             
|investment and foreclosed property                           |          |              |  
|                                                             |          |              |  
|Allowance for loan losses to nonperforming loans             |          |              |  
|                                                             |          |              |  

|(1) | At June 30, 2005 and December 31, 2004, nonaccrual loans  commercial
                    included $5.5 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.
|(3) | Prior to September 30, 2004, personal property repossessions were not included
                    in the definition of foreclosed property. At June 30, 2004, personal property
                    repossessions totaled $720,000.                                                                                                              

TSFGs
nonperforming assets as a percentage of loans held for investment and foreclosed property
at June 30, 2005 improved from June 30, 2004 and December 31, 2004, but was up slightly
from 0.58% at March 31, 2005. This follows nine consecutive quarters of improvement in the
nonperforming asset ratio, partially due to the resolution of certain identified problem
loans purchased from Rock Hill Bank & Trust (the Rock Hill Workout Loans)
in October 2002. A substantial majority of the Rock Hill Workout Loans are resolved so
TSFGs credit quality measures are approaching more normalized levels. At June 30,
2005, the Rock Hill Workout Loans totaled $13.0 million, with nonperforming loans of $6.3
million and an allowance for loan losses of $1.9 million.

Net
loan charge-offs as a percentage of average loans held for investment totaled 0.38% for
the first six months of 2005, compared with 0.39% for the first six months of 2004.

33



Table
7 summarizes information on impaired loans, all of which are in nonaccrual status. All
impaired loans are commercial loans. There was no recognized interest income on impaired
loans.

|Table 7                |  |  |  |  |  | 
|---------------------- |  |  |  |  |  | 
|Impaired Loans         |  |  |  |  |  | 
|(dollars in thousands) |  |  |  |  |  | 

|                                     | At and For theSix MonthsEnded June 30, | At and For theYear EndedDecember 31, | 
|------------------------------------ | -------------------------------------- | ------------------------------------ | 
|
|Impaired loans                       |                                        | $28,266                              | 
|Average investment in impaired loans |                                        | 27,791                               | 
|Related allowance                    |                                        | 4,956                                | 
|Foregone interest                    |                                        | 859                                  | 

Allowance
for Loan Losses

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

The
portfolio is segregated into risk-similar segments for which historical loss ratios are
calculated and adjusted for identified changes in current portfolio characteristics.
Historical loss ratios are calculated by product type for consumer loans (direct
installment, indirect installment, revolving, and mortgage) and by credit risk grade for
performing commercial loans. Nonperforming commercial loans, including commitments, are
reviewed for impairment and impairment is measured in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements
No. 5 and 15 (SFAS 114), and assigned specific allocations. To allow for
modeling error, a range of probable loss ratios (from 95% to 105% of the adjusted
historical loss ratio) is then derived for each segment. The resulting percentages are
then applied to the dollar amounts of loans in each segment to arrive at each
segments range of probable loss levels.

The
Allowance for each portfolio segment is set at an amount within its range that reflects
managements best judgment of the extent to which historical loss levels are more or
less accurate indicators of current losses in the portfolio. Managements judgments
evolve from an assessment of various issues, including but not limited to the pace of loan
growth, emerging portfolio concentrations, risk management system changes, entry into new
markets, new product offerings, loans acquired from acquisitions, loan portfolio quality
trends, lending policy changes, changes in loan review and board oversight activities,
changes in regulations and other external factors affecting loan portfolio quality, and
uncertainty in current economic and business conditions.

The
Allowance is then segregated into allocated and unallocated components. The allocated
component is the sum of the loss estimates at the lower end of the probable loss range for
each category. The unallocated component is the sum of the amounts by which final loss
estimates exceed the lower end estimates for each category. The unallocated component of
the Allowance represents probable losses inherent in the portfolio based on our analysis
that are not fully captured in the allocated component. Allocation of the Allowance to
respective loan portfolio components is not necessarily indicative of future losses or
future allocations. The entire Allowance is available to absorb losses in the loan
portfolio.

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

34



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

Table 8
summarizes the changes in the Allowance and provides certain ratios related to the
Allowance.

|Table 8                         |  |  |  |  |  | 
|------------------------------- |  |  |  |  |  | 
|Summary of Loan Loss Experience |  |  |  |  |  | 
|(dollars in thousands)          |  |  |  |  |  | 

|                                                          | At and ForThe Six MonthsEnded June 30, | At and ForThe Year EndedDecember 31, |  
|--------------------------------------------------------- | -------------------------------------- | ------------------------------------ | -
|
|Allowance for loan losses, beginning of year              |                                        |                                      | $
|Purchase accounting adjustments                           |                                        |                                      |  
|Allowance adjustment for loans sold                       |                                        |                                      |  
|Net charge-offs:                                          |                                        |                                     
|Loans charged-off                                         |                                        |                                      |  
|Loans recovered                                           |                                        |                                      |  
|                                                          |                                        |                                      |  
|                                                          |                                        |                                      |  
|Additions to allowance through provision expense          |                                        |                                      |  
|                                                          |                                        |                                      |  
|Allowance for loan losses, end of period                  |                                        |                                      | $
|                                                          |                                        |                                      |  
|                                                          |                                        |                                     
|Average loans held for investment                         |                                        |                                      | $
|Loans held for investment, end of period                  |                                        |                                      |  
|Net charge-offs as a percentage of average loans held for |                                        |                                     
|investment (annualized)                                   |                                        |                                      |  
|Allowance for loan losses as a percentage of loans held   |                                        |                                     
|for investment                                            |                                        |                                      |  
|Allowance for loan losses to nonperforming loans          |                                        |                                      |  

35



Securities

TSFG
uses the investment securities portfolio for several purposes. It serves as a vehicle to
manage interest rate and prepayment risk, to generate interest and dividend income from
the investment of funds, to provide liquidity to meet funding requirements, and to provide
collateral for pledges on public deposits and securities sold under repurchase agreements.
Table 9 shows the carrying values of the investment securities portfolio.

|Table 9                                     |  |  |  |  |  | 
|------------------------------------------- |  |  |  |  |  | 
|Investment Securities Portfolio Composition |  |  |  |  |  | 
|(dollars in thousands)                      |  |  |  |  |  | 

|                                                       | June 30, | December 31, |  
|------------------------------------------------------ | -------- | ------------ | -
|
|Trading (at fair value)                                |          |              |  
|U.S. Treasury                                          |          |              | $
|U.S. Government agencies                               |          |              |  
|State and municipal                                    |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|Available for Sale (at fair value)                     |          |             
|U.S. Treasury                                          |          |              |  
|U.S. Government agencies                               |          |              |  
|Mortgage-backed securities                             |          |              |  
|State and municipal                                    |          |              |  
|Other investments:                                     |          |             
|Corporate bonds                                        |          |              |  
|Federal Home Loan Bank ("FHLB") stock                  |          |              |  
|Federal National Mortgage Association preferred stock  |          |              |  
|Federal Home Loan Mortgage Corporation preferred stock |          |              |  
|Community bank stocks                                  |          |              |  
|Other equity investments                               |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|Held to Maturity(at amortized cost)                    |          |             
|State and municipal                                    |          |              |  
|Other investments                                      |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|                                                       |          |              |  
|Total                                                  |          |              | $
|                                                       |          |              |  
|                                                       |          |             
|Total securities as a percentage of total assets       |          |              |  
|                                                       |          |              |  
|                                                       |          |             
|Percentage of Total Securities Portfolio               |          |             
|U.S. Treasury                                          |          |              |  
|U.S. Government agencies                               |          |              |  
|Mortgage-backed securities                             |          |              |  
|State and municipal                                    |          |              |  
|Other investments                                      |          |              |  
|                                                       |          |              |  
|Total                                                  |          |              |  
|                                                       |          |              |  

Securities
(i.e., trading securities, securities available for sale, and securities held to maturity)
excluding the unrealized loss on available for sale securities averaged $4.7 billion in
the first six months of 2005, 16.9% above the average for the corresponding period in 2004
of $4.0 billion. Additional securities were purchased during the first quarter 2005,
funded with additional leverage from wholesale borrowings. During the second quarter of
2005, TSFG reduced its securities by approximately $500 million in an effort to lower its
interest rate risk in a rising rate environment and its reliance on wholesale borrowings.
In the near-term, TSFG intends to continue to reduce securities by allowing investment
securities to mature without reinvestment.

36



The
average tax-equivalent portfolio yield increased for the six months ended June 30, 2005 to
4.38% from 3.96% in the first six months of 2004. The securities yield increased in part
due to a $4.8 million decrease in mortgage-backed securities (MBS) premium
amortization for the first half of 2005, compared with the first half of 2004, primarily
related to higher MBS prepayments.

TSFG
strives to keep the duration of its securities portfolio relatively short to provide
adequate flexibility to proactively manage cash flow as market conditions change. Cash
flow may be used to pay-off short-term borrowings, used to fund loan growth, or reinvested
in securities at then current market rates.

The
expected duration of the debt securities portfolio decreased to approximately 2.7 years at
June 30, 2005 from approximately 3.2 years at December 31, 2004 and approximately 3.8
years at June 30, 2004. The decrease was partially due to the impact of the sale of
securities during the second quarter 2005. If interest rates rise, the duration of the
debt securities portfolio may extend.

The
available for sale portfolio constituted 98.5% of total securities at June 30, 2005.
Management believes that maintaining most of its securities in the available for sale
category provides greater flexibility in the management of the overall investment
portfolio. Nearly all of these securities are rated AAA so the credit risk is minimal.
Approximately 62% of MBS are collateralized mortgage obligations (CMOs) with a
total expected duration of 3.4 years. TSFG manages the MBS portfolio to maintain a short
duration and repricing horizon. At June 30, 2005, approximately 21% of the MBS portfolio
was variable rate or hybrid variable rate, where the rate adjusts on an annual basis after
a specified fixed rate period, generally ranging from three to ten years. Many of these
adjustable rate MBS are still in the fixed rate period, and are therefore anticipated to
behave more like a fixed rate instrument over the next twelve months or more.

Changes
in interest rates and related prepayment activity impact yields and fair values of
TSFGs securities, specifically MBS. Based on the current investment portfolio
composition, in a rising interest rate environment, related prepayment activity should
decrease. Decreasing prepayment activity extends the premium amortization period, thereby
improving yields.

The
net unrealized loss on available for sale securities (pre-tax) totaled $42.9 million at
June 30, 2005, compared with a $29.5 million loss at December 31, 2004. This increase in
unrealized loss was primarily due to increases in interest rates, with the most
significant increase in unrealized loss relating to MBS, which increased $11.2 million. If
interest rates continue to increase, TSFG expects its net unrealized loss on available for
sale securities to increase. See Item 1, Note 5 to the Consolidated Financial Statements
for information about TSFGs securities in unrealized loss positions.

Community
Bank Stocks. At June 30, 2005, TSFG had equity investments in 9 community banks
located in the Southeast with an $8.0 million cost basis and pre-tax market value of $10.6
million. In each case, TSFG owns less than 5% of the community banks outstanding
common stock. TSFG made these investments to develop correspondent banking relationships
and to promote community banking in the Southeast. These investments in community banks
are included in securities available for sale.

Intangible
Assets

Intangible
assets totaled $693.5 million at June 30, 2005, up from $344.2 million at June 30, 2004,
principally from the Pointe, CNB Florida and Florida Banks acquisitions. See Item 1, Notes
6 and 7 to the Consolidated Financial Statements for the types and balances of intangible
assets.

37



Deposits

Deposits
remain TSFGs primary source of funds. Average deposits provided funding for 62.2% of
average earning assets in the first six months of 2005, up from 60.6% in the first six
months of 2004. Carolina First Bank and Mercantile Bank face stiff competition from other
banking and financial services companies in gathering deposits. TSFG has developed other
sources, such as FHLB advances, short-term borrowings, and long-term structured repurchase
agreements, to fund a portion of loan demand and any increases in investment securities.
In addition, TSFG has increased the use of brokered deposits, which are included in
deposits.

Table
10 shows the breakdown of total deposits by type of deposit and the respective percentage
of total deposits.

|Table 10               |  |  |  |  |  | 
|---------------------- |  |  |  |  |  | 
|Type of Deposits       |  |  |  |  |  | 
|(dollars in thousands) |  |  |  |  |  | 

|                                    | June 30, | December 31, |  
|----------------------------------- | -------- | ------------ | -
|
|Noninterest-bearing demand deposits |          |              | $
|Interest-bearing checking           |          |              |  
|Money market accounts               |          |              |  
|Savings accounts                    |          |              |  
|                                    |          |              |  
|Total transaction accounts          |          |              |  
|Time deposits under $100,000        |          |              |  
|Time deposits of $100,000 or more   |          |              |  
|                                    |          |              |  
|Customer deposits (1)               |          |              |  
|Brokered deposits                   |          |              |  
|                                    |          |              |  
|Total deposits                      |          |              | $
|                                    |          |              |  
|                                    |          |             
|Percentage of Deposits              |          |             
|Noninterest-bearing demand deposits |          |              |  
|Interest-bearing checking           |          |              |  
|Money market accounts               |          |              |  
|Savings accounts                    |          |              |  
|                                    |          |              |  
|Total transaction accounts          |          |              |  
|Time deposits under $100,000        |          |              |  
|Time deposits of $100,000 or more   |          |              |  
|                                    |          |              |  
|Customer deposits (1)               |          |              |  
|Brokered deposits                   |          |              |  
|                                    |          |              |  
|Total deposits                      |          |              |  
|                                    |          |              |  

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

At
June 30, 2005, deposits were up $2.4 billion from June 30, 2004. Approximately 80% of this
increase was attributable to $1.9 billion in net acquired deposits ($328.6 million from
the acquisition of Pointe, $755.6 million from the acquisition of CNB Florida, $855.0
million from the acquisition of Florida Banks, and $9.5 million from an August 2004 branch
acquisition). Excluding net acquired deposits (includes brokered deposits), organic growth
in deposits totaled 7.5% (based on period-end balances). During the first half of 2005,
deposits increased at a rate of 31.7% annualized. Organic deposit growth accelerated
during the first half of 2005, totaling 23.1% annualized for the first half of 2005.
TSFGs total deposit growth was not concentrated in any particular market.

The
increase in deposits was partially due to an increase of $485.1 million in brokered
deposits, which included approximately $443 million of brokered deposits acquired from the
acquisition of Florida Banks. TSFG utilizes these funds as an alternative funding source
while continuing its efforts to maintain and grow its local customer deposit base.

38



Table
13 in Results of Operations  Net Interest Income details average
balances for the deposit portfolio for the three and six months ended June 30, 2005 and
2004. Comparing the six months ended June 30, 2005 and 2004, average interest-bearing
transaction accounts (checking, savings, and money market) increased $670.7 million, or
21.5%, and average noninterest-bearing deposits increased $404.6 million, or 45.7%. For
the first six months of 2005, average time deposits, excluding average brokered deposits,
increased $485.3 million, or 37.0%, and average brokered deposits increased $587.3
million, or 78.8%.

As
part of its overall funding strategy, TSFG expects to continue its focus on growing
customer deposits. TSFG attempts to enhance its deposit mix by working to attract
lower-cost transaction accounts. TSFGs customer-centered sales process,
Elevate, and deposit campaigns are expected to play an integral part in achieving
this longer-term goal. Despite this focus, growth in time deposits outpaced the growth in
transaction accounts during the first six months of 2005, in response to increased
customer demand for certificates of deposits. However, noninterest-bearing deposit growth
increased at a 37.3% annualized rate (based on period-end balances) for the first half of
2005, and increased at an 18.8% annualized organic growth rate (which excludes the $328.6
million deposits acquired from Pointe). Deposit pricing is very competitive, and we expect
this pricing environment to continue.

Time
deposits of $100,000 or more are generally from customers within our local markets and
include public deposits. During the first half of 2005, time deposits of $100,000 or more
increased $381.6 million, or 59.1%, to $1.0 billion. This increase included $66.9 million
in public deposits.

Borrowed
Funds

Table
11 shows the breakdown of total borrowings by type.

|Table 11               |  |  |  |  | 
|---------------------- |  |  |  |  | 
|Type of Borrowings     |  |  |  |  | 
|(dollars in thousands) |  |  |  |  | 

|                                                           | June 30, | December 31, |  
|---------------------------------------------------------- | -------- | ------------ | -
|
|Short-Term Borrowings                                      |          |              |  
|Federal funds purchased and repurchase agreements          |          |              | $
|Federal Home Loan Bank ("FHLB") advances                   |          |              |  
|Commercial paper                                           |          |              |  
|Treasury, tax and loan note                                |          |              |  
|Lines of credit with unaffiliated banks and other          |          |              |  
|                                                           |          |              |  
|                                                           |          |              |  
|                                                           |          |              |  
|                                                           |          |             
|Long-Term Borrowings                                       |          |             
|Repurchase agreements                                      |          |              |  
|FHLB advances                                              |          |              |  
|Subordinated notes                                         |          |              |  
|Mandatorily redeemable preferred stock of subsidiary       |          |              |  
|Note payable                                               |          |              |  
|Employee stock ownership plan note payable                 |          |              |  
|Purchase accounting premiums, net of amortization          |          |              |  
|                                                           |          |              |  
|                                                           |          |              |  
|                                                           |          |              |  
|Total borrowings                                           |          |              | $
|                                                           |          |              |  
|                                                           |          |             
|                                                           |          |             
|Brokered deposits                                          |          |              |  
|                                                           |          |              |  
|                                                           |          |             
|Total wholesale borrowings                                 |          |              | $
|                                                           |          |              |  
|                                                           |          |             
|Total wholesale borrowings as a percentage of total assets |          |              |  

39



TSFG
uses both short-term and long-term borrowings to fund growth of earning assets in excess
of deposit growth, and also utilizes brokered deposits to supplement retail deposit
growth. In the first six months of 2005, average borrowings totaled $4.8 billion, compared
with $3.8 billion for the same period in 2004. This increase was primarily attributable to
additional borrowings to support earning asset growth. TSFG has and may continue to enter
into interest rate swap agreements to hedge interest rate risk related to borrowings.
During the second quarter 2005, TSFG reduced its total borrowings to $4.3 billion at June
30, 2005, from $5.0 billion at March 31, 2005 as part of its balance sheet repositioning.

Federal
funds purchased and repurchase agreements are used to satisfy daily funding needs and,
when advantageous, for rate arbitrage. The increases in both the short-term and long-term
balances were primarily to support earning asset growth. Balances in these accounts can
fluctuate on a day-to-day basis.

FHLB
advances are a source of funding which TSFG uses depending on the current level of
deposits, its ability to raise deposits through market promotions, the Subsidiary
Banks unused FHLB borrowing capacity, and the availability of collateral to secure
FHLB borrowings.

During
the three and six months ended June 30, 2005, TSFG recognized a loss on the early
extinguishment of debt of $3.0 million and $1.6 million, respectively. The loss for the
second quarter 2005 related to costs to terminate certain structured repurchase agreement
borrowings totaling $593.9 million. In the first quarter 2005, TSFG realized a gain
related to prepayment discounts on Federal Home Loan Bank advances totaling $345.0
million. In March 2004, TSFG recognized a loss of $1.4 million on the early extinguishment
of debt related to prepayment penalties for repurchase agreement borrowings totaling
$185.0 million. See Item 1, Note 12 to the Consolidated Financial Statements for
additional details.

Capital
Resources and Dividends

Total
shareholders equity amounted to $1.5 billion, or 10.2% of total assets, at June 30,
2005, compared with $994.6 million, or 8.7% of total assets, at June 30, 2004. At December
31, 2004, total shareholders equity was $1.4 billion, or 10.2% of total assets. The
increase in shareholders equity since June 30, 2004 was primarily from the issuance
of common stock for the Pointe, CNB Florida and Florida Banks acquisitions, as well as the
retention of earnings. Cash dividends paid and the increase in unrealized loss in the
available for sale investment portfolio partially offset these increases. TSFG has
approximately 1.3 million shares remaining under its stock repurchase authorization, but
at this time has no plans to repurchase any shares.

TSFGs
unrealized loss on available for sale securities, net of income tax, which is included in
accumulated other comprehensive loss, was $27.0 million at June 30, 2005, compared with
$18.5 million at December 31, 2004. For discussion on the primary reasons for the increase
in unrealized losses on available for sale securities, see Securities. At June
30, 2004, TSFG had an unrealized loss on available for sale securities, net of income tax,
totaling $47.6 million.

Book
value per share at June 30, 2005 and 2004 was $20.48 and $16.63, respectively. Tangible
book value per share at June 30, 2005 and 2004 was $11.15 and $10.88, respectively.
Tangible book value was below book value as a result of the purchase premiums associated
with acquisitions of entities and assets accounted for as purchases.

TSFG
is subject to the risk-based capital guidelines administered by bank regulatory agencies.
The guidelines are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under
these guidelines, assets and certain off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios represent capital
as a percentage of total risk-weighted assets and certain off-balance sheet items. TSFG
and its Subsidiary Banks exceeded the well-capitalized regulatory requirements at June 30,
2005. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators, that, if undertaken, could have a
direct material effect on our consolidated financial statements.

40



Table
12 sets forth various capital ratios for TSFG and its Subsidiary Banks. Under current
regulatory guidelines, debt associated with trust preferred securities qualifies for tier
1 capital treatment. At June 30, 2005, trust preferred securities included in tier 1
capital totaled $135.5 million.

|Table 12       |  |  |  | 
|-------------- |  |  |  | 
|Capital Ratios |  |  |  | 

|                          | June 30, 2005 | WellCapitalizedRequirement
|------------------------- | ------------- | --------------------------
|TSFG                      |               |                           
|Total risk-based capital  |               | 10                        
|Tier 1 risk-based capital |               | 9                         
|Leverage ratio            |               | 7                         
|                          |              
|Carolina First Bank       |              
|Total risk-based capital  |               | 10                        
|Tier 1 risk-based capital |               | 8                         
|Leverage ratio            |               | 6                         
|                          |              
|Mercantile Bank           |              
|Total risk-based capital  |               | 11                        
|Tier 1 risk-based capital |               | 7                         
|Leverage ratio            |               | 6                         

As
part of its capital management, TSFG has set a desired threshold of 6% or higher for its
tangible equity to tangible assets ratio. At June 30, 2005, TSFGs tangible equity to
tangible asset ratio totaled 5.84%, a decline from 5.99% at December 31, 2004, due to the
increase in the unrealized loss on available for sale securities. If interest rates
continue to increase, TSFG expects its unrealized loss on available for sale securities to
increase, leading to a lower tangible equity to tangible asset ratio. Additionally,
TSFGs acquisitions of Pointe, Koss Olinger, and Bowditch lowered TSFGs
tangible equity to tangible asset ratio as a result of the goodwill recorded, as well as
the use of cash as partial consideration for these acquisitions.

TSFGs
Subsidiary Banks are subject to certain regulatory restrictions on the amount of dividends
they are permitted to pay. TSFG has paid a cash dividend each quarter since the initiation
of cash dividends on February 1, 1994. TSFG presently intends to pay a quarterly cash
dividend on its common stock; however, future dividends will depend upon TSFGs
financial performance and capital requirements.

TSFG,
through a real estate investment trust subsidiary, had 898 mandatorily redeemable
preferred shares outstanding at June 30, 2005 with a stated value of $100,000 per share.
At June 30, 2005, these preferred shares, which are reported as long-term debt on the
consolidated balance sheet, totaled $89.8 million. Under Federal Reserve Board guidelines,
$25.2 million, net of issuance costs, qualified as tier 1 capital, and $61.9 million, net
of issuance costs, qualified as tier 2 capital. The terms for the preferred shares include
certain asset coverage and cash flow tests, which if triggered, may prohibit TSFGs
real estate trust subsidiary from paying dividends to Carolina First Bank, which in turn
may limit its ability to pay dividends to TSFG.

# Earnings Review

Net
Interest Income

Net
interest income is TSFGs primary source of revenue. Net interest income is the
difference between the interest earned on assets, including loan fees and dividends on
investment securities, and the interest incurred for the liabilities to support such
assets. The net interest margin measures how effectively a company manages the difference
between the yield on earning assets and the rate incurred on funds used to support those
assets. Fully tax-equivalent net interest income adjusts the yield for assets earning
federal tax-exempt income to a comparable yield on a taxable basis based on a 35% marginal
federal income tax rate. Table 13 presents average balance sheets and a net interest
income analysis on a tax-equivalent basis for the three and six months ended June 30, 2005
and 2004.

41



|Table 13                                        |  |  |  |  |  |  |  | 
|----------------------------------------------- |  |  |  |  |  |  |  | 
|Comparative Average Balances - Yields and Costs |  |  |  |  |  |  | 
|(dollars in thousands)                          |  |  |  |  |  |  |  | 

|                                           | Three Months Ended June 30, |  |   |            |  |  
|------------------------------------------ | --------------------------- |  | - | ---------- |  | -
|
|
|Assets                                     |                             |  |   |            |  |  
|Earning assets                             |                             | 
|Loans (1)                                  |                             |  | $ | 8,706,276  |  | $
|Investment securities, taxable (2)         |                             |  |   | 4,366,761  |  |  
|Investment securities, nontaxable (2)(3)   |                             |  |   | 364,360    |  |  
|Federal funds sold and interest-bearing    |                             | 
|bank balances                              |                             |  |   | 22,698     |  |  
|                                           |                             |  |   |            |  |  
|Total earning assets                       |                             |  |   | 13,460,095 |  | $
|                                           |                             |  |   |            |  |  
|Non-earning assets                         |                             |  |   | 1,430,513  |  |  
|                                           |                             |  |   |            |  |  
|Total assets                               |                             |  | $ | 14,890,608 |  |  
|                                           |                             |  |   |            |  |  
|                                           |                             | 
|Liabilities and Shareholders' Equity       |                             | 
|Liabilities                                |                             | 
|Interest-bearing liabilities               |                             | 
|Interest-bearing deposits                  |                             | 
|Interest-bearing checking                  |                             |  | $ | 928,672    |  | $
|Savings                                    |                             |  |   | 195,851    |  |  
|Money market                               |                             |  |   | 2,704,178  |  |  
|Time deposits, excluding                   |                             | 
|brokered deposits                          |                             |  |   | 1,917,124  |  |  
|                                           |                             |  |   |            |  |  
|Total interest-bearing                     |                             | 
|customer deposits(4)                       |                             |  |   | 5,745,825  |  |  
|Brokered deposits                          |                             |  |   | 1,353,437  |  |  
|                                           |                             |  |   |            |  |  
|Total interest-bearing deposits            |                             |  |   | 7,099,262  |  |  
|Borrowings                                 |                             |  |   | 4,819,846  |  |  
|                                           |                             |  |   |            |  |  
|Total interest-bearing liabilities         |                             |  |   | 11,919,108 |  | $
|                                           |                             |  |   |            |  |  
|Noninterest-bearing liabilities            |                             | 
|Noninterest-bearing deposits               |                             |  |   | 1,349,746  |  |  
|Other noninterest-bearing liabilities      |                             |  |   | 158,305    |  |  
|                                           |                             |  |   |            |  |  
|Total liabilities                          |                             |  |   | 13,427,159 |  |  
|Shareholders' equity                       |                             |  |   | 1,463,449  |  |  
|                                           |                             |  |   |            |  |  
|Total liabilities and shareholders' equity |                             |  | $ | 14,890,608 |  |  
|                                           |                             |  |   |            |  |  
|Net interest margin (tax equivalent)       |                             |  |   |            |  | $
|Less: tax-equivalent adjustment (3)        |                             |  |   |            |  |  
|                                           |                             |  |   |            |  |  
|Net interest income                        |                             |  |   |            |  | $
|                                           |                             |  |   |            |  |  
|                                           |                             | 
|                                           |                             | 
|Total cost of customer deposits(5)         |                             |  |   | 7,095,571  |  |  
|Total cost of wholesale                    |                             | 
|borrowings(6)                              |                             |  |   | 6,173,283  |  |  

|(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.                                                                                            
|Note: | Average balances are derived from daily balances.                                                                                                         

42



|Table 13 (Continued)                            |  |  |  |  |  |  |  | 
|----------------------------------------------- |  |  |  |  |  |  |  | 
|Comparative Average Balances - Yields and Costs |  |  |  |  |  |  | 
|(dollars in thousands)                          |  |  |  |  |  |  |  | 

|                                           | Six Months Ended June 30, |  |   |            |  |  
|------------------------------------------ | ------------------------- |  | - | ---------- |  | -
|
|
|Assets                                     |                           |  |   |            |  |  
|Earning assets                             |                           | 
|Loans(1)                                   |                           |  | $ | 8,496,056  |  | $
|Investment securities, taxable(2)          |                           |  |   | 4,305,720  |  |  
|Investment securities, nontaxable(2)(3)    |                           |  |   | 356,666    |  |  
|Federal funds sold and interest-bearing    |                           | 
|bank balances                              |                           |  |   | 26,342     |  |  
|                                           |                           |  |   |            |  |  
|Total earning assets                       |                           |  |   | 13,184,784 |  | $
|                                           |                           |  |   |            |  |  
|Non-earning assets                         |                           |  |   | 1,407,395  |  |  
|                                           |                           |  |   |            |  |  
|Total assets                               |                           |  | $ | 14,592,179 |  |  
|                                           |                           |  |   |            |  |  
|                                           |                           | 
|Liabilities and Shareholders' Equity       |                           | 
|Liabilities                                |                           | 
|Interest-bearing liabilities               |                           | 
|Interest-bearing deposits                  |                           | 
|Interest-bearing checking                  |                           |  | $ | 879,533    |  | $
|Savings                                    |                           |  |   | 193,389    |  |  
|Money market                               |                           |  |   | 2,710,367  |  |  
|Time deposits, excluding brokered          |                           | 
|deposits                                   |                           |  |   | 1,798,657  |  |  
|                                           |                           |  |   |            |  |  
|Total interest-bearing customer            |                           | 
|deposits(4)                                |                           |  |   | 5,581,946  |  |  
|Brokered deposits                          |                           |  |   | 1,332,535  |  |  
|                                           |                           |  |   |            |  |  
|Total interest-bearing deposits            |                           |  |   | 6,914,481  |  |  
|Borrowings                                 |                           |  |   | 4,806,334  |  |  
|                                           |                           |  |   |            |  |  
|Total interest-bearing liabilities         |                           |  |   | 11,720,815 |  | $
|                                           |                           |  |   |            |  |  
|Noninterest-bearing liabilities            |                           | 
|Noninterest-bearing deposits               |                           |  |   | 1,289,140  |  |  
|Other noninterest-bearing liabilities      |                           |  |   | 146,094    |  |  
|                                           |                           |  |   |            |  |  
|Total liabilities                          |                           |  |   | 13,156,049 |  |  
|Shareholders' equity                       |                           |  |   | 1,436,130  |  |  
|                                           |                           |  |   |            |  |  
|Total liabilities and shareholders' equity |                           |  | $ | 14,592,179 |  |  
|                                           |                           |  |   |            |  |  
|Net interest margin (tax equivalent)       |                           |  |   |            |  | $
|Less: tax-equivalent adjustment(3)         |                           |  |   |            |  |  
|                                           |                           |  |   |            |  |  
|Net interest income                        |                           |  |   |            |  | $
|                                           |                           |  |   |            |  |  
|                                           |                           | 
|Total cost of customer deposits(5)         |                           |  |   | 6,871,086  |  |  
|Total cost of wholesale                    |                           | 
|borrowings(6)                              |                           |  |   | 6,138,869  |  |  

|(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.                                                                                            
|Note: | Average balances are derived from daily balances.                                                                                                         

43



Fully
tax-equivalent net interest income increased by $49.1 million, or 29.9%, during the first
six months of 2005, compared with the first six months of 2004. This increase was
attributable to a 31.9% increase in average earning assets, partially offset by a 4 basis
point decrease in the net interest margin. The increase in average earning assets was
principally from organic loan growth, bank acquisitions, and higher average investment
securities.

Comparing
the first six months of 2005 to the corresponding period in 2004, average loans increased
$2.5 billion, or 41.6%, resulting from both internally-generated loans as well as loans
that were added from the bank acquisitions. The Pointe acquisition, which closed May 6,
2005, added approximately $312 million in loans. The CNB Florida and Florida Banks
acquisitions, which closed July 16, 2004, added approximately $1.5 billion in loans. At
June 30, 2005, approximately 66% of TSFGs loans were variable rate loans, the
majority of which are tied to the prime rate.

During
the last six months of 2004 and the first three months of 2005, TSFG increased its
investment portfolio to leverage available capital and to increase net interest income.
During the second quarter of 2005, TSFG sold investment securities (see
Securities). TSFG reduced its level of investment securities to $4.3 billion
at June 30, 2005 from $4.8 billion at March 31, 2005 in an effort to reduce its wholesale
borrowing levels and reduce interest rate risk in a rising rate environment. Investment
securities totaled $4.1 billion at June 30, 2004. Average securities declined as a
percentage of average earning assets to 35.4% for the first six months of 2005, down from
39.9% for the same period of 2004. Accordingly, for the first six months of 2005, interest
income from securities represented approximately 28% of TSFGs total interest income,
down from 33% for the first six months of 2004.

The
net interest margin decreased to 3.27% in the first six months of 2005 from 3.31% in the
first six months of 2004. The contraction in the net interest margin was primarily
attributable to a narrower spread between the earning asset yield and interest-bearing
liabilities used to fund them. Comparing the first six months of 2005 to the same period
in 2004, TSFGs earning asset yield increased 70 basis points, lower than the 85
basis point increase for interest-bearing liabilities. The spread between loans and total
customer deposits increased 47 basis points to 4.46% for the six months ended June 30,
2005, from 3.99% for the six months ended June 30, 2004. However, the yield on investment
securities increased 42 basis points while the cost of wholesale borrowing increased 126
basis points. The cost of wholesale borrowing is anticipated to continue increasing faster
than investment yields in the current interest rate environment, which is anticipated to
continue having a negative impact on the net interest margin. TSFG is attempting to
further reduce its dependence of wholesale borrowing. Over the near-term, TSFG intends to
allow investment securities to mature without reinvestment and is focusing additional
efforts on increasing its customer deposits.

The
net interest margin for the second quarter 2005 declined 8 basis points to 3.23% from
3.31% for the first quarter 2005, primarily due to the higher costs for wholesale
borrowings. The spread between loans and total customer deposits increased to 4.51% for
the three months ended June 30, 2005 from 3.94% for the three months ended June 30, 2004.
However, the yield on investment securities increased 46 basis points while the cost of
wholesale borrowings, including brokered deposits, increased 138 basis points.

The
Federal Reserve increased the federal funds target rate 9 times, by 25 basis points each
time, on June 30, 2005, May 3, 2005, March 22, 2005, February 2, 2005, December 14, 2004,
November 10, 2004, September 21, 2004, August 10, 2004, and June 30, 2004, following a
three-year period of declining rates. Furthermore, over the past year, short-term rates
have increased more quickly than long-term rates, leading to a flattened yield curve.

TSFG
continuously evaluates its balance sheet positioning due to changes in interest rates,
pricing competition, and customer preferences. If no material changes are made to
TSFGs balance sheet, management anticipates that its net interest margin may decline
over the next few quarters.

Provision
for Loan Losses

The
provision for loan losses is recorded in amounts sufficient to bring the allowance for
loan losses to a level deemed appropriate by management. Management determines this amount
based upon many factors, including its assessment of loan portfolio quality, loan growth,
changes in loan portfolio composition, net loan charge-off levels, and expected economic
conditions. The provision for loan losses was $20.9 million and $14.7 million in the
first six months of 2005 and 2004, respectively. The higher provision for loan losses was
primarily attributable to loan growth and net charge-offs.

44



Net
loan charge-offs were $16.0 million, or 0.38% of average loans held for investment, for
the first six months of 2005, compared with $11.6 million, or 0.39% of average loans held
for investment, for the first six months of 2004. The allowance for loan losses equaled
1.18%, 1.20%, and 1.22% of loans held for investment as of June 30, 2005, December 31,
2004, and June 30, 2004, respectively. See Loans, Credit Quality,
and Allowance for Loan Losses.

Noninterest
Income

Table
14 shows the components of noninterest income.

|Table 14                         |  |  |  |  |  |  | 
|-------------------------------- |  |  |  |  |  |  | 
|Components of Noninterest Income |  |  |  |  |  |  | 
|(dollars in thousands)          

|                                                     | Three Months EndedJune 30, | Six Months EndedJune 30, |   |       
|---------------------------------------------------- | -------------------------- | ------------------------ | - | ------
|
|Service charges on deposit accounts                  |                            |                          | $ | 9,979 
|Debit card income                                    |                            |                          |   | 1,652 
|Customer service fee income                          |                            |                          |   | 1,120 
|                                                     |                            |                          |   |       
|Total customer fee income                            |                            |                          |   | 12,751
|                                                     |                            |                          |   |       
|                                                     |                            |                         
|Brokerage income                                     |                            |                          |   | 1,317 
|Trust income                                         |                            |                          |   | 1,078 
|                                                     |                            |                          |   |       
|Total brokerage and trust income                     |                            |                          |   | 2,395 
|                                                     |                            |                          |   |       
|                                                     |                            |                         
|Bank-owned life insurance income                     |                            |                          |   | 2,759 
|Merchant processing income                           |                            |                          |   | 2,713 
|Mortgage banking income                              |                            |                          |   | 2,140 
|Insurance income                                     |                            |                          |   | 1,449 
|Benefits admininstration fees                        |                            |                          |   | 650   
|(Loss) gain on sale of available for sale securities |                            |                          |   | (1,503
|Gain on equity investments                           |                            |                          |   | 650   
|(Loss) gain on trading and derivative activities     |                            |                          |   | (1,032
|Gain on disposition of assets and liabilities        |                            |                          |   | --    
|Other                                                |                            |                          |   | 1,688 
|                                                     |                            |                          |   |       
|Total noninterest income                             |                            |                          | $ | 24,660
|                                                     |                            |                          |   |       

Total customer
fee income rose 17.8% in the first six months of 2005, compared with the same period in
2004. Service charges on deposit accounts, the largest contributor to noninterest income,
rose 10.2% for the same period. Average balances for deposit transaction accounts, which
impact service charges, increased 26.9% for the same period. For the first six months of
2005, service charges on deposit accounts increased $1.7 million, due to acquisitions,
higher nonsufficient funds charges, improved collections, increased number of accounts,
and higher fees.

In
the first six months of 2005 compared with the corresponding period in 2004, brokerage
income increased 3.9%, primarily from the addition of brokers. Trust income increased 5.1%
for the same period. At June 30, 2005 and 2004, the market value of assets administered by
the trust department totaled $1.9 billion and $1.7 billion, respectively.

Bank-owned
life insurance income decreased 4.0% for the first six months of 2005 versus the
corresponding period in 2004, due to the receipt of life insurance proceeds in the first
six months of 2004, and lower investment yields in 2005. The cash surrender value totaled
$252.8 million at June 30, 2005, up from $197.7 million at June 30, 2004.

For
the six months ended June 30, 2005, mortgage banking income increased $447,000, or 14.1%,
compared with the same period in 2004. Mortgage loans originated by TSFG originators
totaled $339.8 million and $270.6 million during the first six months of 2005 and 2004,
respectively. The increase in mortgage banking income was principally the result of higher
loan volume and higher gains on sale to the secondary market. TSFG sells most of the loans
it originates in the secondary market with servicing rights released. TSFG had 82
originators at June 30, 2005, up from 59 at December 31, 2004 and 61 at June 30, 2004.

45



In
the first six months of 2005 compared with the same period in 2004, insurance income
increased 34.3%, principally from two additional acquisitions in the second quarter 2005,
as well as efforts to continue to leverage TSFGs customer base.

TSFG
uses derivatives as economic hedges of on-balance sheet assets and liabilities or
forecasted transactions, which result in realized gains and losses included in earnings.
Such activities may result in volatility in realized gains and losses on trading and
derivative activities, as demonstrated by a first half 2005 loss of $128,000 compared with
a first half 2004 gain of $983,000. See Risk Management  Market Risk and
Asset/Liability Management  Derivatives and Hedging Activities.

Net
gains on securities totaled $1.1 million and $9.6 million for the first six months of 2005
and 2004, respectively. TSFG periodically evaluates its available for sale securities
portfolio for other-than-temporary impairment. As discussed in Note 5 to the Consolidated
Financial Statements, TSFGs unrealized losses were primarily attributable to
increases in interest rates. For additional details, see Critical Accounting
Policies and Estimates  Fair Value of Certain Financial Instruments and
Securities.

During
the first six months of 2004, the gain on disposition of assets and liabilities resulted
from the contribution of land at fair value associated with a conservation grant in North
Carolina.

Other
noninterest income includes income related to international banking services, wire
transfer fees, overdraft protection fee income, internet banking fees, and gains/losses on
disposition of other real estate owned/fixed assets. The increase in other noninterest
income in the first half of 2005 compared with the same period in 2004 was largely due to
an increase in the gain on the disposition of other real estate owned.

Noninterest
Expenses

TSFG
is expanding in new and existing markets within its targeted geographic footprint in the
Southeast, both through organic growth and acquisitions. TSFG also makes strategic
investments in its products and services and technology systems. These factors contributed
to TSFGs increases in noninterest expense, which increased 30.7% for the first half
of 2005 over the first half of 2004. TSFGs market expansion included the May 2005
acquisition of Pointe, the July 2004 acquisitions of CNB Florida and Florida Banks and a
branch office (including related loans and deposits) in August 2004. Additionally, during
the first half of 2005, TSFG opened three de novo branch locations. Non-banking
acquisitions during the first half of 2005 included the Koss Olinger group of companies, a
wealth management advisory firm operating in North Florida, and Bowditch Insurance
Corporation, a property and casualty company operating in Jacksonville, Florida.

46



Table
15 shows the components of noninterest expenses.

|Table 15                           |  |  |  |  |  |  | 
|---------------------------------- |  |  |  |  |  |  | 
|Components of Noninterest Expenses |  |  |  |  |  |  | 
|(dollars in thousands)            

|                                                | Three Months EndedJune 30, | Six Months EndedJune 30, |   |       
|----------------------------------------------- | -------------------------- | ------------------------ | - | ------
|
|Salaries and wages                              |                            |                          | $ | 27,258
|Employee benefits                               |                            |                          |   | 8,423 
|Occupancy                                       |                            |                          |   | 6,823 
|Furniture and equipment                         |                            |                          |   | 6,023 
|Professional services                           |                            |                          |   | 5,135 
|Merchant processing expense                     |                            |                          |   | 2,211 
|Telecommunications                              |                            |                          |   | 1,384 
|Amortization of intangibles                     |                            |                          |   | 2,140 
|Merger-related costs                            |                            |                          |   | 2,194 
|Impairment (recovery) from write-down of assets |                            |                          |   | 917   
|Charitable contribution to foundation           |                            |                          |   | --    
|Conservation grant of land                      |                            |                          |   | --    
|Loss on early extinguishment of debt            |                            |                          |   | 2,981 
|Employment contract payments (reversals)        |                            |                          |   | 222   
|Other                                           |                            |                          |   | 13,824
|                                                |                            |                          |   |       
|Total noninterest expenses                      |                            |                          | $ | 79,535
|                                                |                            |                          |   |       

Salaries,
wages, and employee benefits rose $16.5 million, or 31.3%, in the first half of 2005
compared with the same period in 2004. Full-time equivalent employees as of June 30, 2005
increased to 2,554 from 1,971 at June 30, 2004. The increase in personnel expense was
primarily attributable to the Pointe, CNB Florida and Florida Banks acquisitions, higher
branch and lender incentives, and higher health insurance costs. There was no
discretionary incentive compensation accrued during the six months ended June 30, 2005 and
2004 under TSFGs short-term and long-term incentive plans. The discretionary nature
of TSFGs incentive accruals may result in increased volatility in personnel expense
in future periods.

Occupancy
and furniture and equipment expense increased 23.9% for the first six months of 2005
compared with the corresponding period in 2004, primarily from the addition of branch
offices from TSFGs acquisitions of Pointe, CNB Florida and Florida Banks. The
increase in professional services was partially related to outsourcing costs for various
fee initiatives, and outsourcing costs of internal audit projects. The increase in
merchant processing expense was offset by related revenue increases.

Amortization
of intangibles increased $1.6 million for the six months ended June 30, 2005, primarily
attributable to the addition of core deposit intangibles from the acquisitions of Pointe,
CNB Florida and Florida Banks.

During
the first quarter 2005, TSFG contributed an equity investment to its charitable foundation
and expensed the fair value of the contribution of $683,000. During the first three months
of 2004, TSFG executed a conservation grant of land in North Carolina and expensed the
fair value of the contribution of $3.4 million.

During
both the six months ended June 30, 2005 and 2004, TSFG extinguished debt. See
Borrowed Funds. Loss on early extinguishment of debt was $1.6 million for the
six months ended June 30, 2005 compared to $1.4 million during the same period in 2004.

During
both the six months ended June 30, 2005 and 2004, TSFG incurred pre-tax merger-related
costs, in connection with TSFGs acquisitions in 2005, 2004 and 2003. See
Note 11 to the Consolidated Financial Statements for the types and balances of
pre-tax merger-related costs.

47



In
the second quarter 2005, TSFG wrote-off $1.1 million in software costs relating to a
system that is no longer being used, partially offset by $183,000 in recoveries for
previously impaired assets. During the same period for 2004, TSFG had a recovery of
$277,000 on a previous asset impairment.

Other
noninterest expenses rose 35.8% in the first six months of 2005 compared with the same
period in 2004. The overall increase in other noninterest expenses was principally
attributable to increases in staff recruitment, business development, loan collection,
travel, and debit card expense, and growth from acquisitions.

Income
Taxes

The
effective income tax rate as a percentage of pretax income was 32.8% for the first six
months of 2005 and 31.7% for the first six months of 2004. The blended statutory federal
and state income tax rate was approximately 37% for both of these periods. TSFG
anticipates the effective income tax rate will be between 32% and 33% for 2005.

Discontinued
Operations

During
the six months ended June 30, 2005, TSFG recognized an after-tax loss of $396,000 as
discontinued operations. See Item 1, Note 13 to the Consolidated Financial Statements for
additional information.

Second
Quarter Results

Net
income for the three months ended June 30, 2005 totaled $28.4 million, down 5.4% compared
with $30.0 million for the three months ended June 30, 2004. Earnings per diluted share
for the three months ended June 30, 2005 were $0.38, a 22.4% decrease from earnings per
diluted share of $0.49 for the three months ended June 30, 2004. For the same period,
average diluted shares outstanding increased principally as a result of the acquisitions
of Pointe, CNB Florida, and Florida Banks.

Fully
tax-equivalent net interest income totaled $108.3 million, an increase of $26.8 million,
or 33.0%, compared with the second quarter of 2004. Net interest income increased as a
result of the 32.7% growth in average earning assets, principally from organic loan
growth, growth from acquisitions, and higher average investment securities. The CNB
Florida and Florida Banks acquisitions, which closed July 16, 2004, added approximately
$1.7 billion in earning assets. The Pointe acquisition, which closed May 6, 2005, added
approximately $312 million in earning assets. During 2004 and the first quarter of 2005,
TSFG increased its investment portfolio to leverage capital and take advantage of the
opportunity to increase net income. Average investment securities for the three months
ended June 30, 2005 were $4.7 billion, compared with $4.0 billion for the three months
ended June 30, 2004. During the second quarter 2005, TSFG began repositioning its balance
sheet, by reducing investment securities and wholesale borrowing. Investment securities at
June 30, 2005 totaled $4.3 billion, down from $4.8 billion at March 31, 2005.

The
net interest margin of 3.23% was consistent for the three months ended June 30, 2005,
compared with the three months ended June 30, 2004. The net interest margin for the second
quarter of 2005 declined to 3.23% from 3.31% in the first quarter of 2005. This margin
contraction was due primarily to the continued flattening of the yield curve and narrowing
interest rate spreads for investment securities relative to wholesale borrowings. Due to
the level of variable rate wholesale borrowing, the net interest margin is expected to
continue to experience pressure over the near term if interest rates continue to increase.

The
provision for loan losses totaled $9.9 million in the second quarter of 2005, compared
with $7.0 million in the second quarter of 2004. The higher provision for loan losses was
primarily attributable to increased loan growth. Net loan charge-offs as a percentage of
average loans held for investment declined to 0.32% for the second quarter of 2005 versus
0.36% for the second quarter of 2004. The allowance for loan losses as a percentage of
loans held for investment decreased from 1.22% at June 30, 2004 to 1.18% at June 30, 2005.

Noninterest
income included a loss on the sale of securities of $853,000 for the second quarter of
2005, compared with a gain on the sale of securities of $1.6 million for the second
quarter of 2004. Noninterest income, excluding these gains on asset sales, increased 4.7%
to $25.5 million for the second quarter of 2005 compared with $24.4 million for the second
quarter of 2004. Customer fee income, mortgage banking income, insurance income, and gains
on sale of other real estate owned were the primary drivers of the increase in noninterest
income. The increase in noninterest income, excluding gains on certain asset sales, was
partially offset by a decrease in bank-owned life insurance income from the receipt of
life insurance proceeds in the second quarter of 2004, and by a loss on trading and
derivative activity of $1.0 million for the second quarter of 2005, compared with a gain
in the second quarter of 2004 of $2.4 million.

48



For
the second quarters of 2005 and 2004, noninterest expenses included pre-tax other
non-operating items of $6.3 million and $298,000, respectively, consisting primarily of
merger-related costs, impairment (recovery) from write-down in assets, and loss on early
extinguishment of debt. Noninterest expenses, excluding non-operating items, increased
35.2% to $73.2 million for the second quarter of 2005 from $54.2 million for the second
quarter of 2004, which was primarily attributable to higher personnel and occupancy costs,
additional costs resulting from the acquisitions of Pointe, CNB Florida, and Florida
Banks, and incremental costs associated with growing the noninterest income. Salaries,
wages, and employee benefits increased to $35.7 million in the second quarter 2005 from
$27.0 million in the second quarter 2004, primarily due to acquisitions, higher health
insurance costs, and certain annual pay increases, which were effective April 1, 2005.

# Risk Management

TSFGs
management and board of directors have established policies and procedures designed to
identify and address the material risks that are inherent to our business. Our business
exposes us to several types of risk, including market, economic, credit, operational,
liquidity, compliance, and litigation risk. In response, we have implemented control
processes and procedures which are designed to align risk-taking with risk management and
limit earnings volatility, thereby increasing shareholder value. TSFGs management
and board of directors have also implemented corporate governance policies and practices
to help mitigate risk.

Compliance
and financial reporting reliability are important responsibilities of TSFGs
management, and TSFGs system of internal controls is the framework that management
has established to ensure that it meets those responsibilities. Our internal audit
department, which is monitored by our Audit Committee, is designed to provide an objective
assessment of the design and execution of our internal control system, including our
information and management systems, risk governance, and compliance procedures. Internal
audit activities are designed to provide reasonable assurance that resources are
safeguarded; that significant financial, managerial and operating information is
sufficient, accurate and reliable; and that employee actions are in compliance with our
policies and applicable laws and regulations.

Our
Corporate Governance Guidelines, Code of Conduct, Code of Ethics for Senior Executive and
Financial Officers, Whistleblower Policy, and charters for Board Committees are accessible
on TSFGs web site, www.thesouthgroup.com, through the Investor Relations link.

Market
Risk and Asset/Liability Management

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

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

TSFG
has risk management policies and systems which attempt to monitor and limit exposure to
interest rate risk. Specifically, TSFG manages its exposure to fluctuations in interest
rates through policies established by our Subsidiary Banks Joint Asset/Liability Committee
(ALCO), reviewed by the Subsidiary Banks Joint Investment Committee, and
approved by the Subsidiary Banks Board of Directors. The primary goal of the ALCO is to
monitor and limit exposure to interest rate risk through implementation of various
strategies. These strategies include positioning the balance sheet to minimize
fluctuations in income associated with interest rate risk, while maintaining adequate
liquidity and capital. At June 30, 2005, the overall interest rate risk position of TSFG
fell within the interest rate risk guidelines established by ALCO.

49



In
evaluating interest rate risk, TSFG uses a simulation model to analyze various interest
rate scenarios, which take into account changes in the shape of the yield curve, forecasts
by groups of economists, projections based on movements in the futures markets, and
instantaneous interest rate shocks. ALCO assesses interest rate risk by comparing our
static balance sheet and flat interest rate environment results to the various interest
rate scenarios. The variations of net interest income, economic value of equity
(EVE), and duration in the varying interest rate scenarios as compared to our
base case, provide insight into the inherent risk in our balance sheet.

In
addition to evaluating interest rate risk, the model is also used to prepare forecasts for
management. The forecast utilizes managements projections regarding changes in the balance
sheet, including volume, mix, spread, and other assumptions to gauge the impact of changes
in interest rates and/or balance sheet items on the earnings of TSFG compared to the base
forecast. Strategies can be formulated based on the information provided by the earnings
simulation if either a scenario seems likely to occur or we choose to undertake the
proposed transaction. ALCO updates its base forecast quarterly based on economic changes
that occurred during the past quarter as well as changes in the economic outlook for the
coming year. Based on the circumstances and our modeling, we may choose to extend or
shorten the maturities of our funding sources. We may choose to redirect cash flows into
assets with shorter or longer expected durations, or repay borrowings. Derivative
instruments may be used to reduce repricing mismatches between assets and liabilities.

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

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

Interest
Sensitivity Analysis. The information presented in Tables 16 and 17 are not
projections, and are presented with static balance sheet positions. This methodology
allows for an analysis of our inherent risk associated with changes in interest rates.
There are some similar assumptions used in both Table 16 and 17. These include, but are
not limited to, the following:

| | 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 reflects the sensitivity of net interest income to changes in interest rates. It shows
the effect that the indicated changes in interest rates would have on net interest income
over the next twelve months compared with the base case or flat interest rate scenario.
The base case scenario assumes interest rates stay at June 30, 2005 levels.

50



|Table 16                                          |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Interest Rate Risk Analysis - Net Interest Income |  |  |  |  |  |  |  |  |  |  | 

|                       | Annualized Hypothetical Percentage Change in     |       
|---------------------- | ------------------------------------------------ | ------
|Interest Rate Scenario | Net Interest Income when Compared with Base Case
|                       | 2.00%(1)                                         | 3.37% 
|                       | 1.00(1)                                          | 1.94  
|                       | Flat (Base Case)                                 | --    
|                       | (1.00)(1)                                        | (6.38)
|                      
|                       | Forward Yield Curve(2)                           | (0.71)
|                       |                                                  |       

|(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 reflects the sensitivity of the EVE to changes in interest rates. EVE is a measurement
of the inherent, long-term economic value of TSFG (defined as the fair value of all assets
minus the fair value of all liabilities and their associated off balance sheet amounts) at
a given point in time. Table 17 shows the effect that the indicated changes in interest
rates would have on the fair value of net assets at June 30, 2005 compared with the base
case or flat interest rate scenario. The base case scenario assumes interest rates stay at
June 30, 2005 levels.

|Table 17                                                |  |  |  |  |  |  |  |  |  |  |  | 
|------------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Interest Rate Shock Analysis - Economic Value of Equity |  |  |  |  |  |  |  |  |  |  | 

|                       | Annualized Hypothetical Percentage Change in          |        
|---------------------- | ----------------------------------------------------- | -------
|Interest Rate Scenario | Economic Value of Equity when Compared with Base Case
|                       | 2.00%(1)                                              | (4.25)%
|                       | 1.00(1)                                               | (0.06) 
|                       | Flat (Base Case)                                      | --     
|                       | (1.00)(1)                                             | (7.65) 
|                       |                                                       |        

|(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 March 31, 2005 scenario results were due primarily to the reduction in investment
securities and wholesale borrowings that occurred during the quarter. Another component of
the change in sensitivity for June 30, 2005 was the change in the absolute level of
interest rate as compared to March 31, 2005. In addition, TSFG continually refines the
modeling process through the use of more precise model assumptions. Specific model
assumption refinements for the June 30, 2005 quarter include the following:

| | Utilization of institution specific
prepayment assumptions on commercial and consumer loans;
|- | --------------------------------------------------------------------------------------------
| | Utilization of institution
specific deposit repricing betas, average lives and premiums; and
| | Refinement in the
evaluation of call dates on callable instruments.                         

51



There
are material limitations with TSFGs models presented in Tables 16 and 17, which
include, but are not limited to, the following:

| | 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. TSFG uses derivative instruments as part of its interest rate
risk management activities to reduce risks associated with its lending, investment,
deposit taking, and borrowing activities. Derivatives used for interest rate risk
management include various interest rate swaps, options, and futures contracts. Options
and futures contracts typically have indices that relate to the pricing of specific
on-balance sheet instruments and forecasted transactions and may be more speculative in
nature.

TSFG
has interest rate swap agreements that qualify as fair value hedges and those that qualify
as cash flow hedges. Fair value hedges are used to hedge fixed rate deposits and
borrowings. TSFG uses cash flow hedges to hedge interest rate risk associated with
variable rate borrowings.

TSFG
uses futures, options, and other derivatives as economic hedges of on-balance sheet assets
and liabilities or forecasted transactions, which do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) as amended by SFAS No. 137, 138, and 149.
Accordingly, these derivatives are reported at fair value on the consolidated balance
sheet with realized gains and losses included in earnings. Such activities may result in
increased volatility in realized gains and losses on trading activities. For the first six
months of 2005, the loss on trading and derivative activities totaled $128,000, compared
with a gain of $983,000 for the corresponding period in 2004.

As
part of our mortgage activities, TSFG originates certain residential loans and commits
these loans for sale. The commitments to originate residential loans and the sales
commitments are freestanding derivative instruments and are generally funded within 90
days. The fair value of these commitments was not significant at June 30, 2005. During the
third quarter 2005, TSFG expanded its strategy to include selling mortgage loans on a
pooled basis in addition to individual loan sales. As a result, the amount of time between
origination date and sale date has increased, which has increased the amount of interest
rate risk associated with these loans. TSFG enters into forward commitments to mitigate
the interest rate risk.

By
using derivative instruments, TSFG is exposed to credit and market risk. Credit risk,
which is the risk that a counterparty to a derivative instrument will fail to perform, is
equal to the extent of the fair value gain in a derivative. Credit risk is created when
the fair value of a derivative contract is positive, since this generally indicates that
the counterparty owes us. When the fair value of a derivative is negative, no credit risk
exists since TSFG would owe the counterparty. TSFG minimizes the credit risk in derivative
instruments by entering into transactions with high-quality counterparties as evaluated by
management. In addition, many derivative contracts include a Credit Support Annex, which
can require that securities be pledged to mitigate this credit risk. Market risk is the
adverse effect on the value of a financial instrument from a change in interest rates or
implied volatility of rates. TSFG manages the market risk associated with interest rate
contracts by establishing and monitoring limits as to the types and degree of risk that
may be undertaken. The market risk associated with derivatives used for interest rate risk
management activity is fully incorporated into our market risk sensitivity analysis.

In
accordance with SFAS 133, TSFG records derivatives at fair value, as either assets or
liabilities, on the consolidated balance sheets, included in other assets or other
liabilities. Table 18 shows the fair value of TSFGs derivative assets and
liabilities and their related notional amounts. Derivative transactions are measured in
terms of the notional amount, but this amount is not recorded on the balance sheet and is
not, when viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional amount is not exchanged, but is used only as the basis upon which interest
and other payments are calculated.

52



|Table 18                                     |  |  |  |  |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Summary of Derivative Assets and Liabilities |  |  |  |  |  |  |  |  |  |  | 
|(dollars in thousands)                       |  |  |  |  |  |  |  |  |  |  |  | 

|                                       | June 30, 2005 | December 31, 2004 |  |                |  |            
|-------------------------------------- | ------------- | ----------------- |  | -------------- |  | -----------
|
|
|Cash Flow Hedges                       |               |                   |  |                |  |            
|Interest rate swaps associated with    |              
|borrowing activities                   |               | $  1,320          |  | $          187 |  | $   378,500
|                                       |              
|Fair Value Hedges                      |              
|Interest rate swaps associated with    |              
|borrowing activities                   |               | --                |  | 10,224         |  | 185,000    
|Interest rate swaps associated with    |              
|deposit taking activities              |               | 1,008             |  | 8,647          |  | 1,031,516  
|                                       |              
|Other Derivatives                      |              
|Future contracts                       |               | --                |  | 135            |  | 40,000     
|Options, interest rate swaps and other |               | 9,256             |  | 16,454         |  | 127,034    
|                                       |               |                   |  |                |  |            
|                                       |               | $11,584           |  | $     35,647   |  | $1,762,050 
|                                       |               |                   |  |                |  |            

During
2005, unrealized gains on cash flow hedges totaled $677,000. In 2005, the company
terminated a cash flow hedge in the amount of $487,000 which will be amortized over the
remaining term of the forecasted transaction. For the first six months of 2005, the
company recognized $154,000 in earnings related to terminated cash flow hedges.

Economic
Risk

TSFGs
performance is impacted by U.S. and particularly Southeastern economic conditions,
including the level of interest rates, price compression, competition, bankruptcy filings
and unemployment rates, as well as political policies, regulatory guidelines and general
developments. TSFG strives to remain diversified in its products and customers and
continues to monitor the economic situations in its areas of operations to achieve growth
and limit risk.

Credit
Risk

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

Liquidity
Risks

TSFGs
business is also subject to liquidity risk. TSFGs liquidity risk is that we will be
unable to meet a financial commitment to a customer, creditor, or investor when due. See
Liquidity.

Operational
Risk

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

Managing
merger integration risk is a key component of TSFGs operational risk. To manage the
integration risk inherent in TSFG a significant resource commitment is made. For each
significant acquisition, TSFG establishes a steering committee, which includes the bank
president, key members of finance, and key members of technology, for oversight of the
integration process. In addition, an integration team is comprised of managers from all
affected departments. Finally, a project team of dedicated resources is established to
manage our merger-task list, monitor risks, host regular meetings, coordinate
information-sharing, and make on-site visits to the acquiree.

53



TSFG
has a formal risk management division. This group benefits from the direction of both a
committee of the corporate board and a committee of executive management. In addition to
evaluating and measuring risk tolerances of various business units, it evaluates risks
involved in new product roll-out and acquisitions.

Compliance
and Litigation Risks

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

TSFGs
regulatory compliance risk is managed by our compliance group and its risk management
area. This group works with our business lines regularly monitoring activities and
evaluating policies and procedures. Please refer to TSFGs Annual Report on Form 10-K
for the year ended December 31, 2004 Item 1, Supervision and Regulation for
some of the laws and regulations, which impact TSFG and its subsidiaries. TSFG has
policies and control processes that are designed to help ensure compliance with applicable
laws and regulations and limit litigation.

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

# Off-Balance Sheet
Arrangements

In the
normal course of operations, TSFG engages in a variety of financial transactions that, in
accordance with generally accepted accounting principles, are not recorded in the
financial statements, or are recorded in amounts that differ from the notional amounts.
These transactions involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. Such transactions are used by TSFG for general corporate purposes or for
customer needs. Corporate purpose transactions are used to help manage credit, interest
rate, and liquidity risk or to optimize capital. Customer transactions are used to manage
customers requests for funding.

TSFGs
off-balance sheet arrangements, which principally include lending commitments and
derivatives, are described below.

Lending
Commitments. Lending commitments include loan commitments, standby letters of credit,
unused business credit card lines, and documentary letters of credit. These instruments
are not recorded in the consolidated balance sheet until funds are advanced under the
commitments. TSFG provides these lending commitments to customers in the normal course of
business.

For
commercial customers, loan commitments generally take the form of revolving credit
arrangements to finance customers working capital requirements. For retail
customers, loan commitments are generally lines of credit secured by residential property.
At June 30, 2005, commercial and retail loan commitments totaled $2.4 billion. Documentary
letters of credit are typically issued in connection with customers trade financing
requirements and totaled $997,000 at June 30, 2005. Unused business credit card lines,
which totaled $18.5 million at June 30, 2005, are generally for short-term
borrowings.

Standby
letters of credit represent an obligation of TSFG to a third party contingent upon the
failure of TSFGs customer to perform under the terms of an underlying contract with
the third party. The underlying contract may entail either financial or nonfinancial
obligations and may involve such things as the customers delivery of merchandise,
completion of a construction contract, release of a lien, or repayment of an obligation.
Under the terms of a standby letter, drafts will be generally drawn only when the
underlying event fails to occur as intended. TSFG has legal recourse to its customers for
amounts paid, and these obligations are secured or unsecured, depending on the
customers creditworthiness. Commitments under standby letters of credit are usually
for one year or less. TSFG evaluates its obligation to perform as a guarantor and records
reserves as deemed necessary. The maximum potential amount of undiscounted future payments
related to standby letters of credit at June 30, 2005 was $157.5 million.

54



TSFG
applies essentially the same credit policies and standards as it does in the lending
process when making these commitments.

Derivatives.  
          In accordance with SFAS 133, TSFG records derivatives at fair value, as either
          assets or liabilities, on the consolidated balance sheets. Derivative
          transactions are measured in terms of the notional amount, but this amount is
          not recorded on the balance sheet and is not, when viewed in isolation, a
          meaningful measure of the risk profile of the instrument. The notional amount is
          not exchanged, but is used only as the basis upon which interest and other
          payments are calculated. See Market Risk and Asset/Liability Management
           Derivative and Hedging Activities for information on the off
          balance sheet notional amounts of TSFGs derivatives.

# Liquidity

Liquidity
management ensures that adequate funds are available to meet deposit withdrawals, fund
loan and capital expenditure commitments, maintain reserve requirements, pay operating
expenses, provide funds for dividends and debt service, manage operations on an ongoing
basis, and capitalize on new business opportunities. Funds are primarily provided by the
Subsidiary Banks through customers deposits, wholesale money market borrowings,
principal and interest payments on loans, loan sales, securities available for sale,
maturities and paydowns of securities, temporary investments, and earnings. Securities
classified as available for sale, which are not pledged, may be sold in response to
changes in interest rates or liquidity needs. A significant portion of TSFGs
securities are pledged as collateral for FHLB borrowings, repurchase agreements and public
funds deposits. The projected cash flows from the securities portfolio, under different
interest rate scenarios, including a rising rate scenario, are expected to provide some of
the necessary funding needs for the remainder of 2005. Management believes that cash
flows from investments and its loan portfolio, in addition to its available borrowing
capacity, are sufficient to provide the necessary funding for the remainder of 2005.

In
managing its liquidity needs, TSFG focuses on its existing assets and liabilities, as well
as its ability to enter into additional borrowings, and on the manner in which they
combine to provide adequate liquidity to meet our needs. Table 19 summarizes future
contractual payment obligations as of June 30, 2005. Table 19 does not include payments,
which may be required under employment and deferred compensation agreements. In addition,
Table 19 does not include payments required for interest and income taxes (see Item 1,
Consolidated Statements of Cash Flows for details on interest and income taxes paid for
the six months ended June 30, 2005).

|Table 19                |  |  |  |  |  |  |  |  |  |  |  | 
|----------------------- |  |  |  |  |  |  |  |  |  |  |  | 
|Contractual Obligations |  |  |  |  |  |  |  |  |  |  | 
|(dollars in thousands)  |  |  |  |  |  |  |  |  |  |  |  | 

|                                   | Payments Due by Period |            |  |            | 
|---------------------------------- | ---------------------- | ---------- |  | ---------- | 
|
|Time deposits                      |                        | $3,476,672 |  | $1,195,433 | 
|Short-term borrowings              |                        | 1,442,729  |  | 1,442,729  | 
|Long-term debt                     |                        | 2,888,850  |  | 5,168      | 
|Operating leases                   |                        | 155,331    |  | 8,028      | 
|                                   |                        |            |  |            | 
|Total contractual cash obligations |                        | $7,963,582 |  | $2,651,358 | 
|                                   |                        |            |  |            | 

Net
cash provided by operations and deposits from customers have been the primary sources of
liquidity for TSFG. TSFG is focusing additional efforts aimed at acquiring new deposits
through the Subsidiary Banks established branch network to enhance liquidity and
reduce reliance on wholesale borrowing. Liquidity needs are a factor in developing the
Subsidiary Banks deposit pricing structure, which may be altered to retain or grow
deposits if deemed necessary.

The
Subsidiary Banks currently have the ability to borrow from the FHLB and maintain
short-term unsecured lines of credit from unrelated banks. FHLB advances, outstanding as
of June 30, 2005, totaled $871.9 million. At June 30, 2005, the Subsidiary Banks had $2.2
billion of unused borrowing capacity from the FHLB. This capacity may be used when the
Subsidiary Banks have available collateral to pledge. Until the Subsidiary Banks make
collateral available (other than cash) to secure additional FHLB advances, TSFG will fund
its short-term needs principally with deposits, including brokered deposits, federal funds
purchased, repurchase agreements, and the sale of securities available for sale. In
addition, the Subsidiary Banks may purchase securities or may repay repurchase agreements
to provide additional FHLB-qualifying collateral. At June 30, 2005, the Subsidiary Banks
had unused, unsecured short-term lines of credit from unrelated banks totaling $899.9
million (which may be canceled at the lenders option).

55



The
Subsidiary Banks also use repurchase agreements as a source of funding. These borrowings
are collateralized by investment securities and range in term from overnight to several
years. Repurchase agreements with final maturities in excess of one year generally allow
the lender to call the borrowing prior to its stated maturity at each interest payment
date after a pre-set call lock-out period has expired.

The
Federal Reserve Bank also provides short-term funding for commercial banks. Collateralized
borrowing relationships with the Federal Reserve Banks of Richmond and Atlanta are in
place for the Subsidiary Banks to meet emergency funding needs. At June 30, 2005, the
Subsidiary Banks had qualifying collateral to secure advances up to $1.0 billion of which
none was outstanding.

At
June 30, 2005, the parent company had three short-term lines of credit totaling $35.0
million. These lines of credit may be canceled at the lenders option and mature
November 15, 2005 for $10.0 million, May 14, 2006 for $15.0 million, and June 30, 2006 for
$10.0 million. There were no amounts outstanding under these lines of credit at June 30,
2005 or during the six months then ended.

TSFG,
principally through the Subsidiary Banks, enters into agreements in the normal course of
business to extend credit to meet the financial needs of its customers. For amounts and
types of such agreements at June 30, 2005, see Off-Balance Sheet Arrangements.
Increased demand for funds under these agreements would reduce TSFGs available
liquidity and could require additional sources of liquidity.

# Recently Adopted
Accounting Pronouncements

Accounting
for Certain Loans or Debt Securities Acquired in a Transfer

Effective
January 1, 2005, TSFG adopted Statement of Position No. 03-3 (SOP 03-3),
Accounting for Certain Loans or Debt Securities Acquired in a Transfer, which
prohibits carryover or creation of valuation allowances in the initial accounting of all
loans acquired in a transfer that are within the scope of this SOP. The prohibition of the
valuation allowance carryover applies to the purchase of a loan (including loans acquired
in a business combination) with evidence of deterioration of credit quality since
origination, for which its probable, at acquisition, that the investor will be
unable to collect all contractually required payments. The initial adoption of this issue
did not have an impact on the financial condition or results of operations of TSFG. An
evaluation of the loans acquired from Pointe Financial during the second quarter 2005
revealed no loans that fall under the scope of SOP 03-3.

# Recently Issued
Accounting Pronouncements

Share-Based
Payment

In
December 2004, the FASB issued SFAS No. 123R (SFAS 123R), Share-Based
Payment, which requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to
employees. SFAS 123R is an amendment of SFAS No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, and its related implementation
guidance. SFAS 123R does not change the accounting guidance provided in SFAS 123 for
share-based payment transactions with parties other than employees. Under SFAS 123R,
classification of an award will affect the measurement of compensation cost.
Liability-classified awards are remeasured to fair value at each balance-sheet date until
the award is settled. Liability-classified awards include the following:

| | 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.

Equity-classified
awards are measured at grant-date fair value, amortized over the subsequent vesting
period, and are not subsequently remeasured. Equity-classified awards include the
following:



| | 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.

Effective
April 21, 2005, the Securities and Exchange Commission (SEC) issued an
amendment to Rule 4-01(a)(1) of Regulation S-X delaying the effective date for public
entities that do not file as small business issuers to the first annual period beginning
after June 15, 2005 instead of SFAS 123Rs original effective date, which was as of
the beginning of the first interim reporting period beginning after June 15, 2005. TSFG
plans to adopt this standard on January 1, 2006 and is evaluating the impact on
TSFGs 2006 results of operations.

Accounting
for Nonmonetary Transactions

In
December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of
Nonmonetary Assets-an amendment of APB Opinion No. 29, which eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS 153 is
effective for nonmonetary transactions occurring in fiscal years beginning after June 15,
2005.

Accounting
Changes and Error Corrections

In
May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS
154), Accounting Changes and Error Correctionsa replacement of APB Opinion No.
20 and FASB Statement No. 3, which eliminates the requirement to reflect changes in
accounting principles as cumulative adjustments to net income in the period of the change
and requires retrospective application to prior periods financial statements of
voluntary changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. If it is impracticable
to determine the cumulative effect of the change to all prior periods, SFAS 154 requires
that the new accounting principle be adopted prospectively. For new accounting
pronouncements, the transition guidance in the pronouncement should be followed.
Retrospective application refers to the application of a different accounting principle to
previously issued financial statements as if that principle had always been used.

SFAS
154 did not change the guidance for reporting corrections of errors, changes in estimates
or for justification of a change in accounting principle on the basis of preferability.
SFAS 154 is effective for accounting changes made in fiscal years beginning after December
15, 2005.

56



# Item 3. Quantitative and
Qualitative Disclosures about Market Risk

See
Risk Management in Item 2, Management Discussion and Analysis of Financial
Condition and Results of Operations for quantitative and qualitative disclosures about
market risk, which information is incorporated herein by reference.

# Item 4. Controls and
Procedures

Evaluation
of Disclosure Controls and Procedures

TSFGs
management, with the participation of its principal executive officer and principal
financial officer, has evaluated the effectiveness, as of June 30, 2005, of TSFGs
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based upon their evaluation, the principal executive officer and principal financial
officer concluded that TSFGs disclosure controls and procedures, as of June 30,
2005, were effective to provide reasonable assurance that information required to be
disclosed by TSFG in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and to provide reasonable assurance that information required
to be disclosed by TSFG in such reports is accumulated and communicated to TSFGs
management, including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.

Changes
in Internal Controls over Financial Reporting

TSFG
assesses the adequacy of its internal control over financial reporting quarterly and
strives to enhance its controls in response to internal control assessments and internal
and external audit and regulatory recommendations. No control enhancements during the
quarter ended June 30, 2005 or through the date of this Quarterly Report on
Form 10-Q have materially affected, or are reasonably likely to materially affect,
TSFGs internal control over financial reporting.

57



# PART II. OTHER
INFORMATION

# Item 1. Legal Proceedings

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

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

In
connection with stock repurchases, TSFG has repurchased shares of our common stock in
private transactions and open-market purchases, as authorized by our Board. The amount and
timing of stock repurchases will be based on factors, including but not limited to,
managements assessment of TSFGs capital structure and liquidity, the market price of
TSFGs common stock compared to managements assessment of the stock's underlying
value, and applicable regulatory, legal, and accounting matters. The following table
presents information about our stock repurchases for the three months ended June 30, 2005.

|Issuer Purchases of Equity Securities |  |  |  |      
|------------------------------------- |  |  |  | -----
|
|April 1, 2005 to April 30, 2005       |  |  |  | 2,789
|May 1, 2005 to May 31, 2005           |  |  |  | --   
|June 1, 2005 to June 30, 2005         |  |  |  | --   
|                                      |  |  |  |      
|Total                                 |  |  |  | 2,789
|                                      |  |  |  |      

|(1) | These shares were canceled in connection with option exercises. Pursuant to TSFGs stock option plans, participants may exercise stock option plans 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 June 30, 2005, there are 289,502 shares remaining under the February 2003 authorization and 1 million shares under the April 2003 authorization.

On
April 4, 2005, we acquired the Koss Olinger group of companies, a wealth management group
based in Gainesville, Florida.  In connection with this acquisition, we issued 56,398
shares of TSFG common stock valued at $1.5 million and paid $4.5 million cash. The Koss
Olinger companies had six shareholders, all of whom received TSFG stock as partial
consideration in connection with the acquisition. This issuance of shares was not
registered under the Securities Act of 1933 in reliance upon the exemption set forth in
Section 4(2) thereof.

On
June 6, 2005, we acquired Bowditch Insurance Corporation, an independent insurance agency
based in Jacksonville, Florida.  In connection with this acquisition, we issued
87,339 shares of TSFG common stock valued at $2.4 million and paid $2.0 million cash.
Bowditch Insurance Corporation had eight shareholders, all of whom received TSFG stock as
partial consideration in connection with the acquisition. This issuance of shares was not
registered under the Securities Act of 1933 in reliance upon the exemption set forth in
Section 4(2) thereof.

On
April 15, 2005, we issued 2,200 shares to the former sole shareholder of Summit Title,
LLC, a title insurance agency acquired by TSFG in 2004. These shares were issued in
connection with earnout provisions in the acquisition documents. This issuance of shares
was not registered under the Securities Act of 1933 in reliance upon the exemption set
forth in Section 4(2) thereof.

58



# Item 3.  Defaults upon
Senior Securities

None.

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

# Annual Meeting of
Shareholders

On
April 19, 2005, TSFG held its 2005 Annual Meeting of Shareholders. The results of the 2005
Annual Meeting of Shareholders follow.

# Proposal #1 
Election of Directors

|                     | Voting shares in favor | Withheld   | 
|-------------------- | ---------------------- | ---------- | 
|
|J.W. Davis           |                        | 59,967,273 | 
|Jon W. Pritchett     |                        | 60,367,938 | 
|Charles B. Schooler  |                        | 59,392,163 | 
|Edward J. Sebastian  |                        | 55,990,287 | 
|John C. B. Smith, Jr |                        | 56,178,549 | 
|Mack I. Whittle, Jr  |                        | 59,808,462 | 

| | William
P. Brant, C. Claymon Grimes, Jr., William S. Hummers III, William R. Timmons III, David C.
Wakefield III, M. Dexter Hagy, H. Earle Russell, Jr., William R. Timmons, Jr., and Samuel
H. Vickers continued in their present terms as directors. On May 23, 2005, TSFG announced
that its directors elected Darla Moore to the corporate board. Moore is a partner in
Rainwater, Inc., one of the nations largest private investment firms.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Proposal #2 
Ratification of Auditors

| | The
shareholders approved the appointment of KPMG LLP as independent auditors of TSFG for
fiscal year 2005 with 58,074,127 shares, or 95.5%, voting in favor, 2,759,871 shares
voting against, and 347,452 shares abstaining.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 5.  Other Information

None.

59



# 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-QThe
above exhibits may be found on TSFGs electronic filing of its June 30, 2005
Quarterly Report on Form 10-Q with the Securities and Exchange Commission
(SEC) and are accessible at no cost on TSFGs web site,
www.thesouthgroup.com, through the Investor Relations link. TSFGs SEC filings are
also available through the SECs web site at www.sec.gov.

60



# SIGNATURES

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

|The South Financial Group, Inc.
|-------------------------------





|Date:  August 9, 2005 | /s/ William S. Hummers III                         | 
|--------------------- | -------------------------------------------------- | 
|                      | William S. Hummers III                             | 
|                      | Executive Vice President                           | 
|                      | (Principal Accounting and Chief Financial Officer)
|                      |                                                    | 

61