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 ended September 30, 2004
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |   | Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the
transition period from ____ to ____     

Commission file number
0-15083

The South Financial
Group, Inc.(Exact name of
registrant as specified in its charter)

|South Carolina                                                |  | 57-0824914                       
|------------------------------------------------------------- |  | ---------------------------------
|(State or other
jurisdiction ofincorporation or organization) |  | (IRS Employer Identification No.)

|102 South Main Street, Greenville, South Carolina |  | 29601     
|------------------------------------------------- |  | ----------
|(Address of principal executive offices)          |  | (ZIP Code)

(864) 255-7900
Registrants telephone number, including area code

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

Indicate by check mark whether the  registrant  is an  accelerated  filer (as defined in Rule 12b-2 of the Exchange
Act).  Yes X    No

The number of outstanding shares of
the issuers $1.00 par value common stock as of November 3, 2004 was 71,080,940.



# PART I. FINANCIAL INFORMATION

# Item 1. Financial Statements

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

|                                                              | September 30, | December 31, |  
|------------------------------------------------------------- | ------------- | ------------ | -
|
|Assets                                                        |               |              |  
|Cash and due from banks                                       |               |              | $
|Interest-bearing bank balances                                |               |              |  
|Federal funds sold                                            |               |              |  
|Securities                                                    |               |             
|Trading                                                       |               |              |  
|Available for sale                                            |               |              |  
|Held to maturity (market value $77,302, $72,922 and           |               |             
|$93,188, respectively)                                        |               |              |  
|                                                              |               |              |  
|Total securities                                              |               |              |  
|                                                              |               |              |  
|Loans                                                         |               |             
|Loans held for sale                                           |               |              |  
|Loans held for investment                                     |               |              |  
|Allowance for loan losses                                     |               |              |  
|                                                              |               |              |  
|Net loans                                                     |               |              |  
|                                                              |               |              |  
|Premises and equipment, net                                   |               |              |  
|Accrued interest receivable                                   |               |              |  
|Intangible assets                                             |               |              |  
|Other assets                                                  |               |              |  
|                                                              |               |              |  
|                                                              |               |              | $
|                                                              |               |              |  
|                                                              |               |             
|Liabilities and shareholders' equity                          |               |             
|Liabilities                                                   |               |             
|Deposits                                                      |               |             
|Noninterest-bearing                                           |               |              | $
|Interest-bearing                                              |               |              |  
|                                                              |               |              |  
|Total deposits                                                |               |              |  
|Federal funds purchased and repurchase agreements             |               |              |  
|Other short-term borrowings                                   |               |              |  
|Long-term debt                                                |               |              |  
|Debt associated with trust preferred securities               |               |              |  
|Accrued interest payable                                      |               |              |  
|Other liabilities                                             |               |              |  
|                                                              |               |              |  
|Total liabilities                                             |               |              |  
|                                                              |               |              |  
|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 70,894,247, 47,073,578,        |               |             
|and 59,064,375 shares, respectively                           |               |              |  
|Surplus                                                       |               |              |  
|Retained earnings                                             |               |              |  
|Guarantee of employee stock ownership plan debt and nonvested |               |             
|restricted stock                                              |               |              |  
|Common stock held in trust for deferred compensation          |               |              |  
|Deferred compensation payable      in common stock            |               |              |  
|Accumulated other comprehensive loss, net of tax              |               |              |  
|                                                              |               |              |  
|Total shareholders' equity                                    |               |              |  
|                                                              |               |              |  
|                                                              |               |              | $
|                                                              |               |              |  

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



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

|                                                                | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |           
|--------------------------------------------------------------- | ------------------------------- | ------------------------------ | - | ----------
|
|Interest income                                                 |                                 |                                |   |           
|Interest and fees on loans                                      |                                 |                                | $ | 103,398   
|Interest and dividends on securities                            |                                 |                               
|Taxable                                                         |                                 |                                |   | 41,594    
|Exempt from Federal income taxes                                |                                 |                                |   | 2,141     
|                                                                |                                 |                                |   |           
|Total interest and dividends on securities                      |                                 |                                |   | 43,735    
|Interest on short-term investments                              |                                 |                                |   | 85        
|                                                                |                                 |                                |   |           
|Total interest income                                           |                                 |                                |   | 147,218   
|                                                                |                                 |                                |   |           
|Interest expense                                                |                                 |                               
|Interest on deposits                                            |                                 |                                |   | 27,345    
|Interest on borrowed funds                                      |                                 |                                |   | 20,115    
|                                                                |                                 |                                |   |           
|Total interest expense                                          |                                 |                                |   | 47,460    
|                                                                |                                 |                                |   |           
|Net interest income                                             |                                 |                                |   | 99,758    
|Provision for loan losses                                       |                                 |                                |   | 9,440     
|                                                                |                                 |                                |   |           
|Net interest income after provision for loan losses             |                                 |                                |   | 90,318    
|Noninterest income                                              |                                 |                                |   | 24,083    
|Noninterest expenses, excluding merger-related costs            |                                 |                                |   | 64,371    
|Merger-related costs                                            |                                 |                                |   | 5,487     
|                                                                |                                 |                                |   |           
|Income from continuing operations before income                 |                                 |                               
|taxes, minority interest, and discontinued operations           |                                 |                                |   | 44,543    
|Income taxes                                                    |                                 |                                |   | 13,363    
|                                                                |                                 |                                |   |           
|Income before minority interest and discontinued                |                                 |                               
|operations                                                      |                                 |                                |   | 31,180    
|Minority interest in consolidated subsidiary, net of income tax |                                 |                                |   | --        
|                                                                |                                 |                                |   |           
|Income from continuing operations                               |                                 |                                |   | 31,180    
|Discontinued operations, net of income tax                      |                                 |                                |   | (165      
|                                                                |                                 |                                |   |           
|Net income                                                      |                                 |                                | $ | 31,015    
|                                                                |                                 |                                |   |           
|                                                                |                                 |                               
|Average common shares outstanding, basic                        |                                 |                                |   | 68,635,847
|Average common shares outstanding, diluted                      |                                 |                                |   | 70,342,922
|Per common share, basic                                         |                                 |                               
|Income from continuing operations                               |                                 |                                | $ | 0.45      
|Discontinued operations                                         |                                 |                                |   | --        
|                                                                |                                 |                                |   |           
|Net income                                                      |                                 |                                | $ | 0.45      
|                                                                |                                 |                                |   |           
|Per common share, diluted                                       |                                 |                               
|Income from continuing operations                               |                                 |                                | $ | 0.44      
|Discontinued operations                                         |                                 |                                |   | --        
|                                                                |                                 |                                |   |           
|Net income                                                      |                                 |                                | $ | 0.44      
|                                                                |                                 |                                |   |           

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



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

|                                     |  |  |  |            |   |  
|------------------------------------ |  |  |  | ---------- | - | -
|
|Balance, December 31, 2002           |  |  |  | 47,347,375 |   | $
|Net income                           |  |  |  | --         |   |  
|Other comprehensive loss, net of tax |  | 
|of $12,355                           |  |  |  | --         |   |  
|                                     |  |  |  |            |   |  
|Comprehensive income                 |  |  |  | --         |   |  
|                                     |  |  |  |            |   |  
|Cash dividends declared              |  | 
|($0.42 per common share)             |  |  |  | --         |   |  
|Common stock activity:               |  | 
|Repurchase of stock                  |  |  |  | (1,274,808 | ) |  
|Exercise of stock options            |  |  |  | 648,075    |   |  
|Acquisitions                         |  |  |  | 149,173    |   |  
|Restricted stock plan                |  |  |  | 67,023     |   |  
|Dividend reinvestment plan           |  |  |  | 105,184    |   |  
|Employee stock purchase plan         |  |  |  | 20,666     |   |  
|Director compensation                |  |  |  | 10,890     |   |  
|Common stock purchased by trust for  |  | 
|deferred compensation                |  |  |  | --         |   |  
|Deferred compensation payable in     |  | 
|common stock                         |  |  |  | --         |   |  
|Miscellaneous                        |  |  |  | --         |   |  
|                                     |  |  |  |            |   |  
|Balance, September 30, 2003          |  |  |  | 47,073,578 |   | $
|                                     |  |  |  |            |   |  
|                                     |  | 
|                                     |  | 
|Balance, December 31, 2003           |  |  |  | 59,064,375 |   | $
|Net income                           |  |  |  | --         |   |  
|Other comprehensive loss, net of tax |  | 
|of $3,873                            |  |  |  | --         |   |  
|                                     |  |  |  |            |   |  
|Comprehensive income                 |  |  |  | --         |   |  
|                                     |  |  |  |            |   |  
|Cash dividends declared ($0.45 per   |  | 
|common share)                        |  |  |  | --         |   |  
|Common stock activity:               |  | 
|Acquisitions                         |  |  |  | 10,752,972 |   |  
|Exercise of stock options, including |  | 
|tax benefit of $4,154                |  |  |  | 777,285    |   |  
|Dividend reinvestment plan           |  |  |  | 90,186     |   |  
|Restricted stock plan                |  |  |  | 195,832    |   |  
|Director compensation                |  |  |  | 6,618      |   |  
|Employee stock purchase plan         |  |  |  | 6,991      |   |  
|Common stock purchased by trust for  |  | 
|deferred compensation                |  |  |  | --         |   |  
|Deferred compensation payable in     |  | 
|common stock                         |  |  |  | --         |   |  
|Miscellaneous                        |  |  |  | (12        | ) |  
|                                     |  |  |  |            |   |  
|Balance, September 30, 2004          |  |  |  | 70,894,247 |   | $
|                                     |  |  |  |            |   |  

*   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.



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

|                                                                                     | Nine Months Ended September 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                                                            |                                 | 
|Gain on sale of available for sale securities                                        |                                 | 
|Gain on equity investments                                                           |                                 | 
|Gain on trading and derivative activities                                            |                                 | 
|Gain on disposition of assets and liabilities                                        |                                 | 
|Gain on sale of loans                                                                |                                 | 
|Loss (gain) on disposition of premises and equipment                                 |                                 | 
|Loss on disposition of other real estate owned                                       |                                 | 
|Conservation grant of land                                                           |                                 | 
|Impairment (recovery) loss from write-down of assets                                 |                                 | 
|Impairment (recovery) loss from write-down of mortgage servicing rights              |                                 | 
|Loss on early extinguishment of debt                                                 |                                 | 
|Minority interest in consolidated subsidiary                                         |                                 | 
|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                                            |                                 | 
|Purchase of securities held to maturity                                              |                                 | 
|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 for branch acquisition                                     |                                 | 
|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.



# THE SOUTH FINANCIAL GROUP, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
                                            (in thousands) (Unaudited)

|                                                                            | Nine Months Ended September 30, | 
|--------------------------------------------------------------------------- | ------------------------------- | 
|
|Cash flows from financing activities                                        |                                 | 
|Deposits, net                                                               |                                 | 
|Federal funds purchased and repurchase agreements, net                      |                                 | 
|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                                         |                                 | 
|Cash dividends paid on minority interest                                    |                                 | 
|Repurchase of 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:                  |                                 | 
|Minority interest in consolidated subsidiary reclassified to long-term debt |                                 | 
|Loans held for sale transferred to assets held for disposal                 |                                 | 
|Change in unrealized loss on available for sale securities                  |                                 | 
|Loans transferred to other real estate owned                                |                                 | 
|Premises and equipment, net transferred to long-lived assets held for sale  |                                 | 
|Business combinations:                                                      |                                 | 
|Fair value of assets acquired (includes cash and cash equivalents)          |                                 | 
|Fair value of common stock issued and stock options recognized              |                                 | 
|Basis of stock investment in acquiree, shares canceled effective with the   |                                 | 
|acquisition closing date                                                    |                                 | 
|Cash paid for common shares                                                 |                                 | 
|                                                                            |                                 | 
|Liabilities assumed                                                         |                                 | 
|                                                                            |                                 | 

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



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

# (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 footnotes included in TSFGs Annual Report on Form 10-K for the year ended
December 31, 2003 should be referred to in connection with the reading of these unaudited
interim consolidated financial statements. Certain prior year amounts have been
reclassified to conform to the 2004 presentations.

# 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 mortgage, trust, investment and
insurance services to consumers and commercial customers. At September 30, 2004, TSFG
operated through 76 branch offices in South Carolina, 24 in North Carolina and 53 in
Florida.

# 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 accounting principles generally accepted in the United States of America. Voting
interest entities are entities in which the total equity investment at risk is sufficient
to enable each entity to finance itself independently and provides the equity holders with
the obligation to absorb losses, the right to receive residual returns, and the right to
make decisions about the entitys activities. TSFG consolidates voting interest
entities in which it has all, or at least majority of, the voting interest. As defined in
applicable accounting standards, variable interest entities (VIEs) are
entities that lack one or more of the characteristics of a voting interest entity
described above. A controlling financial interest in an entity is present when an
enterprise has a variable interest, or combination of variable interests, that will absorb
a majority of the entitys expected losses, receive a majority of the entitys
expected residual returns, or both. The enterprise with a controlling financial interest,
known as the primary beneficiary, consolidates the VIE. TSFGs wholly owned
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.

# 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, income
tax assets or liabilities, and accounting for acquisitions. To a lesser extent,
significant estimates are also associated with the determination of securities,
intangibles, valuation of derivative instruments, stock based compensation, and
environmental remediation costs.

# Reclassifications

Certain
prior year amounts have been reclassified to conform to the 2004 presentations. In
particular, in connection with the adoption of Statement of Financial Accounting Standards
(SFAS) No. 150 (SFAS 150), TSFG reclassified its minority interest
in consolidated subsidiary (representing mandatorily redeemable preferred stock of its
real estate investment trust subsidiary) to long-term debt effective July 1, 2003. At
September 30, 2003, TSFGs mandatorily redeemable preferred stock of subsidiary
totaled $89.8 million. In addition, effective July 1, 2003, TSFG



reported dividends earned
by institutional holders of preferred shares of its real estate investment trust
subsidiaries as interest expense. For periods prior to July 1, 2003, these dividends
earned are reported as minority interest in consolidated subsidiary, net of tax.

# Recently Adopted
Accounting Pronouncements

Accounting for
Investments in Limited Liability Companies

Effective
June 30, 2004, TSFG adopted Emerging Issues Task Force Issue (EITF) No. 03-16,
Accounting for Investments in Limited Liability Companies, which provided
guidance for determining whether an investment in a limited liability company
(LLC) should be accounted for using the cost or equity method of accounting.
This guidance specified that the provisions of the American Institute of Certified Public
Accountants Statement of Position (SOP) 78-9 (SOP 78-9),
Accounting for Investments in Real Estate Ventures, and related guidance would
apply to LLCs. SOP 78-9 requires noncontrolling investments be accounted for using the
equity method of accounting unless the investors interest is so minor that they have
virtually no influence over partnership operating and financial policies, and accordingly,
accounting for the investment using the cost method of accounting may be appropriate.
Guidance has stated that investments of more than three to five percent are considered to
be more than minor and, therefore, should be accounted for using the equity method of
accounting. The initial adoption of this issue did not have a material impact on the
financial condition or results of operations of TSFG.

Accounting for
Investments Other Than Common Stock

Effective
September 30, 2004, TSFG adopted EITF No. 02-14, Whether an Investor Should Apply
the Equity Method of Accounting to Investments Other Than Common Stock, which
provided guidance for circumstances when an investor has the ability to exercise
significant influence over the operating and financial policies of an investee and that
the equity method of accounting should be applied only when the investment is common stock
and/or in-substance common stock. The initial adoption of this issue did not have an
impact on the financial condition or results of operations of TSFG.

# Recently Issued
Accounting Pronouncements

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments

In
March 2004, the Financial Accounting Standards Board (FASB) issued EITF No.
03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, which provided guidance for evaluating whether
an investment is other-than-temporarily impaired and its application to investments
classified as either available for sale or held to maturity under FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost or equity method of accounting. In September
2004, the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1, a delay of
the effective date for the measurement and recognition guidance contained in paragraphs
10-20 of EITF 03-1 until the FASB issues final guidance, expected in the fourth quarter
2004.

Paragraphs
10 through 20 of EITF 03-1 provide guidance on when impairment of debt and equity
securities is considered other-than-temporary. This guidance generally states 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. We are currently evaluating the impact of the
initial adoption of this guidance on the financial condition or results of operations of
TSFG.

TSFG
adopted the guidance of EITF 03-1, excluding paragraphs 10-20 effective as of September
30, 2004. As a result of this adoption, TSFG provides additional disclosures, which are
found in Note 9. The initial adoption of this issue, which excludes paragraphs 10-20 did
not have a material impact on the financial condition or results of operations of TSFG.



# (2)     SUPPLEMENTAL
FINANCIAL INFORMATION TO CONSOLIDATED STATEMENTS OF INCOME

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

|                                                           | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |       
|---------------------------------------------------------- | ------------------------------- | ------------------------------ | - | ------
|
|Noninterest income                                         |                                 |                                |   |       
|Service charges on deposit accounts                        |                                 |                                | $ | 9,950 
|Debit card income                                          |                                 |                                |   | 1,103 
|Customer service fee income                                |                                 |                                |   | 683   
|                                                           |                                 |                                |   |       
|Total customer fee income                                  |                                 |                                |   | 11,736
|                                                           |                                 |                                |   |       
|                                                           |                                 |                               
|Brokerage income                                           |                                 |                                |   | 1,240 
|Trust income                                               |                                 |                                |   | 824   
|                                                           |                                 |                                |   |       
|Total brokerage and trust income                           |                                 |                                |   | 2,064 
|                                                           |                                 |                               
|Bank-owned life insurance income                           |                                 |                                |   | 2,869 
|Merchant processing income                                 |                                 |                                |   | 2,528 
|Mortgage banking income                                    |                                 |                                |   | 1,514 
|Insurance income                                           |                                 |                                |   | 1,132 
|Gain on sale of available for sale securities              |                                 |                                |   | 678   
|(Loss) gain on equity investments                          |                                 |                                |   | (367  
|Gain on trading and derivative activities                  |                                 |                                |   | 1,150 
|Gain on disposition of assets and liabilities              |                                 |                                |   | --    
|Other                                                      |                                 |                                |   | 779   
|                                                           |                                 |                                |   |       
|Total noninterest income                                   |                                 |                                | $ | 24,083
|                                                           |                                 |                                |   |       
|                                                           |                                 |                               
|Noninterest expenses                                       |                                 |                               
|Salaries and wages                                         |                                 |                                | $ | 24,727
|Employee benefits                                          |                                 |                                |   | 7,431 
|Occupancy                                                  |                                 |                                |   | 5,841 
|Furniture and equipment                                    |                                 |                                |   | 5,670 
|Professional fees                                          |                                 |                                |   | 2,318 
|Merchant processing expense                                |                                 |                                |   | 1,984 
|Telecommunications                                         |                                 |                                |   | 1,237 
|Amortization of intangibles                                |                                 |                                |   | 1,839 
|Impairment (recovery) loss from write-down of assets       |                                 |                                |   | --    
|Conservation grant of land                                 |                                 |                                |   | --    
|Loss on early extinguishment of debt                       |                                 |                                |   | --    
|Other                                                      |                                 |                                |   | 13,324
|                                                           |                                 |                                |   |       
|Total noninterest expenses, excluding merger-related costs |                                 |                                |   | 64,371
|Merger-related costs                                       |                                 |                                |   | 5,487 
|                                                           |                                 |                                |   |       
|Total noninterest expenses                                 |                                 |                                | $ | 69,858
|                                                           |                                 |                                |   |       



# (3)    ACCUMULATED OTHER
COMPREHENSIVE LOSS

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

|                                                                   | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |        
|------------------------------------------------------------------ | ------------------------------- | ------------------------------ | - | -------
|
|Unrealized (losses) gains on available for sale securities         |                                 |                                |   |        
|Balance at beginning of period                                     |                                 |                                | $ | (47,552
|Other comprehensive income (loss):                                 |                                 |                               
|Unrealized holding gains (losses) arising during the period        |                                 |                                |   | 54,925 
|Income tax (expense) benefit                                       |                                 |                                |   | (20,435
|Less: Reclassification adjustment for gains included in net income |                                 |                                |   | (311   
|Income tax expense                                                 |                                 |                                |   | 122    
|                                                                   |                                 |                                |   |        
|                                                                   |                                 |                                |   | 34,301 
|                                                                   |                                 |                                |   |        
|Balance at end of period                                           |                                 |                                |   | (13,251
|                                                                   |                                 |                                |   |        
|                                                                   |                                 |                               
|Unrealized gains (losses) on cash flow hedges                      |                                 |                               
|Balance at beginning of period                                     |                                 |                                |   | 1,319  
|Other comprehensive income:                                        |                                 |                               
|Unrealized (loss) gain on change in fair values                    |                                 |                                |   | (1,376 
|Income tax benefit (expense)                                       |                                 |                                |   | 468    
|                                                                   |                                 |                                |   |        
|                                                                   |                                 |                                |   | (908   
|                                                                   |                                 |                                |   |        
|Balance at end of period                                           |                                 |                                |   | 411    
|                                                                   |                                 |                                |   |        
|                                                                   |                                 |                                | $ | (12,840
|                                                                   |                                 |                                |   |        

# (4)    BUSINESS COMBINATIONS

# CNB Florida Bancshares,
Inc. and Florida Banks, Inc.

On
July 16, 2004, TSFG acquired CNB Florida Bancshares, Inc. (CNB Florida),
headquartered in Lake City, Florida, and Florida Banks, Inc. (Florida Banks),
headquartered in Jacksonville, Florida. CNB Florida operated through 16 branch offices in
Northeast Florida. Florida Banks operated through seven branch offices in Tampa,
Jacksonville, Gainesville, Ft. Lauderdale, Ocala, and West Palm Beach, Florida. These
acquisitions build on TSFGs existing Florida franchise, advancing efforts to expand
in markets with favorable population and per capita income growth prospects. In connection
with these acquisitions, CNB Florida and Florida Banks were merged into Mercantile Bank.

The
aggregate purchase price for CNB Florida was $161.9 million, which consisted of 5,312,974
shares of TSFG common stock valued at $154.0 million, $2,000 of cash paid in lieu of
fractional shares, outstanding employee stock options valued at $6.6 million, and
TSFGs equity investment of 125,000 common shares in CNB Florida, which had a basis
of $1.3 million and were canceled effective with the acquisition closing date.

The
aggregate purchase price for Florida Banks was $175.9 million, which consisted of
5,418,890 shares of TSFG common stock valued at $158.5 million, $2,000 of cash paid in
lieu of fractional shares, outstanding employee stock options valued at $9.7 million, and
TSFGs equity investments of 291,500 common shares and 50,000 preferred shares in
Florida Banks, which had a basis of $7.7 million and were canceled effective with the
acquisition closing date.

The
CNB Florida and Florida Banks purchase prices and the amount of the purchase prices
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
third 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 fourth
quarter of 2004 as well as within one year of the acquisitions as additional fair value
information becomes available.



|                                                                | July 16, 2004 |          | 
|--------------------------------------------------------------- | ------------- | -------- | 
|
|Purchase price                                                  |               | $161,920 | 
|Fair value of net assets acquired (1)                           |               | 35,732   | 
|                                                                |               |          | 
|Excess of purchase price over fair value of net assets acquired |               | 126,188  | 
|Core deposit intangibles                                        |               | 10,571   | 
|Non-compete agreements                                          |               | 741      | 
|                                                                |               |          | 
|Goodwill                                                        |               | $114,876 | 
|                                                                |               |          | 

(1)    
          Includes direct acquisition costs and deferred income taxes.

The
core deposit intangible assets are amortized over 10 years and 12 years for CNB Florida
and Florida Banks, respectively based on the estimated lives of the associated deposits. The
core deposit intangible valuation and amortization periods are based on a historical study
of the deposits acquired. The non-compete agreement intangibles are amortized on a
straight-line basis over the estimated useful lives, which range from three to five years.
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 SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). The total amount
of goodwill expected to be deductible for income tax purposes is $10.1 million.

The
estimated fair values of assets acquired and liabilities assumed at acquisition (in
thousands) are presented below. As previously discussed, these fair values are subject to
change. In addition, certain assets and liabilities related to Florida Banks wholesale
mortgage operations, primarily loans held for sale, were moved to discontinued operations
(see Note 8 for further details).

|                          | July 16, 2004 |  |  
|------------------------- | ------------- |  | -
|
|Assets                    |               |  |  
|Cash and cash equivalents |               |  | $
|Securities                |               |  |  
|Loans                     |               | 
|Loans held for sale       |               |  |  
|Loans held for investment |               |  |  
|Allowance for loan losses |               |  |  
|                          |               |  |  
|Net loans                 |               |  |  
|                          |               |  |  
|Intangible assets         |               |  |  
|Other assets              |               |  |  
|                          |               |  |  
|Total assets acquired     |               |  |  
|                          |               |  |  
|Liabilities               |               | 
|Deposits                  |               |  |  
|Other borrowed funds      |               |  |  
|Other liabilities         |               |  |  
|                          |               |  |  
|Total liabilities assumed |               |  |  
|                          |               |  |  
|Net assets acquired       |               |  | $
|                          |               |  |  

TSFGs
consolidated financial statements include the results of operations of CNB Florida and
Florida Banks since July 16, 2004. In July 2004, due to branch office consolidations
associated with these two acquisitions, Mercantile Bank closed three branch offices.



# Summit Title, LLC

On
April 12, 2004, TSFG acquired Summit Title, LLC (Summit), an independent title
insurance company based in Hendersonville, North Carolina. TSFG issued 8,371 shares of
common stock valued at $245,000, acquired tangible assets totaling $86,000, assumed
liabilities totaling $25,000, recorded a customer list intangible asset of $37,000,
recorded a non-compete agreement intangible asset of $18,000, and recorded goodwill of
$129,000. The customer list intangible is amortized on a straight-line basis over its
estimated life of 10 years. The non-compete agreement intangible is amortized on a
straight-line basis over its estimated useful life of 7 years. In addition, TSFG agreed to
issue annual earnout shares, valued at the time of issuance at $66,906, for each of April
12, 2005, 2006, 2007, and 2008, based on revenue retention and earnings achievement. If
issued, the earnout shares would increase goodwill. TSFG intends to use Summit as an
additional source of noninterest income.

# Amortization of Premiums
and Discounts

Premiums
and discounts that resulted from recording the assets and liabilities acquired through
acquisitions at their respective fair values are being amortized and accreted using
methods that approximate a constant effective yield over the life of the assets and
liabilities. This net accretion or amortization increased net income before income taxes
by $14,000 for the three months ended September 30, 2004 and decreased net income before
income taxes by $1.7 million for the nine months ended September 30, 2004.
For the three and nine months ended September 30, 2003, this net amortization decreased
net income before income taxes by $799,000 and $1.7 million, respectively.

# Pro Forma Financial
Information

The
following unaudited pro forma financial information presents the combined results of
operations of TSFG, CNB Florida, Florida Banks, and MountainBank Financial Corporation
(MBFC) as if the mergers had occurred as of the beginning of the period for
each period presented, after giving effect to certain adjustments, including amortization
of core deposit intangibles, non-compete agreement intangibles, loan premiums, and deposit
premiums and related income tax effects (in thousands, except per common share). MBFC was
acquired on October 3, 2003. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had TSFG, CNB Florida, Florida
Banks, and MBFC constituted a single entity during such periods.

|                                                                | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |  |        
|--------------------------------------------------------------- | ------------------------------- | ------------------------------ |  | -------
|
|Net interest income                                             |                                 | $100,011                       |  | $86,861
|Noninterest income, excluding wholesale mortgage banking income |                                 | 24,083                         |  | 30,362 
|Wholesale mortgage banking income                               |                                 | --                             |  | 2,399  
|Employment contract termination costs                           |                                 | 9,749                          |  | 9,749  
|Net income                                                      |                                 | 23,540                         |  | 19,409 
|Net income, excluding expenses for employment contract          |                                
|termination costs paid by acquiree                              |                                 | 31,097                         |  | 26,966 
|Per common share:                                               |                                
|Net income, basic                                               |                                 | 0.33                           |  | 0.31   
|Net income, diluted                                             |                                 | 0.33                           |  | 0.30   
|Net income, excluding expenses for employment contract          |                                
|termination costs paid by acquiree, basic                       |                                 | 0.44                           |  | 0.43   
|Net income, excluding expenses for employment contract          |                                
|termination costs paid by acquiree, diluted                     |                                 | 0.43                           |  | 0.41   

The
wholesale mortgage banking income is presented separately from other noninterest income in
the pro forma financial information above since TSFG decided in the third quarter 2004 to discontinue the wholesale
mortgage operations acquired from Florida Banks. See Note 8 for additional details.

The
contract termination payments presented separately in the pro forma financial information
above represent payments by CNB Florida and Florida Banks to certain executives pursuant
to their employment contracts.



# (5)    BRANCH ACQUISITION

In
August 2004, Carolina First Bank acquired a branch office (including related loans and
deposits) in Lake Lure, North Carolina from an unrelated financial institution. In
connection with this branch acquisition, TSFG acquired loans of $2.0 million, deposits
totaling $9.5 million, and recorded a core deposit intangible asset of $571,000. The core
deposit intangible asset is being amortized over 11 years on a sum-of-the-years digits
method.

# (6)    DISPOSITION OF
ASSETS AND LIABILITIES

In
March 2004, TSFG executed a conservation grant of land in North Carolina, which resulted
in the recognition of a gain totaling $2.4 million, included in noninterest income, and a
deduction for the fair value of the contribution totaling $3.4 million, included in
noninterest expenses.

On
June 28, 2004, TSFG completed the sale of substantially all of the assets and all
liabilities of Community National Bank headquartered in Pulaski, Virginia. TSFG acquired
Community National Bank in connection with its October 2003 acquisition of MBFC and it was
outside TSFGs targeted geographic market. In connection with this disposition, TSFG
sold $40.4 million in loans and $60.0 million in deposits, and recorded reductions of
goodwill totaling $6.6 million and core deposit intangibles totaling $864,000. This
transaction resulted in no book gain or loss. Since Community National Bank was immaterial
to TSFGs financial statements, presentation as a discontinued operation is not
warranted. For the period from January 1, 2004 to June 28, 2004, Community National
Banks net income totaled $91,000.

# (7)    SALE OF LONG-LIVED
ASSETS

In
June 2004, TSFG sold three long-lived asset properties, which resulted in the recognition
of an impairment recovery totaling $277,000 and a loss on the disposition of premises and
equipment (included in other noninterest income) totaling $17,000. The net realizable
value of these properties, which consisted of land and buildings, was estimated at $1.7
million, prior to their sale.

# (8)    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 CNB Florida and Florida Banks, TSFG decided in the third
quarter 2004 to discontinue the wholesale mortgage operations acquired from Florida Banks
and expects to be completed by the first quarter 2005. Assets held for disposal, included
in other assets, totaled $48.4 million at September 30, 2004, and consisted primarily of
loans held for sale. At September 30, 2004, liabilities related to the wholesale mortgage
operation, included in other liabilities, totaled $2.9 million, and consisted primarily of
a recourse reserve associated with loans previously sold. 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. Since these assets and liabilities were recorded at their net
realizable value at the acquisition date, the disposal is not expected to result in a book
gain or loss. For the period from July 16, 2004 to September 30, 2004, the revenue and
pre-tax loss related to the wholesale mortgage operations acquired from Florida Banks
totaled $695,000 and $254,000, respectively. The after-tax loss of $165,000 is recognized
as discontinued operations in the consolidated statement of income for the three and nine
months ended September 30, 2004.



# (9)    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 continuous unrealized loss position, at September 30, 2004, were as follows (in
thousands):

|                              | Less than 12 Months | 12 Months or Longer | Total |              |  |           
|----------------------------- | ------------------- | ------------------- | ----- | ------------ |  | ----------
|
|Securities available for sale |                     |                     |       |              |  |           
|U.S. Treasury                 |                     | $   168,499         |       | $       419  |  | $  46,914 
|U.S. Government agencies      |                     | 125,753             |       | 798          |  | 112,132   
|Mortgage-backed securities    |                     | 1,087,167           |       | 12,972       |  | 665,644   
|State and municipals          |                     | 91,049              |       | 910          |  | 31,634    
|Other investments             |                     | 63,993              |       | 1,160        |  | 70,657    
|                              |                     |                     |       |              |  |           
|                              |                     | $1,536,461          |       | $  16,259    |  | $926,981  
|                              |                     |                     |       |              |  |           
|Securities held to maturity   |                    
|State and municipals          |                     | $     16,585        |       | $         78 |  | $    5,628
|                              |                     |                     |       |              |  |           

At
September 30, 2004, TSFG had 546 individual investments that were in an unrealized loss
position. The unrealized losses on investments in U.S. Treasury, U.S. Government agencies,
mortgage-backed securities, state and municipals, corporate bonds (a $609,000 unrealized
loss included in other investments), Federal National Mortgage Association preferred stock
(a $7.0 million unrealized loss included in other investments), and Federal Home Loan
Mortgage Corporation preferred stock (a $664,000 unrealized loss included in other
investments) summarized above were attributable to increases in interest rates, rather
than credit quality. TSFG believes it has the ability and intent to hold these investments
until a market price recovery or maturity, and therefore these investments are not
considered impaired on an other-than-temporary basis.

At
September 30, 2004, cost method investments totaling $3.9 million and $7.2 million were
included in available for sale securities and other assets, respectively. All of these
investments are privately held, their market values are not readily available, and
TSFGs percentage ownership and degree of management influence warrant the cost
method of accounting treatment. TSFGs management evaluates the fair value of these
cost method investments based on the investees ability to generate cash through its
operations, obtain alternative financing, and subjective factors. At September 30, 2004,
none of these cost method investments were considered impaired.

# (10)    INTANGIBLE ASSETS

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

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



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 nine months ended September
30, 2004:

|                                                        | CarolinaFirst Bank | MercantileBank | Other | Total  
|------------------------------------------------------- | ------------------ | -------------- | ----- | -------
|Balance, December 31, 2003                              |                    |                | $     | 206,780
|Purchase accounting adjustments related to acquisitions |                    |                |       | 3,059  
|Disposition                                             |                    |                |       | --     
|                                                        |                    |                |       |        
|Balance, September 30, 2004                             |                    |                | $     | 209,839
|                                                        |                    |                |       |        

The
goodwill for each reporting unit was tested for impairment as of June 30, 2004 in
accordance with SFAS No. 142, Goodwill and Other Intangible Assets. TSFG will
continue to update this testing annually as of June 30th each year. The fair
value of each reporting unit was estimated using a cash flow approach based upon the
expected present value of future cash flows and a market approach based upon recent
purchase transactions and public company market values. These valuations indicated that no
impairment charge was required as of the June 30, 2004 test date.

Amortization
of intangibles totaled $3.6 million for core deposit intangibles, $515,000 for non-compete
agreement intangibles, and $118,000 for customer list intangibles for the nine months
ended September 30, 2004. Amortization of intangibles totaled $2.0 million for core
deposit intangibles, $111,000 for non-compete agreement intangibles, and $93,000 for
customer list intangibles for the nine months ended September 30, 2003.

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

|                                         | CoreDepositIntangible | Non-CompeteAgreementIntangible | CustomerListIntangible | Total  
|---------------------------------------- | --------------------- | ------------------------------ | ---------------------- | -------
|2004                                     |                       | $  5,037                       |                        | $   792
|2005                                     |                       | 5,423                          |                        | 1,289  
|2006                                     |                       | 4,805                          |                        | 1,288  
|2007                                     |                       | 4,013                          |                        | 1,181  
|2008                                     |                       | 3,560                          |                        | 551    
|Aggregate total for all years thereafter |                       | 15,985                         |                        | 277    
|                                         |                       |                                |                        |        
|                                         |                       | $38,823                        |                        | $5,378 
|                                         |                       |                                |                        |        

# (11)    MORTGAGE SERVICING
RIGHTS

The
following summarizes the changes in the carrying amount of capitalized mortgage servicing
rights (MSRs) (in thousands), which are included in other assets, at and for
the nine months ended September 30:

|                                                          | 2004 | 2003   
|--------------------------------------------------------- | ---- | -------
|Balance at beginning of year                              |      | $ 1,781
|MSRs amortized                                            |      | (704   
|MSR impairment recovery (loss) from the valuation of MSRs |      | 136    
|                                                          |      |        
|                                                          |      | $ 1,213
|                                                          |      |        

The
aggregate fair value of capitalized MSRs at September 30, 2004, December 31, 2003, and
September 30, 2003 was $1.4 million, $1.9 million, and $2.1 million, respectively. At
September 30, 2004, December 31, 2003, and September 30, 2003, the valuation allowance for
capitalized MSRs totaled $1.7 million, $1.8 million, and $1.9 million, respectively.

The
estimated amortization expense for MSRs for the years ended December 31 is as follows:
$939,000 for 2004 and 2005, $39,000 for 2006, and none for all the years thereafter. The
estimated amortization expense is based on current information regarding loan payments and
prepayments. Amortization expense could change in future periods based on changes in the
volume of prepayments and economic factors.



# (12)    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.

# Environmental
Remediation Costs

TSFG
acquired the former Beacon Manufacturing Company facility (Beacon property) in
Swannanoa, North Carolina on October 3, 2003 as part of its acquisition of MBFC. 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. Demolition, removal, and
disposal of the debris in accordance with all state and federal regulatory guidelines are
now complete. In addition, clean up of the oil spill, including releases to the adjacent
Swannanoa River, is substantially completed. TSFG continues to investigate, and if
necessary remediate, any additional related environmental impacts and soil and groundwater
contamination attributable to the facility. The environmental remediation liability,
included in other liabilities, totaled $835,000 at September 30, 2004 and was based on
available information. TSFG continues to evaluate the reserve level and may make
adjustments as more information becomes known. There can be no guarantee that any
liability or costs arising out of this matter will not exceed any established reserves.
The related estimated net realizable value of the other real estate owned, included in
other assets, totaled $300,000 at September 30, 2004. TSFG entered into a contract to sell
the Beacon property to an independent third party, however this transaction is contingent
upon the purchaser conducting normal and customary due diligence and environmental review.

# (13)    SHARE INFORMATION

The
following is a summary of the earnings per share calculations:

|                                                 | Three Months Ended September 30, | 
|------------------------------------------------ | -------------------------------- | 
|
|Numerators                                       |                                  | 
|Income from continuing operations                |                                  | 
|Discontinued operations, net of income tax       |                                  | 
|                                                 |                                  | 
|Net income                                       |                                  | 
|                                                 |                                  | 
|Basic                                            |                                  | 
|Average common shares outstanding (denominator)  |                                  | 
|                                                 |                                  | 
|Earnings per share:                              |                                  | 
|Income from continuing operations                |                                  | 
|Discontinued operations                          |                                  | 
|                                                 |                                  | 
|Net income                                       |                                  | 
|                                                 |                                  | 
|Diluted                                          |                                  | 
|Average common shares outstanding                |                                  | 
|Average dilutive potential common shares         |                                  | 
|                                                 |                                  | 
|Average diluted shares outstanding (denominator) |                                  | 
|                                                 |                                  | 
|Earnings per share:                              |                                  | 
|Income from continuing operations                |                                  | 
|Discontinued operations                          |                                  | 
|                                                 |                                  | 
|Net income                                       |                                  | 
|                                                 |                                  | 



|                                                 | Nine Months Ended September 30, | 
|------------------------------------------------ | ------------------------------- | 
|
|Numerators                                       |                                 | 
|Income from continuing operations                |                                 | 
|Discontinued operations, net of income tax       |                                 | 
|                                                 |                                 | 
|Net income                                       |                                 | 
|                                                 |                                 | 
|Basic                                            |                                 | 
|Average common shares outstanding (denominator)  |                                 | 
|                                                 |                                 | 
|Earnings per share:                              |                                 | 
|Income from continuing operations                |                                 | 
|Discontinued operations                          |                                 | 
|                                                 |                                 | 
|Net income                                       |                                 | 
|                                                 |                                 | 
|Diluted                                          |                                 | 
|Average common shares outstanding                |                                 | 
|Average dilutive potential common shares         |                                 | 
|                                                 |                                 | 
|Average diluted shares outstanding (denominator) |                                 | 
|                                                 |                                 | 
|Earnings per share:                              |                                 | 
|Income from continuing operations                |                                 | 
|Discontinued operations                          |                                 | 
|                                                 |                                 | 
|Net income                                       |                                 | 
|                                                 |                                 | 

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 |                 |                        
|September 30, 2004         |                 | 171,525                
|September 30, 2003         |                 | 297,362                
|                           |                
|For the nine months ended  |                
|September 30, 2004         |                 | 111,573                
|September 30, 2003         |                 | 532,915                

# (14)    STOCK-BASED
COMPENSATION

At
September 30, 2004, TSFG had stock-based employee and director compensation option plans,
which are described more fully in Note 30 to the Consolidated Financial Statements in
TSFGs Annual Report on Form 10-K for the year ended December 31, 2003. TSFG accounts
for its option plans under the recognition and measurement principles of APB Opinion 25,
Accounting for Stock Issued to Employees, and related Interpretations
(APB Opinion 25). Accordingly, except in situations where accelerated vesting
occurs due to termination of employment, no compensation expense has been recognized for
the stock-based option plans. The following table illustrates the effect on net income and
earnings per share as if TSFG had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock Based Compensation (SFAS 123) to
stock-based compensation (dollars in thousands, except share data).



|                                                    | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |  |               
|--------------------------------------------------- | ------------------------------- | ------------------------------ |  | --------------
|
|Net income                                          |                                 |                                |  |               
|Net income, as reported                             |                                 | $     31,015                   |  | $     23,893  
|Deduct:                                             |                                
|Total stock-based employee compensation expense     |                                
|determined under fair value based method for        |                                
|all option awards, net of related income tax effect |                                 | 508                            |  | 799           
|                                                    |                                 |                                |  |               
|Pro forma net income                                |                                 | $     30,507                   |  | $     23,094  
|                                                    |                                 |                                |  |               
|                                                    |                                
|Basic earnings per share                            |                                
|As reported                                         |                                 | $         0.45                 |  | $         0.51
|Pro forma                                           |                                 | 0.44                           |  | 0.49          
|                                                    |                                
|Diluted earnings per share                          |                                
|As reported                                         |                                 | $         0.44                 |  | $         0.50
|Pro forma                                           |                                 | 0.43                           |  | 0.48          

# (15)    MERGER-RELATED AND
DIRECT ACQUISITION COSTS

In
connection with acquisitions, TSFG recorded pre-tax merger-related costs, included in
expense, 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):

|                                          | Nine Months EndedSeptember 30, |         
|----------------------------------------- | ------------------------------ | --------
|
|Merger-related costs                      |                                |         
|Compensation-related expenses             |                                | $  1,819
|System conversion costs                   |                                | 1,350   
|Impairment loss from write-down of assets |                                | --      
|Travel                                    |                                | 897     
|Advertising                               |                                | 198     
|Other                                     |                                | 1,975   
|                                          |                                |         
|                                          |                                | $  6,239
|                                          |                                |         
|                                          |                               
|Direct acquisition costs                  |                               
|Investment banking and professional fees  |                                | $  5,097
|Contract and lease terminations           |                                | 7,617   
|Severance                                 |                                | 915     
|                                          |                                |         
|                                          |                                | $13,629 
|                                          |                                |         

Severance
charges were associated with the involuntary termination of former acquiree employees who
held positions deemed redundant within the combined organization. These positions were
primarily in centralized corporate support and data processing areas. The contract
termination costs are primarily comprised of payments required to be made to certain
executives pursuant to their employment contracts. The lease termination costs were for
buyouts on leased facilities.

At
September 30, 2004, the accrual of merger-related costs totaled $799,000, and the
accrual of direct acquisition costs totaled $1.8 million. These accruals are included in
other liabilities.



# (16)    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 on investment securities, service charges on deposits, and other customer service
fees. 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, 2003.

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 September 30, 2004                |                    |                |       |                    |      
|Net interest income                                  |                    |                | $     | 66,826             |      
|Provision for loan losses                            |                    |                |       | 8,574              |      
|Noninterest income                                   |                    |                |       | 15,499             |      
|Noninterest expenses, excluding merger-related costs |                    |                |       | 41,406             |      
|Merger-related costs                                 |                    |                |       | 1                  |      
|Amortization of intangibles (a)                      |                    |                |       | 810                |      
|Income tax expense                                   |                    |                |       | 9,727              |      
|Discontinued operations, net of income tax           |                    |                |       | --                 |      
|Net income                                           |                    |                |       | 22,617             |      
|                                                     |                    |               
|Nine Months Ended September 30, 2004                 |                    |               
|Net interest income                                  |                    |                | $     | 193,671            |      
|Provision for loan losses                            |                    |                |       | 19,817             |      
|Noninterest income                                   |                    |                |       | 57,900             |      
|Noninterest expenses, excluding merger-related costs |                    |                |       | 121,450            |      
|Merger-related costs                                 |                    |                |       | 766                |      
|Amortization of intangibles (a)                      |                    |                |       | 2,416              |      
|Income tax expense                                   |                    |                |       | 34,220             |      
|Discontinued operations, net of income tax           |                    |                |       | --                 |      
|Net income                                           |                    |                |       | 75,318             |      
|                                                     |                    |               
|September 30, 2004                                   |                    |               
|Total assets                                         |                    |                | $     | 9,148,501          |      
|Total loans                                          |                    |                |       | 4,929,374          |      
|Total deposits                                       |                    |                |       | 4,750,370          |      



|                                                         | CarolinaFirst Bank | MercantileBank | Other | EliminatingEntries | Total
|-------------------------------------------------------- | ------------------ | -------------- | ----- | ------------------ | -----
|Three Months Ended September 30, 2003                    |                    |                |       |                    |      
|Net interest income                                      |                    |                | $     | 47,985             |      
|Provision for loan losses                                |                    |                |       | 3,723              |      
|Noninterest income                                       |                    |                |       | 22,126             |      
|Noninterest expenses, excluding merger-related costs     |                    |                |       | 37,581             |      
|Merger-related costs                                     |                    |                |       | 185                |      
|Amortization of intangibles (a)                          |                    |                |       | 310                |      
|Income tax expense                                       |                    |                |       | 8,499              |      
|Net income                                               |                    |                |       | 20,123             |      
|                                                         |                    |               
|Nine Months Ended September 30, 2003                     |                    |               
|Net interest income                                      |                    |                | $     | 150,964            |      
|Provision for loan losses                                |                    |                |       | 11,113             |      
|Noninterest income                                       |                    |                |       | 55,121             |      
|Noninterest expenses, excluding merger-related costs     |                    |                |       | 104,593            |      
|Merger-related costs                                     |                    |                |       | 616                |      
|Amortization of intangibles (a)                          |                    |                |       | 940                |      
|Income tax expense                                       |                    |                |       | 28,296             |      
|Minority interest in consolidated subsidiary, net of tax |                    |                |       | (2,012             | )    
|Net income                                               |                    |                |       | 59,455             |      
|                                                         |                    |               
|September 30, 2003                                       |                    |               
|Total assets                                             |                    |                | $     | 7,193,820          |      
|Total loans                                              |                    |                |       | 3,600,913          |      
|Total deposits                                           |                    |                |       | 3,835,269          |      

(a)    
          Included in noninterest expenses.

# (17)    SUBSEQUENT EVENT

On
October 27, 2004, TSFG signed a definitive agreement to acquire Pointe Financial
Corporation (Pointe), a bank holding company headquartered in Boca Raton,
Florida. At September 30, 2004, Pointe had total assets of approximately $428.9 million
and operated primarily through its banking subsidiary, PointeBank, which had 10 branches
in Dade, Broward and Palm Beach counties. At closing, TSFG will issue 2,554,022
shares of its common stock and $24.5 million in cash in exchange for all common stock and
stock obligations of Pointe. The transaction, which is expected to close in April 2005,
will be accounted for using the purchase method of accounting, and is subject to
regulatory approvals and Pointe shareholder approvals.

# (18)    MANAGEMENTS
OPINION

The
consolidated financial statements in this report are unaudited, and the consolidated
balance sheet at December 31, 2003 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.



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 flow of The
South Financial Group, Inc. and its subsidiaries (collectively, TSFG). TSFG
may also be referred to herein as we, us, or our,
except where the context requires otherwise. 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, 2003. Results of operations
for the nine months ended September 30, 2004 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:

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Such
forward-looking statements speak only as of the date on which such statements are made. 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
Securities and Exchange Commission, 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, in
accordance with common industry practice, certain designated net interest income amounts
are presented on a tax-equivalent basis. 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. 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

Founded
in 1986, TSFG is a financial holding company that operates primarily in fast-growing
banking markets in the Southeast. TSFG had $13.7 billion in total assets with 153 branch
offices in South Carolina, North Carolina, and Florida at September 30, 2004. TSFG
operates primarily through two subsidiary banks:

|  | 
|- | 
| | 
| | 

TSFG uses a super-community bank
strategy serving small and middle market businesses and retail consumers by offering a
broad range of financial services, including cash management, investments, insurance, and
trust services.

On
July 16, 2004, TSFG completed its acquisitions of CNB Florida Bancshares, Inc. (CNB
Florida) and Florida Banks, Inc. (Florida Banks). CNB Florida, which had
approximately $840 million in assets, operated through 16 branch offices in Northeast
Florida. Florida Banks, which had approximately $1.0 billion in assets, operated through
seven banking centers in the Florida markets of Tampa, Jacksonville, Gainesville, Ft. Lauderdale, Ocala, and West
Palm Beach. TSFG completed the system conversions associated with these acquisitions.

Approximately
45% of TSFGs growth has come through acquisitions. TSFG will continue to consider
acquisitions that meet its acquisition criteria of strategic franchise enhancement,
accretion to cash earnings per share within 12 months, and consistency with three-year
performance goals. In October 2004, TSFG announced a definitive agreement to acquire
Pointe Financial Corporation (Pointe), a bank holding company headquartered in
Boca Raton, Florida.

The
average projected growth rates for TSFGs markets exceed the Southeastern and United
States medians for household growth and per capita income growth. TSFG believes this
market strength enhances TSFGs opportunities to grow loans and deposits and provide
noninterest income products and services. TSFG ranks fourth in total deposit share in
South Carolina. In Florida, TSFG ranks among the top ten banks in Tampa Bay, Orlando, and
Jacksonville in terms of deposit market share. After TSFGs pending merger with
Pointe is completed, TSFG expects to rank fourteenth in total deposit share in the entire
state of Florida. Following the merger, approximately 43% of TSFGs total deposits will
be in Florida.

For
the first nine months of 2004, TSFG reported net income of $93.3 million, an increase of
40.0% from $66.6 million for the nine months ending September 30, 2003. Double-digit
growth in total revenues, slower growth in noninterest expenses, and effective merger
integration drove the increase. For the first nine months of 2004, net income per diluted
share totaled $1.46, a 5.0% increase from $1.39 per diluted share for the first nine
months of 2003. For the same period, average diluted shares outstanding increased 33.4%,
principally as a result of the acquisitions of MountainBank Financial Corporation
(MBFC or MountainBank), CNB Florida, and Florida Banks, and a
common equity offering, which occurred in the fourth quarter of 2003.

For
the first nine months of 2004, net interest income, TSFGs primary source of revenue,
accounted for 76.8% 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 nine months ended September 30, 2004 increased 35.1% over the corresponding
period in 2003,



principally due to strong organic loan growth, growth from acquisitions,
and a higher net interest margin. Reflecting the high levels of organic loan growth and
the positive impact of recent acquisitions, securities as a percentage of total assets
declined to 31.6% at September 30, 2004 from 38.1% at September 30, 2003.

TSFG
believes that noninterest income, particularly fee income from providing other products
and services, represents one of its best opportunities for revenue growth. Noninterest
income increased to $79.4 million for the first nine months of 2004, up 10.9% from $71.6
million for the first nine months of 2003. For the first nine months of 2004, noninterest
income included $10.0 million in gains on available for sale securities (including equity
investments) and a $2.4 million gain on disposition of land associated with a conservation
grant, compared with $12.0 million in gains on available for sale securities (including
equity investments) and a $601,000 gain on the sale of a branch office in the first nine
months of 2003. Excluding these gains on asset sales, customer fee income (service charges
on deposit accounts, debit card income, and customer service fee income), bank-owned life
insurance, merchant processing income, and mortgage banking income represent TSFGs
largest sources of noninterest income, accounting for 77.7% of noninterest income for the
nine months ended September 30, 2004.

For
the first nine months of 2004, noninterest expenses totaled $181.6 million, which included
$10.9 million from non-operating expenses (principally merger-related costs, conservation
grant of land and loss on early extinguishment of debt). Excluding the non-operating
items, noninterest expenses increased by 18.3% for the first nine months of 2004, compared
with the first nine months of 2003. Personnel expense, the largest component, accounts for
close to half of total noninterest expenses, excluding non-operating items.

TSFGs
strong loan growth continued during the first nine months of 2004. Loans held for
investment at September 30, 2004 increased 64.4% over September 30, 2003. Adjusting for
$2.2 billion in loans held for investment acquired in the CNB Florida, Florida Banks, and
MountainBank mergers, $2.0 million acquired in a branch office acquisition, and $40.4
million sold in the Community National Bank disposition (a small national bank acquired in
the MountainBank acquisition), the organic loan growth for this period was 18.6%.
TSFGs loan growth was well-diversified throughout its markets.

At
September 30, 2004, nonperforming assets as a percentage of loans held for investment and
foreclosed property was 0.83% compared to 1.33% at September 30, 2003. This follows an
improving trend that began in the first quarter of 2003. Net loan charge-offs for the
first nine months of 2004 totaled 0.44%, down from 0.69% for the first nine months of
2003. Loan portfolio credit quality can significantly impact earnings. TSFGs
provision for loan losses increased to $24.2 million for the nine months ended September
30, 2004 from $16.3 million for the nine months ended September 30, 2003, primarily as a
result of the increased provision associated with strong loan growth.

TSFG
gained core deposits and enhanced its deposit mix, reflecting acquisitions and successful
sales and promotional campaigns. Average deposit transaction account balances increased
46.0% during the first nine months of 2004, driven by growth in money market and
noninterest-bearing deposits.  Average deposit
transaction account balances as a percentage of average total deposits increased to 64.9%
for the nine months ended September 30, 2004 from 60.5% for the same period in 2003. For the first nine months of 2004, organic transaction deposit growth, which excludes the net acquired transaction deposits, totaled 11.8%

TSFGs
tangible equity to tangible asset ratio increased to 5.92% at September 30, 2004 from
4.58% at September 30, 2003, primarily due to $161.1 million in new capital raised in
November 2003 and retention of earnings.

# 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. In order to
understand our financial position and results of operations, it is important to understand
our more critical accounting policies and the extent to which we use judgment and
estimates in applying those policies. The more critical accounting policies include
TSFGs accounting for securities, loans, allowance for loan losses, intangibles,
acquisitions, derivatives, contingent liabilities, stock-based compensation, and income
taxes. In particular, TSFG considers its policies regarding the allowance for loan losses,
income taxes, and accounting for acquisitions to be its most critical accounting policies
due to the significant degree of the levels of subjectivity and management judgment
necessary to account for these matters. 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 (the Allowance) represents managements
estimate of probable losses inherent in the loan 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,
assigning specific allocations for impaired loans, and setting amounts within probable
loss ranges (from 95% to 105% of the adjusted historical loss ratios) for each segment.
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, loan portfolio quality
trends, and uncertainty in current economic and business conditions.

Assessing
the adequacy of the Allowance is a process that requires considerable judgment. Management
considers the period-end 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 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 us to adjust our Allowance based on
information available to them at the time of their examination. Historically, TSFGs
Allowance reported on its consolidated financial statements has 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.

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.

During
the third quarter 2004, the Internal Revenue Service completed its examination of
TSFGs 1999 through 2002 federal income tax returns. TSFG did not receive any adverse
rulings or additional tax assessments as a result of these examinations.

Accounting for
Acquisitions

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. In addition, purchase acquisitions
typically result in goodwill or other intangible assets, which are subject to periodic
impairment tests, on an annual basis, or more often, if events or circumstances indicate
that there may be impairment. These tests, which TSFG performed as of June 30, 2004, 2003,
and 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.

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, 2004 indicated that no impairment charge was required as of that
test date. Historically, TSFGs acquisition intangibles 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.

Please
see the Annual Report of TSFG on Form 10-K for the year ended December 31, 2003, Item 8,
Note 1 to the Consolidated Financial Statements for a description of TSFGs
significant accounting policies.

# Acquisitions and Sales

The
following table summarizes TSFGs acquisitions completed during 2003 and during the
nine months ended September 30, 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                   |                 |             |              |                           |                              |         
|CNB Florida                         |                 |            
|Lake City, Florida                  |                 |             | 7/16/04      |                           |                              | $       
|                                    |                 |            
|Florida Banks                       |                 |            
|Jacksonville, Florida               |                 |             | 7/16/04      |                           |                              |         
|                                    |                 |            
|MBFC                                |                 |            
|Hendersonville, North Carolina      |                 |             | 10/03/03     |                           |                              |         
|                                    |                 |            
|Insurance agency/other acquisitions |                 |            
|Summit Title, LLC                   |                 |            
|Hendersonville, North Carolina      |                 |             | 04/12/04     |                           |                              |         
|                                    |                 |            
|Allied Assurance                    |                 |            
|Columbia, South Carolina            |                 |             | 09/22/03     |                           |                              |         
|                                    |                 |            
|American Pensions, Inc.             |                 |            
|Mount Pleasant, South Carolina      |                 |             | 04/30/03     |                           |                              |         

|(1) | Book value at the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | TSFG obtained third-party valuations of certain assets and liabilities (as of
               the acquisition date) by the end of the third quarter; however,
               managements comprehensive analyses of those valuations are not complete.
               Therefore, the estimated fair values of the assets and liabilities assumed and
               the amount allocated to goodwill is subject to adjustment in the fourth quarter
               2004 as well as within one year of the acquisitions as additional fair value
               information becomes available. See Item 1, Note 4 to the consolidated financial
               statements for additional information about the CNB Florida and Florida Banks
               acquisitions.



|(3) | TSFG agreed to issue annual earnout shares, valued at the time of issuance at
               $66,906, for each of April 12, 2005, 2006, 2007, and 2008, based on revenue
               retention and earnings achievement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | TSFG agreed to issue annual earnout shares, valued at the time of issuance at
               approximately $45,000, for each of August 31, 2004, 2005, 2006, and 2007, based
               on revenue retention.          

As
part of its acquisition strategy, TSFG considers acquisitions in its targeted footprint in
markets typically growing faster than the United States and Southeast medians for
household growth and per capita income growth. Table 2 summarizes the geographic markets
for TSFGs bank acquisitions completed during 2003 and during the first nine months
of 2004.

Table 2
SUMMARY OF BANK ACQUISITIONS - GEOGRAPHIC MARKETS

|              | Acquisition         Date | NumberofBranches | Geographic Markets
|------------- | ------------------------ | ---------------- | ------------------
|CNB Florida   |                          | 7/16/04          |                   
|Florida Banks |                          | 7/16/04          |                   
|MBFC          |                          | 10/03/03         |                   

Branch acquisition

In
August 2004, Carolina First Bank acquired a branch office (including related loans and
deposits) located in Lake Lure, North Carolina from an unrelated financial institution.
See Item 1, Note 5 to the consolidated financial statements for additional information.

Sale

On
June 28, 2004, TSFG completed the sale of substantially all of the assets and all
liabilities of Community National Bank headquartered in Pulaski, Virginia. TSFG acquired
Community National Bank in connection with its October 2003 acquisition of MBFC and it was
outside TSFGs targeted geographic market. In connection with this disposition, TSFG
sold $40.4 million in loans and $60.0 million in deposits, and recorded reductions of
goodwill totaling $6.6 million and core deposit intangibles totaling $864,000. This
transaction resulted in no book gain or loss. Since Community National Bank was immaterial
to TSFGs financial statements, presentation as a discontinued operation is not
warranted. For the period from January 1, 2004 to June 28, 2004, Community National
Banks net income totaled $91,000.

Subsequent Event 
Pending Acquisition

On
October 27, 2004, TSFG signed a definitive agreement to acquire Pointe, a bank holding
company headquartered in Boca Raton, Florida. At September 30, 2004, Pointe had total
assets of approximately $428.9 million and operated primarily through its banking
subsidiary, PointeBank, which had 10 Florida branches in Dade, Broward, and Palm Beach
counties. At closing, TSFG will issue 2,554,022 shares of its common stock and $24.5
million in cash in exchange for all common stock and stock obligations of Pointe. This
acquisition builds on TSFGs existing Florida franchise, advancing efforts to expand
in markets with favorable population and per capita income growth prospects. The
transaction, which is expected to close in April 2005, will be accounted for using the
purchase method of accounting and is subject to regulatory approvals and Pointe
shareholder approvals.

# Balance Sheet Review

Loans

TSFG
focuses its lending activities on small and middle market businesses and individuals in
its geographic markets. At September 30, 2004, outstanding loans totaled $8.0 billion,
which equaled 102.5% of total deposits and 58.7% 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, North Carolina, and Florida.



At September 30, 2004, less than 5% of the
portfolio was unsecured. The portfolio contains no highly leveraged
transactions, as defined by regulatory authorities.

Loans
held for investment increased $3.1 billion, or 64.4%, to $8.0 billion at September 30,
2004 from $4.9 billion at September 30, 2003. This increase included $2.2 million in net
acquired loans held for investment ($716.3 million, $772.3 million, and $772.8 million
from the acquisitions of CNB Florida, Florida Banks, and MountainBank, respectively, and
$2.0 million from an August 2004 branch acquisition, net of $40.4 million sold in
connection with the disposition of Community National Bank). For the same period, organic
growth in loans held for investment, which excludes the net acquired loans, totaled 18.6%.
Organic loan growth consisted primarily of commercial, indirect consumer and home equity
loans. TSFG sells a substantial majority of its residential mortgage loans at origination
in the secondary market. Loans held for sale decreased $23.9 million to $21.9 million at
September 30, 2004 from $45.8 million at September 30, 2003, primarily related to lower
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.

Table 3
LOAN PORTFOLIO COMPOSITION
(dollars in thousands)

|                                                 | September 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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)

|                                        | September 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 five years.



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 these
loans.

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

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 but are judged
sellable with seasoning. 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. Due to
sustained strong population growth and household income growth, real estate development
and construction are major components of the economic activity that occurs in TSFGs
markets. The risk attributable to this concentration is managed by focusing our lending to
markets we are familiar with and to borrowers who have proven track records and who we
believe possess the financial means to weather adverse market conditions. In its
commercial real estate lending, TSFG does not make loans without recourse to the borrower,
loans without personal guarantees from the owners, or loans to cash out equity in
commercial properties. See Table 5 for TSFGs geographic and property type
diversification of its commercial real estate loans. 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. Table 5 sorts the commercial real estate portfolio by geography and property
type.



Table 5
COMMERCIAL REAL ESTATE LOANS
(dollars in thousands)

|                                                           | September 30, 2004 | December 31, 2003 |   |          
|---------------------------------------------------------- | ------------------ | ----------------- | - | ---------
|
|Commercial Real Estate Loans by Geographic Diversification |                    |                   |   |          
|Western North Carolina (Hendersonville/Asheville)          |                    |                   | $ | 497,758  
|North Coastal South Carolina (Myrtle Beach)                |                    |                   |   | 364,237  
|Upstate South Carolina (Greenville)                        |                    |                   |   | 345,885  
|Tampa Bay Florida                                          |                    |                   |   | 345,560  
|Midlands South Carolina (Columbia)                         |                    |                   |   | 309,326  
|South Coastal South Carolina (Charleston)                  |                    |                   |   | 268,267  
|Northeast Florida (Jacksonville)                           |                    |                   |   | 231,841  
|Central Florida (Orlando)                                  |                    |                   |   | 219,652  
|Alachua Florida (Gainesville)                              |                    |                   |   | 151,054  
|North Central Florida                                      |                    |                   |   | 112,251  
|Greater South Charlotte South Carolina (Rock Hill)         |                    |                   |   | 101,790  
|Other (1)                                                  |                    |                   |   | 202,454  
|                                                           |                    |                   |   |          
|Total commercial real estate loans                         |                    |                   | $ | 3,150,075
|                                                           |                    |                   |   |          
|                                                           |                    |                  
|Commercial Real Estate Loans by Product Type               |                    |                  
|Commercial construction/development                        |                    |                   | $ | 829,031  
|Mixed use                                                  |                    |                   |   | 360,817  
|1-4 family residential                                     |                    |                   |   | 345,405  
|Hotel/motel                                                |                    |                   |   | 255,143  
|Retail                                                     |                    |                   |   | 239,382  
|Undeveloped land                                           |                    |                   |   | 230,749  
|Residential construction                                   |                    |                   |   | 209,921  
|Multi-family residential                                   |                    |                   |   | 178,849  
|Other (1)                                                  |                    |                   |   | 500,778  
|                                                           |                    |                   |   |          
|Total commercial real estate loans                         |                    |                   | $ | 3,150,075
|                                                           |                    |                   |   |          

(1)      
          Other includes all loans in categories smaller than the lowest percentages shown
          above. Note: At September 30, 2004 and December 31, 2003, average loan size for
          commercial real estate loans totaled $281,000          and $324,000, respectively.

TSFG
has set a house-lending limit of $25 million, below the legal lending limit of $73.0
million for Carolina First Bank and $67.3 million for Mercantile Bank, respectively at
September 30, 2004. In accordance with TSFGs lending policies, Board approval must
be received in order for a lending commitment to be made in excess of $25 million. At
September 30, 2004, TSFG has two relationships in excess of the house-lending limit of $25
million, which total $46.1 million and $32.6 million. Board approval was granted for both
of these relationships. The 20 largest relationships have an aggregate outstanding
principal balance of $298.1 million, or 3.7% of total loans held for investment, at
September 30, 2004.

At
September 30, 2004, the loan portfolio included commitments totaling $297.8 million in
shared national credits (multi-bank credit facilities of $20 million or more).
Outstandings under these commitments totaled $100.1 million. By policy, TSFG participates
in shared national credits only if the borrower is headquartered or conducts business in
our market, the borrower is in an industry familiar to us, we meet directly with the
borrower to conduct our analysis, and the opportunity exists to establish an ongoing
banking relationship with us. None of these credits were classified in the most recent
report on shared national credits prepared by the regulatory agencies.



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 presents our credit quality indicators.

Table 6
NONPERFORMING ASSETS
(dollars in thousands)

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

|(1) | 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. See (3) below.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | At September 30, 2004, personal property repossessions totaled $639,000 and were
                    included in nonperforming assets. Personal property repossessions totaled $1.1
                    million and $1.0 million at September 30, 2003 and December 31, 2003,
                    respectively, and were excluded from nonperforming assets.     
|(3) | TSFGs accrued interest reserve associated with these loans totaled
                    $509,000 and $474,000 at September 30, 2003 and December 31, 2003, respectively.                                                                                                                                                                                         

TSFGs
nonperforming asset ratio improved each quarter since December 31, 2002 aided by the
resolution of certain identified problem loans purchased from Rock Hill Bank & Trust
(the Rock Hill Workout Loans) in October 2002. Net loan charge-offs decreased
to 0.44% of average loans held for investment for the first nine months of 2004 from 0.69%
for the first nine months of 2003, primarily due to the disposition of fully-reserved Rock
Hill Workout Loans in 2003. Third quarter 2004 net loan charge-offs increased to 0.51%
from 0.36% in second quarter 2004, with the resolution of certain problem loans, which
were reserved in prior quarters. The allowance coverage increased to 1.67 times
nonperforming loans at September 30, 2004 from 1.14 times at September 30, 2003.



Management
believes that loss exposure in its loan portfolio is identified, adequately reserved for
in a timely manner, and closely monitored to ensure that changes are promptly addressed in
its analysis of allowance for loan loss adequacy. Future credit quality trends depend in
part on the direction of the economy. Current economic outlook does not provide a clear
signal of the economic direction. If the economy continues to improve, TSFG expects the
nonperforming asset ratio to continue declining slightly. TSFG expects the net loan
charge-off ratio to remain in the 0.50% range for the rest of 2004 and then decline in
2005.

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 theNine MonthsEnded September 30, | At and For theYear EndedDecember 31, | 
|------------------------------------ | -------------------------------------------- | ------------------------------------ | 
|
|Impaired loans                       |                                              | $51,881                              | 
|Average investment in impaired loans |                                              | 49,703                               | 
|Related allowance                    |                                              | 15,001                               | 
|Foregone interest                    |                                              | 2,074                                | 

Allowance for Loan
Losses

The
allowance for loan losses represents managements estimate of probable losses
inherent in the loan portfolio. The adequacy of the allowance for loan losses (the
Allowance) is analyzed quarterly. For purposes of this analysis, adequacy is
defined as a level sufficient to absorb probable 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 are individually assessed for
impairment under 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, 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.



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.

The
Allowance declined as a percentage of loans held for investment to 1.21% at September 30,
2004 from 1.30% at September 30, 2003. This decline was primarily due to charge-offs of
losses on Rock Hill Workout Loans, which were reserved at the time of acquisition. See
Credit Quality.

Table 8,
which summarizes the changes in the Allowance, provides additional information with
respect to the activity in the Allowance.

Table 8
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)

|                                                          | At and ForThe Nine MonthsEnded September 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                                            |                                              |                                      |  

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.
In addition, TSFG has engaged in, and expects to continue to engage in, hedging activities
to reduce interest rate risk associated with the investment securities and other balance
sheet items. Table 9 shows the carrying values of the investment securities portfolio.



Table 9
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
(dollars in thousands)

|                                         | September 30, | December 31, |  
|---------------------------------------- | ------------- | ------------ | -
|
|Trading (at fair value)                  |               |              |  
|U.S. Government agencies                 |               |              | $
|State and municipal                      |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|Available for Sale (at fair value)       |               |             
|Mortgage-backed securities               |               |              |  
|U.S. Government agencies                 |               |              |  
|U.S. Treasury                            |               |              |  
|State and municipal                      |               |              |  
|Other investments:                       |               |             
|Corporate bonds                          |               |              |  
|Preferred stock                          |               |              |  
|Federal Home Loan Bank ("FHLB") stock    |               |              |  
|Community bank stocks                    |               |              |  
|NetBank, Inc. ("NetBank") common stock   |               |              |  
|Other equity investments                 |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|Held to Maturity (at amortized cost)     |               |             
|State and municipal                      |               |              |  
|Other investments                        |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|                                         |               |              |  
|Total                                    |               |              | $
|                                         |               |              |  
|                                         |               |             
|Percentage of Total Securities Portfolio |               |             
|Mortgage-backed securities               |               |              |  
|U.S. Government agencies                 |               |              |  
|U.S. Treasury                            |               |              |  
|State and municipal                      |               |              |  
|Other investments                        |               |              |  
|                                         |               |              |  
|Total                                    |               |              |  
|                                         |               |              |  

At
September 30, 2004, TSFGs investment securities portfolio declined to 31.6% of total
assets from 37.4% and 38.1% at December 31, 2003 and September 30, 2003, respectively.
This decline is partially attributable to the July 2004 acquisitions and is consistent
with TSFGs long-term plan to reduce the level of its securities portfolio as a
percentage of total assets, as loan growth replaced some securities balances. During the
first nine months of 2004, loan growth outpaced deposit growth, and the resulting
shortfall was funded with cash flows from the securities portfolio and increases in
short-term borrowings.

Securities
(i.e., trading securities, securities available for sale, and securities held to maturity)
excluding the unrealized loss on available for sale securities averaged $4.1 billion in
the first nine months of 2004, 24.8% above the average for the corresponding period in
2003 of $3.3 billion. The increase was attributable to securities purchased to leverage
available capital and purchases made in response to the acquisitions of CNB Florida,
Florida Banks and MBFC, which were done to manage the interest rate and prepayment risks
associated with the growth of the overall balance sheet. The average portfolio yield
increased for the nine months ended September 30, 2004 to 4.02% from 3.90% in the first
nine months of 2003. The securities yield increased in part due to a $4.8 million decrease
in MBS premium amortization for the first nine months 2004 compared to the same period in
2003, due to higher MBS prepayments in 2003. The decrease in the MBS premium amortization
was partially offset by sales of higher-yielding securities and the purchase of
lower-yielding, shorter duration securities.



For
the remainder of 2004, TSFG expects loan growth to outpace deposit growth. The projected
cash flows from the securities portfolio are sufficient, under different interest rate
scenarios, including a rising rate scenario, to provide much of the necessary funding.
TSFG strives to keep the weighted average life and 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. In addition,
shorter portfolio duration should reduce TSFGs exposure to rising interest rates and
extension risk. Under both the current level of interest rates and under expected future
rate scenarios, TSFG believes its securities portfolio will continue to provide sufficient
liquidity.

The
duration of the debt securities portfolio decreased to approximately 2.9 years at
September 30, 2004 from approximately 3.5 years at December 31, 2003. At September 30,
2003, the duration of the debt securities portfolio was approximately 5.0 years.

Nearly
all of these securities are rated AAA so the credit risk is minimal. Approximately 40% of
mortgage-backed securities (MBS) are collateralized mortgage obligations
(CMOs), the majority of which are short-term with a total duration of 2.5
years. TSFG manages the MBS portfolio to maintain a short duration and repricing horizon.
At September 30, 2004, approximately 36% of the MBS portfolio was variable rate.

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
available for sale portfolio constituted 98.2% of total securities at September 30, 2004.
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.

The
net unrealized loss on available for sale securities (pre-tax) totaled $21.2 million at
September 30, 2004, compared with a $11.5 million loss at December 31, 2003. This
increased unrealized loss was due in part to a $4.6 million decrease in the unrealized
gain on TSFGs investment in NetBank common stock. TSFG sold 346,000 shares of
NetBank common stock during the period and recognized a gain of $3.8 million. In addition,
TSFG had unrealized gains totaling $1.6 million and $1.4 million for investments in CNB
Florida and Florida Banks, respectively, at December 31, 2003. These unrealized gains are
not present at September 30, 2004 since TSFG acquired these entities and canceled the
stock investment effective with the acquisition closing date of July 16, 2004 (see
Acquisitions). The unrealized loss related to MBS increased by $4.0 million,
due to increases in long-term interest rates in the first nine months of 2004, which also
contributed to the increase in unrealized loss during the period. TSFG believes it has the
ability and intent to hold its investments that are in unrealized loss positions until a market
price recovery or maturity, and therefore these investments are not considered impaired on
an other-than-temporary basis. See Item 1, Note 9 to the consolidated financial statements
for additional information.

Community
Bank Stocks. At September 30, 2004, TSFG had equity investments in 15 community banks
located in the Southeast with a $9.1 million cost basis and pre-tax market value of $12.8
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 $610.3 million at September 30, 2004, up from $245.8 million at September
30, 2003, principally from the CNB Florida, Florida Banks, and MountainBank acquisitions.
See Item 1, Note 10 to the consolidated financial statements for the types and balances of
intangible assets.

Deposits

Deposits
remain TSFGs primary source of funds for loans and investments. Average deposits
provided funding for 62.0% of average earning assets in the first nine months of 2004 and
60.8% in the first nine months of 2003. 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 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)

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

At
September 30, 2004, deposits were up $2.5 billion from September 30, 2003. This increase
included $2.3 billion in net acquired deposits ($755.6 million, $851.3 million, and $778.3
million from the acquisitions of CNB Florida, Florida Banks, and MountainBank,
respectively, and $9.5 million from an August 2004 branch acquisition, net of $60.0
million sold in connection with the disposition of Community National Bank). The net
acquired deposits accounted for 91.7% of the increase in deposits since September 30,
2003.

The
increase in deposits is partially due to an increase of $616.4 million in brokered
deposits, which includes a significant amount in brokered deposits acquired from the acquisition
of Florida Banks. TSFG considers these funds to be an attractive alternative funding
source available to use while continuing its efforts to maintain and grow its local
deposit base.

TSFG
transaction accounts increased through increased sales referrals and targeted deposit
promotions. During the first nine months of 2004, TSFGs organic growth in
noninterest-bearing deposits, which excludes net acquired noninterest deposits, totaled
approximately 15% annualized. For this same period, organic growth in transaction account
deposits, which excludes net acquired transaction account deposits, totaled approximately
12% annualized.

Table
13 in Results of Operations  Net Interest Income details average
balances for the deposit portfolio for the three and nine months ended September 30, 2004
and 2003. Comparing the nine months ending September 30, 2004 and 2003, average money
market accounts increased $1.0 billion, or 71.9%, and average noninterest-bearing deposits
increased $236.6 million, or 31.9%. For the same period, average time deposits increased
$394.6 million, or 20.6%, which includes a $364.4 million increase in average brokered
deposits.

As
part of its overall funding strategy, TSFG focuses on the mix of deposits and, in
particular, increasing the level of transaction accounts. For the nine months ended
September 30, 2004, transaction accounts made up 64.9% of average deposits, compared with
60.5% for the nine months ended September 30, 2003. These trends reflect TSFGs
efforts 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 of achieving this goal.



At
September 30, 2004, total deposits for Bank CaroLine, an Internet banking division of
Carolina First Bank, totaled $28.8 million, up from $24.7 million as of September 30,
2003. Deposits generated through Bank CaroLine generally receive higher rates than those
offered by TSFGs branch locations as a result of the less expensive Internet
delivery channel. Deposits for Bank CaroLine principally increased due to the acquisition
of MountainBank. MountainBank offered Internet-only time deposits that were advertised
exclusively on the Internet.

Time
deposits of $100,000 or more are generally from customers within our local markets. As
such, TSFG believes these deposits have a greater degree of stability than is typically
associated with this source of funds at other institutions.

Borrowed Funds

Table
11 shows the breakdown of total borrowings by type.

Table 11
TYPE OF BORROWINGS
(dollars in thousands)

|                                                       | September 30, | December 31, |  
|------------------------------------------------------ | ------------- | ------------ | -
|
|Short-Term Borrowings                                  |               |              |  
|Federal funds purchased and repurchase agreements      |               |              | $
|Commercial paper                                       |               |              |  
|Treasury, tax and loan note                            |               |              |  
|Line of credit to unaffiliated bank and other          |               |              |  
|                                                       |               |              |  
|                                                       |               |              |  
|                                                       |               |              |  
|                                                       |               |             
|Long-Term Borrowings                                   |               |             
|Repurchase agreements                                  |               |              |  
|FHLB advances                                          |               |              |  
|Subordinated notes (1)                                 |               |              |  
|Debt associated with trust preferred securities (1)    |               |              |  
|Mandatorily redeemable preferred stock of subsidiary   |               |              |  
|Employee stock ownership plan note payable             |               |              |  
|Note payable                                           |               |              |  
|Purchase accounting premiums and deferred charges, net |               |              |  
|                                                       |               |              |  
|                                                       |               |              |  
|                                                       |               |              |  
|Total borrowings                                       |               |              | $
|                                                       |               |              |  

|(1) | In accordance with the revised Financial Accounting Standards Board
               Interpretation No. 46, (FIN 46), Consolidation of Variable
               Interest Entities, which addresses consolidation by business enterprises
               of variable interest entities, TSFG deconsolidated five trust subsidiaries at
               December 31, 2003, which had been formed to raise capital by issuing preferred
               securities to institutional investors. The deconsolidation of these wholly-owned
               subsidiaries, increased TSFGs other assets by $3.6 million, increased
               long-term debt (specifically subordinated notes) $119.1 million and decreased
               debt associated with trust preferred securities by $115.5 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

TSFG
uses both short-term and long-term borrowings to partially fund growth of earning assets
in excess of deposit growth. In the first nine months of 2004, average borrowings totaled
$3.9 billion, compared with $3.1 billion for the same period in 2003. This increase was
primarily attributable to an increased reliance on borrowings to support earning asset
growth and the reclassification of minority interest in consolidated subsidiary to
long-term debt. TSFG enters into interest rate swap agreements to hedge interest rate risk
related to borrowings.

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 are 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.

In
March 2004, TSFG recorded a loss on early extinguishment of debt totaling $1.4 million for
prepayment penalties for repurchase agreement borrowings totaling $185.0 million with
variable interest rates that would have changed to fixed at periods ranging from 6 months
to 18 months. The fixed interest rates on these repurchase agreements ranged from 1.54% to
2.99%. Due to a change in estimates related to step-up and callable repurchase agreements
(including the retired debt), TSFG reversed $900,000 in interest expense accrued at
December 31, 2003. TSFG continues to evaluate the relative cost and benefit of incurring
prepayment penalties from the early extinguishment of debt.

Environmental
Remediation Costs

TSFG
acquired the former Beacon Manufacturing Company facility (Beacon property) in
Swannanoa, North Carolina on October 3, 2003 as part of its acquisition of MBFC. 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. Demolition, removal, and
disposal of the debris in accordance with all state and federal regulatory guidelines are
now complete. In addition, clean up of the oil spill, including releases to the adjacent
Swannanoa River, is substantially completed. TSFG continues to investigate, and if
necessary remediate, any additional related environmental impacts and soil and groundwater
contamination attributable to the facility. The environmental remediation liability,
included in other liabilities, totaled $835,000 at September 30, 2004 and was based on
available information. TSFG continues to evaluate the reserve level and may make
adjustments as more information becomes known. There can be no guarantee that any
liability or costs arising out of this matter will not exceed any established reserves.
The related estimated net realizable value of the other real estate owned, included in
other assets, totaled $300,000 at September 30, 2004. TSFG entered into a contract to sell
the Beacon property to an independent third party, however this transaction is contingent
upon the purchaser conducting normal and customary due diligence and environmental review.

Capital Resources and
Dividends

Total
shareholders equity amounted to $1.4 billion, or 10.1% of total assets, at September
30, 2004, compared with $656.7 million, or 7.1% of total assets, at September 30, 2003. At
December 31, 2003, total shareholders equity was $979.9 million, or 9.1% of total
assets. The increase in shareholders equity since September 30, 2003 was primarily
from the issuance of common stock for the CNB Florida, Florida Banks, and MBFC
acquisitions and from a fourth quarter 2003 equity offering, as well as the retention of
earnings. Cash dividends paid and the increase in the 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.

TSFGs
unrealized loss on available for sale securities, net of tax, which is included in
accumulated other comprehensive income, was $13.3 million at September 30, 2004, compared
with $7.0 million at December 31, 2003. For discussion on the primary reasons for the
unrealized decline in the market value of available for sale securities, see
Securities. The unrealized loss at September 30, 2003 was $1.2 million. Since
TSFG has the ability and intent to hold its investments that are in unrealized loss positions until
a market price recovery or maturity, these investments are not considered impaired on an
other-than-temporary basis.

Book
value per share at September 30, 2004 and 2003 was $19.50 and $13.95, respectively.
Tangible book value per share at September 30, 2004 and 2003 was $10.89 and $8.73,
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
September 30, 2004. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary actions by regulators, which, if
undertaken, could have a direct material effect on its consolidated financial statements.



Table
12 sets forth various capital ratios for TSFG and its Subsidiary Banks. Due to the
adoption of FIN 46, TSFG no longer reflects debt associated with trust preferred
securities on its consolidated balance sheets. Under current regulatory guidelines, these
securities continue to qualify for tier 1 capital treatment. At September 30, 2004, trust
preferred securities included in tier 1 capital totaled $135.5 million, which includes $20
million acquired from the acquisition of Florida Banks.

Table 12
CAPITAL RATIOS

|                          | September 30, 2004 | WellCapitalizedRequirement
|------------------------- | ------------------ | --------------------------
|TSFG                      |                    |                           
|Total risk-based capital  |                    | 11                        
|Tier 1 risk-based capital |                    | 9                         
|Leverage ratio            |                    | 7                         
|                          |                   
|Carolina First Bank       |                   
|Total risk-based capital  |                    | 11                        
|Tier 1 risk-based capital |                    | 9                         
|Leverage ratio            |                    | 6                         
|                          |                   
|Mercantile Bank           |                   
|Total risk-based capital  |                    | 11                        
|Tier 1 risk-based capital |                    | 8                         
|Leverage ratio            |                    | 7                         

On
November 12, 2003, TSFG completed a common stock offering, selling 6,325,000 shares
at a gross offering price of $27.00 per share. This common stock offering generated
proceeds to TSFG of $161.1 million, net of issuance costs for underwriting and expenses.
TSFG used some of the net proceeds to increase the capital at TSFGs subsidiary banks
and for general corporate purposes. These funds were also used to support growth. 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 September 30, 2004, TSFGs tangible
equity to tangible asset ratio was at 5.92%, a decline from 6.05% at December 31, 2003,
due to the acquisitions of CNB Florida and Florida Banks and the associated impact on
total assets, intangibles, and equity and the increase in the unrealized loss on available
for sale securities.

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 September 30, 2004 with a stated value of $100,000 per
share. At September 30, 2004, these preferred shares, which are reported as long-term debt
on the consolidated balance sheet, totaled $89.9 million. Under Federal Reserve Board
guidelines, $25.3 million, net of issuance costs, qualified as tier 1 capital, and $61.8
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 paid on funds used to support those
assets. Fully tax-equivalent net



interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis. Table 13 presents average
balance sheets and a net interest income analysis on a tax equivalent basis for the three
and nine months ended September 30, 2004 and 2003.

Table 13
COMPARATIVE AVERAGE BALANCES - YIELDS AND COSTS
(dollars in thousands)

|                                           | Three Months Ended September 30, |  |   |            |  |  
|------------------------------------------ | -------------------------------- |  | - | ---------- |  | -
|
|
|Assets                                     |                                  |  |   |            |  |  
|Earning assets                             |                                  | 
|Loans (1)                                  |                                  |  | $ | 7,617,721  |  | $
|Investment securities, taxable (2)         |                                  |  |   | 4,015,616  |  |  
|Investment securities, nontaxable (2)(3)   |                                  |  |   | 297,505    |  |  
|Federal funds sold and interest-bearing    |                                  | 
|bank balances                              |                                  |  |   | 18,885     |  |  
|                                           |                                  |  |   |            |  |  
|Total earning assets                       |                                  |  |   | 11,949,727 |  | $
|                                           |                                  |  |   |            |  |  
|Non-earning assets                         |                                  |  |   | 1,213,131  |  |  
|                                           |                                  |  |   |            |  |  
|Total assets                               |                                  |  | $ | 13,162,858 |  |  
|                                           |                                  |  |   |            |  |  
|                                           |                                  | 
|Liabilities and shareholders' equity       |                                  | 
|Liabilities                                |                                  | 
|Interest-bearing liabilities               |                                  | 
|Interest-bearing deposits                  |                                  | 
|Interest-bearing checking                  |                                  |  | $ | 789,141    |  | $
|Savings                                    |                                  |  |   | 214,171    |  |  
|Money market                               |                                  |  |   | 2,688,311  |  |  
|Time deposits                              |                                  |  |   | 2,819,316  |  |  
|                                           |                                  |  |   |            |  |  
|Total interest-bearing deposits            |                                  |  |   | 6,510,939  |  |  
|Borrowings                                 |                                  |  |   | 4,090,647  |  |  
|                                           |                                  |  |   |            |  |  
|Total interest-bearing liabilities         |                                  |  |   | 10,601,586 |  | $
|                                           |                                  |  |   |            |  |  
|Noninterest-bearing liabilities            |                                  | 
|Noninterest-bearing deposits               |                                  |  |   | 1,160,947  |  |  
|Other noninterest-bearing liabilities      |                                  |  |   | 108,163    |  |  
|                                           |                                  |  |   |            |  |  
|Total liabilities                          |                                  |  |   | 11,870,696 |  |  
|Shareholders' equity                       |                                  |  |   | 1,292,162  |  |  
|                                           |                                  |  |   |            |  |  
|Total liabilities and shareholders' equity |                                  |  | $ | 13,162,858 |  |  
|                                           |                                  |  |   |            |  |  
|Net interest margin (tax equivalent)       |                                  |  |   |            |  | $
|Less: tax-equivalent adjustment (3)        |                                  |  |   |            |  |  
|                                           |                                  |  |   |            |  |  
|Net interest income                        |                                  |  |   |            |  | $
|                                           |                                  |  |   |            |  |  

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



Table 13 (Continued)
COMPARATIVE AVERAGE BALANCES - YIELDS AND COSTS
(dollars in thousands)

|                                                | For the Nine Months Ended September 30, |  |   |            |  |  
|----------------------------------------------- | --------------------------------------- |  | - | ---------- |  | -
|
|
|Assets                                          |                                         |  |   |            |  |  
|Earning assets                                  |                                         | 
|Loans (1)                                       |                                         |  | $ | 6,543,119  |  | $
|Investment securities, taxable (2)              |                                         |  |   | 3,830,130  |  |  
|Investment securities, nontaxable (2)           |                                         |  |   | 266,233    |  |  
|Federal funds sold and interest-bearing         |                                         | 
|bank balances                                   |                                         |  |   | 9,924      |  |  
|                                                |                                         |  |   |            |  |  
|Total earning assets                            |                                         |  |   | 10,649,406 |  | $
|                                                |                                         |  |   |            |  |  
|Non-earning assets                              |                                         |  |   | 1,049,493  |  |  
|                                                |                                         |  |   |            |  |  
|Total assets                                    |                                         |  | $ | 11,698,899 |  |  
|                                                |                                         |  |   |            |  |  
|                                                |                                         | 
|Liabilities and shareholders' equity            |                                         | 
|Liabilities                                     |                                         | 
|Interest-bearing liabilities                    |                                         | 
|Interest-bearing deposits                       |                                         | 
|Interest-bearing checking                       |                                         |  | $ | 710,107    |  | $
|Savings                                         |                                         |  |   | 178,121    |  |  
|Money market                                    |                                         |  |   | 2,418,749  |  |  
|Time deposits                                   |                                         |  |   | 2,313,987  |  |  
|                                                |                                         |  |   |            |  |  
|Total interest-bearing deposits                 |                                         |  |   | 5,620,964  |  |  
|Borrowings                                      |                                         |  |   | 3,893,019  |  |  
|                                                |                                         |  |   |            |  |  
|Total interest-bearing liabilities              |                                         |  |   | 9,513,983  |  | $
|                                                |                                         |  |   |            |  |  
|Noninterest-bearing liabilities                 |                                         | 
|Noninterest-bearing deposits                    |                                         |  |   | 977,332    |  |  
|Other noninterest-bearing liabilities           |                                         |  |   | 109,986    |  |  
|                                                |                                         |  |   |            |  |  
|Total liabilities                               |                                         |  |   | 10,601,301 |  |  
|Minority interest in consolidated subsidiary(4) |                                         |  |   | --         |  |  
|Shareholders' equity                            |                                         |  |   | 1,097,598  |  |  
|                                                |                                         |  |   |            |  |  
|Total liabilities and shareholders' equity      |                                         |  | $ | 11,698,899 |  |  
|                                                |                                         |  |   |            |  |  
|Net interest margin (tax equivalent)            |                                         |  |   |            |  | $
|Less: tax-equivalent adjustment (3)             |                                         |  |   |            |  |  
|                                                |                                         |  |   |            |  |  
|Net interest income                             |                                         |  |   |            |  | $
|                                                |                                         |  |   |            |  |  

|(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)   | The minority interest in consolidated subsidiary pertains to the REIT preferred
               stock, which qualifies as regulatory capital and pays cumulative
               dividends. Effective July 1, 2003, in accordance with the adoption of SFAS 150,
               TSFG reclassified these amounts to long-term debt.
|Note: | Average balances are derived from daily balances.                                                                                                                                                                                                                                                                               



Fully
tax-equivalent net interest income increased by $69.3 million, or 35.4%, during the first
nine months of 2004 compared with the first nine months of 2003. This increase was
attributable to a 33.3% increase in average earning assets and a 5 basis point increase in
the net interest margin. The increase in average earning assets was principally from
strong organic loan growth, bank acquisitions, and higher investment securities. Comparing
the first nine months of 2004 to the corresponding period in 2003, average loans increased
$1.9 billion, or 40.5%, resulting from both the internally generated loans as well as the
loans that were added from the bank acquisitions. The MountainBank acquisition, which
closed October 3, 2003, added approximately $877.7 million in earning assets including
$772.8 million in loans. The CNB Florida and Florida Banks acquisitions, which closed July
16, 2004, added approximately $1.7 billion in earning assets including $1.5 billion in
loans. TSFG increased its investment portfolio to leverage available capital and to manage
the interest rate and prepayment risks associated with the acquisitions of CNB Florida,
Florida Banks and MountainBank.

The
net interest margin, which increased to 3.33% in the first nine months of 2004 from 3.28%
in the first nine months of 2003, also contributed to the increase in net interest income.
TSFGs net interest income at risk analysis indicates a slightly asset-sensitive
position, one in which TSFG benefits from an increase in interest rates (see Market
Risk and Asset/Liability Management for additional details). Therefore, as rates
increased in the third quarter of 2004, the earning asset yield rose 22 basis points, a
faster rate than the 11 basis point increase for interest-bearing liabilities. In addition,
average loans increased to 61.4% of average earning assets in the first nine months of
2004 from 58.3% in the corresponding period of 2003. This increase was primarily due to
the decline in the level of the securities portfolio as a percentage of total assets, as
higher yielding loans replaced security balances. The average securities portfolio yield
increased to 4.02% from 3.90% and also contributed to TSFGs improved net interest
margin in the first nine months of 2004 compared to the same period in 2003. This improved
yield was due in part to a $4.8 million decrease in MBS premium amortization when
comparing these same periods (see Securities for additional details).

The
Federal Reserve increased the federal funds target rate by 25 basis points on September
21, 2004, August 10, 2004, and June 30, 2004 following a three-year period of declining
rates. At September 30, 2004, adjustable rate loans constitute 62.2% of the loan portfolio
and 81.6% of these loans reprice immediately following an interest rate change by the
Federal Reserve. The funding source changes take slightly more time to filter into the net
interest margin, primarily as a result of the timed maturities of certificates of deposit
and borrowings.

In
connection with its adoption of SFAS 150, effective July 1, 2003, TSFG reported dividends
earned by institutional holders on preferred shares of its real estate investment trust
subsidiary as interest expense and the related preferred shares were included in
borrowings. For periods prior to July 1, 2003, these dividends earned were reported as
minority interest in consolidated subsidiary, net of tax. This reclassification lowered
the net interest margin for the first nine months of 2004 by five basis points.

TSFG
has experienced solid growth in money market accounts, principally from a product priced
at a percentage of the prime interest rate with a September 30, 2004 balance of
approximately $2.1 billion. TSFG is expected to benefit from the relatively slower
increase in rates on these accounts if interest rates continue to rise.

Average
total deposits increased by $1.7 billion, or 35.9%, during the first nine months of 2004
compared with the corresponding period in 2003. The growth in deposits since the third
quarter of 2003 was driven by growth in money market and noninterest-bearing deposits
generated through sales referrals and targeted deposit promotions. In addition, TSFG
acquired $778.3 million in deposits from MountainBank on October 3, 2003 and $1.6 billion
from the CNB Florida and Florida Banks acquisitions on July 16, 2004. For the first nine
months of 2004, average time deposits increased $394.6 million, or 20.6%, which includes a
$364.4 million increase in average brokered deposits.

Average
borrowings increased by $772.3 million, or 24.7%, during the nine months ended September
30, 2004 compared with the nine months ended September 30, 2003, due to increases in
repurchase agreements and federal funds purchased. These borrowings were used to fund the
growth in earning assets.

In
March 2004, TSFG recorded a loss of $1.4 million on the early extinguishment of debt
related to approximately $185.0 million in step-up and callable repurchase agreements.
TSFG continues to evaluate the relative cost and benefit of incurring additional
prepayment penalties from the early extinguishment of debt. See Borrowed
Funds.



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 $24.2 million and $16.3 million in the
first nine months of 2004 and 2003, respectively. The higher provision for loan losses was
primarily attributable to increased loan growth, increased specific reserves on
nonperforming loans, and lower provision expense in 2003 due to liquidation of
nonperforming loans on which allocated reserves exceeded net losses incurred.

Net
loan charge-offs were $21.3 million, or 0.44% of average loans held for investment, for
the first nine months of 2004, compared with $23.6 million, or 0.69% of average loans held
for investment, for the first nine months of 2003. The allowance for loan losses equaled
1.21%, 1.28%, and 1.30% of loans held for investment as of September 30, 2004, December
31, 2003, and September 30, 2003, respectively. The decrease was primarily attributable to
the liquidation, movement to performing status, or other resolution of a portion of the
Rock Hill Workout Loans. See Loans, Credit Quality, and
Allowance for Loan Losses.

Noninterest Income

Noninterest
income increased during the first nine months of 2004 compared with the corresponding
period for 2003, both including and excluding gains on certain asset sales. These
increases reflect expansion in noninterest income sources and continuing benefits from
TSFGs Elevate sales process. Customer fee income, bank-owned life
insurance and merchant processing income drove the increases in noninterest income
excluding gains on certain asset sales. These increases were partially offset by a decline
in mortgage banking income.



Table
14 shows the components of noninterest income.

Table 14
COMPONENTS OF NONINTEREST INCOME
(dollars in thousands)

|                                                              | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |       
|------------------------------------------------------------- | ------------------------------- | ------------------------------ | - | ------
|
|Service charges on deposit accounts                           |                                 |                                | $ | 9,950 
|Debit card income                                             |                                 |                                |   | 1,103 
|Customer service fee income                                   |                                 |                                |   | 683   
|                                                              |                                 |                                |   |       
|Total customer fee income                                     |                                 |                                |   | 11,736
|                                                              |                                 |                                |   |       
|                                                              |                                 |                               
|Brokerage income                                              |                                 |                                |   | 1,240 
|Trust income                                                  |                                 |                                |   | 824   
|                                                              |                                 |                                |   |       
|Total brokerage and trust income                              |                                 |                                |   | 2,064 
|                                                              |                                 |                               
|Bank-owned life insurance income                              |                                 |                                |   | 2,869 
|Merchant processing income                                    |                                 |                                |   | 2,528 
|Mortgage banking income                                       |                                 |                                |   | 1,514 
|Insurance income                                              |                                 |                                |   | 1,132 
|Gain on trading and derivative activities                     |                                 |                                |   | 1,150 
|Other                                                         |                                 |                                |   | 779   
|                                                              |                                 |                                |   |       
|Noninterest income, excluding gains on certain asset sales    |                                 |                                |   | 23,772
|                                                              |                                 |                                |   |       
|Gain on sale of available for sale securities                 |                                 |                                |   | 678   
|(Loss) gain on equity investments                             |                                 |                                |   | (367  
|Gain on disposition of assets and liabilities                 |                                 |                                |   | --    
|                                                              |                                 |                                |   |       
|Gain on certain asset sales, net                              |                                 |                                |   | 311   
|                                                              |                                 |                                |   |       
|Total noninterest income                                      |                                 |                                | $ | 24,083
|                                                              |                                 |                                |   |       
|                                                              |                                 |                               
|Total noninterest income as a percentage of total revenue (1) |                                 |                                |   | 19.4  
|Noninterest income, excluding gains on certain asset sales,   |                                 |                               
|as a percentage of total revenue, exlcuding gains on certain  |                                 |                               
|asset sales (1)                                               |                                 |                                |   | 19.2  

(1)       
          Calculated as noninterest income, divided by the sum of net interest income and
          noninterest income.

Total
customer fee income rose 24.6% in the first nine months of 2004 compared to the same
period in 2003. Service charges on deposit accounts, the largest contributor to
noninterest income, rose 20.9% for the same period. This increase was primarily
attributable to increasing transaction accounts, including cash management, and improving
collection of fees. Average balances for deposit transaction accounts, which impact
service charges, increased 46.0% for the same period. Debit card income and customer
service fee income increased 68.3% and 29.2%, respectively, for the first nine months of
2004 compared with the first nine months of 2003.

In
the first nine months of 2004 compared with the corresponding period in 2003, brokerage
income decreased $296,000, or 7.3%, due to higher than normal levels in the first nine
months of 2003. Trust income increased $246,000, or 9.7%, for the same period. At
September 30, 2004 and 2003, the market value of assets administered by the trust
department totaled $817.1 million and $685.8 million, respectively.

Bank-owned
life insurance income increased $2.7 million, or 45.0%, for the first nine months of 2004
versus the corresponding period in 2003, due to additional life insurance policies,
increases in the cash values, and the second and third quarter 2004 receipt of life
insurance proceeds (which is not expected to recur every quarter). TSFG purchased an
additional $25.0 million of life insurance on certain officers in October 2003, added
$13.8 million from the acquisition of MountainBank, and added $30.8 million from the
acquisitions of CNB Florida and Florida Banks. The cash surrender value totaled $229.2
million at September 30, 2004, up from $150.1 million at September 30, 2003.



Merchant
processing fees increased $1.4 million, or 25.2%, for the nine months ended September 30,
2004 compared with the same period in 2003, primarily from increased sales efforts.

Table
15 shows the components of mortgage banking income.

Table 15
COMPONENTS OF MORTGAGE BANKING INCOME
(dollars in thousands)

|                                                                      | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |      
|--------------------------------------------------------------------- | ------------------------------- | ------------------------------ | - | -----
|
|Mortgage origination and secondary marketing income                   |                                 |                                | $ | 1,709
|Mortgage servicing loss, net of related amortization and subservicing |                                 |                               
|payments                                                              |                                 |                                |   | (211 
|Recovery (impairment) on mortgage servicing rights                    |                                 |                                |   | 16   
|                                                                      |                                 |                                |   |      
|Total mortgage banking income                                         |                                 |                                | $ | 1,514
|                                                                      |                                 |                                |   |      

For
the first nine months of 2004, mortgage origination and secondary marketing income
declined 50.3%, compared with the same period in 2003. Mortgage loans originated by TSFG
originators totaled $391.8 million and $569.5 million in the first nine months of 2004 and
2003, respectively. The decrease in mortgage banking income was principally the result of
lower origination volumes due to higher mortgage loan rates. TSFG may experience growth in
mortgage banking income for the remainder of 2004 if new housing starts rise as expected
and the recent increase in the mortgage pipeline continues.

TSFGs
mortgage banking strategy is to sell most of the loans it originates in the secondary
market with servicing rights released. At September 30, 2004, TSFGs servicing
portfolio included 2,656 loans having an aggregate principal balance of $168.1 million,
down from $256.5 million at September 30, 2003. The servicing portfolio decline
accelerated in 2003 due to prepayments of loans from increased refinancings as a result of
lower rates.

Fees
related to servicing other loans, for which Carolina First Bank owns the rights to
service, are offset by the related amortization of mortgage servicing rights. In 2004,
TSFG's net mortgage servicing loss improved due to lower amortization of
mortgage servicing rights as prepayments slow. Mortgage servicing rights, net of the
valuation allowance, totaled $1.2 million and $2.0 million at September 30, 2004 and 2003,
respectively. At September 30, 2004 and 2003, the valuation allowance for capitalized
mortgage servicing rights totaled $1.7 million and $1.9 million, respectively.

In
the first nine months of 2004 compared with the same period in 2003, insurance income
increased $494,000, or 18.5%, principally from acquiring an insurance agency.

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 quarter 2004 loss of $1.4 million
followed by a second quarter 2004 gain of $2.4 million and a third quarter gain of $1.2
million. The gain on trading and derivative activities totaled $2.1 million and $2.1
million in the first nine months of 2004 and 2003, respectively. See Market Risk and
Asset/Liability Management  Derivatives and Hedging Activities.

For
the first nine months of 2004, the gain on sale of available for sale securities included
gross gains of $9.1 million and was partially offset by losses of $2.6 million. In the
first nine months of 2004, the gain on equity investments included a $3.8 million gain
realized from the sale of 346,000 shares of NetBank common stock and was partially offset
by impairment losses in another investment totaling $367,000. For the nine months ended
September 30, 2003, the gain on equity investments included a $1.9 million gain realized
from the sale of 207,096 shares of NetBank common stock, a $1.6 million gain from the sale
of community bank stock and corporate bonds, partially offset by a $183,000 loss
associated with the write-down of an investment in a venture capital limited partnership.
At September 30, 2004, TSFG owned 11,904 shares of NetBank common stock.

During
the first nine 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 benefits administration, international
banking services, and other services. The increase in other noninterest income in the
first nine months of 2004 compared with the same period in 2003 was largely due to
increases in benefits administration fees (due to the American Pensions, Inc.
acquisition), which increased $834,000, and business referral fees, which increased
$781,000. These increases were partially offset by an increase in the loss on the
disposition of other real estate owned, which increased $537,000.

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 21.4%, or 18.3% excluding
non-operating items, for the first nine months of 2004 over the first nine months of 2003.
TSFGs market expansion included the July acquisitions of CNB Florida and Florida
Banks and the October 2003 acquisition of MountainBank. TSFG also purchased an insurance
agency and benefit plan administrator in 2003, a title insurance company in April 2004,
and a branch office (including related loans and deposits) in August 2004.

Table
16 shows the components of noninterest expenses and TSFGs efficiency ratio, a
measure of TSFGs expenses relative to total revenues.

Table 16
COMPONENTS OF NONINTEREST EXPENSES
(dollars in thousands)

|                                                     | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30, |   |       
|---------------------------------------------------- | ------------------------------- | ------------------------------ | - | ------
|
|Salaries and wages                                   |                                 |                                | $ | 24,553
|Employee benefits                                    |                                 |                                |   | 7,431 
|Occupancy                                            |                                 |                                |   | 5,841 
|Furniture and equipment                              |                                 |                                |   | 5,670 
|Professional fees                                    |                                 |                                |   | 2,318 
|Merchant processing expense                          |                                 |                                |   | 1,984 
|Telecommunications                                   |                                 |                                |   | 1,237 
|Amortization of intangibles                          |                                 |                                |   | 1,839 
|Other                                                |                                 |                                |   | 13,324
|                                                     |                                 |                                |   |       
|Noninterest expenses, excluding non-operating items  |                                 |                                |   | 64,197
|                                                     |                                 |                                |   |       
|Merger-related costs                                 |                                 |                                |   | 5,487 
|Conservation grant of land                           |                                 |                                |   | --    
|Loss on early extinguishment of debt                 |                                 |                                |   | --    
|Impairment (recovery) loss from write-down of assets |                                 |                                |   | --    
|Employment contract payments                         |                                 |                                |   | 174   
|                                                     |                                 |                                |   |       
|Non-operating noninterest expenses                   |                                 |                                |   | 5,661 
|                                                     |                                 |                                |   |       
|Total noninterest expenses                           |                                 |                                | $ | 69,858
|                                                     |                                 |                                |   |       
|                                                     |                                 |                               
|Efficiency ratio (1)                                 |                                 |                                |   | 56.4  
|Efficiency ratio, operating basis (2)                |                                 |                                |   | 52.0  

(1)    
          Calculated as noninterest expenses, divided by the sum of net interest income
          and noninterest income.(2)    Calculated as noninterest expenses,
          excluding non-operating items, divided by the sum of net interest income
and noninterest income, excluding gains on certain asset sales (see Table 14).

Salaries,
wages, and employee benefits rose $10.8 million, or 14.5%, in the first nine months of
2004 compared with the same period in 2003. Full-time equivalent employees as of September
30, 2004 increased to 2,324 from 1,726 at September 30, 2003. The increase in personnel
expense was primarily attributable to the MountainBank, CNB Florida, and Florida Banks
acquisitions, higher health insurance costs, and higher Supplemental Executive Retirement
Plan Benefits. This increase was partially offset by lower discretionary short-term
accruals and no discretionary long-term incentive accruals.



Occupancy
and furniture and equipment expense increased 14.8% for the first nine months of 2004
compared with the corresponding period in 2003, primarily from the addition of branch
offices from TSFGs acquisitions of MountainBank, CNB Florida, and Florida Banks. The
increase in professional fees was partially related to increases associated with
compliance obligations under section 404 of the Sarbanes-Oxley Act of 2002, deposit
pricing modeling, and fee initiatives. The increase in merchant processing expense was
offset by related revenue increases.

Amortization
of intangibles increased $2.1 million for the nine months ended September 30, 2004,
primarily attributable to the addition of core deposit intangibles from the acquisitions
of MountainBank, CNB Florida, and Florida Banks. In addition, TSFG added customer list
intangibles from its acquisition of Summit Title, LLC and non-compete intangibles in
connection with each of its acquisitions.

During
the first nine 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.

In
the first nine months of 2004, TSFG recorded a loss on early extinguishment of debt
totaling $1.4 million for prepayment penalties for repurchase agreement borrowings. See
Borrowed Funds.

During
both the nine months ended September 30, 2004 and 2003, TSFG incurred pre-tax
merger-related costs, in connection with TSFGs acquisitions in 2004, 2003, and 2002.
See Note 15 to the consolidated financial statements for the types and balances of
pre-tax merger-related costs.

Other
noninterest expenses rose 25.4% in the first nine months of 2004 compared with the same
period in 2003. The overall increase in other noninterest expenses was principally
attributable to increases in business development, insurance, outside service fees,
deposit account charge-offs, and loan collection, partially offset by a decrease in
intangible franchise tax expense.

Income Taxes

The
effective income tax rate as a percentage of pretax income was 31.2% for both the first
nine months of 2004 and 2003. As previously discussed, during the third quarter 2004, the
Internal Revenue Service completed its examination of TSFGs 1999 through 2002
federal income tax returns. As a result of this examination, TSFGs effective income
tax rate decreased to 30% in the third quarter from 31.7% in the first half of 2004 and is
expected to be approximately 31% for the fourth quarter. The blended statutory federal and
state income tax rate was approximately 37% for both of these periods.

Discontinued Operations

During
the three and nine months ended September 30, 2004, TSFG recognized an after-tax loss of
$165,000 as discontinued operations. See Item 1, Note 8 to the consolidated financial
statements for additional information.

Third Quarter Results

Net
income for the three months ended September 30, 2004 totaled $31.0 million, up 29.8%
compared with $23.9 million for the three months ended September 30, 2003. Earnings per
diluted share for the three months ended September 30, 2004 were $0.44, a 12.0% decrease
from earnings per diluted share of $0.50 for the three months ended September 30, 2003.

Fully
tax-equivalent net interest income totaled $100.9 million, an increase of $37.8 million,
or 60.0%, compared with the third quarter of 2003. Net interest income increased from a
higher net interest margin, which increased 35 basis points, and a 43.7% growth in average
earning assets. The net interest margin improved to 3.36% in the third quarter 2004 from
3.01% in the same period in 2003. TSFGs net interest income at risk analysis indicates
a slightly asset-sensitive position, one in which TSFG benefits from an increase
in interest rates (see Market Risk and Asset/Liability Management for
additional details). Therefore, as rates increased in the third quarter of 2004,
TSFGs earning asset yield improved at a faster rate than its interest-bearing
liability costs. In addition, average loans increased to 63.7% of average earning assets
in the third quarter 2004 from 57.6% in the corresponding period of 2003, due to the acquisitions and replacement of security balances with higher yielding loans.  At September 30,
2004, adjustable rate loans constitute 62.2% of the loan portfolio and 81.6% of these
loans reprice immediately following an interest rate change by the Federal Reserve. The
funding source changes take slightly more time to filter into the net interest margin,
primarily as a result of the



timed maturities of certificates of deposit and borrowings.
Finally, the average securities portfolio yield increased to 4.14% from 3.53% and also
contributed to TSFGs improved net interest margin in the three months ended
September 30, 2004 compared to the same period in 2003. This improved yield was due in
part to a $2.8 million decrease in MBS premium amortization when comparing these same
periods (see Securities for additional details).

The
growth in average earning assets was principally attributable to strong organic loan
growth, the acquisitions of MountainBank, CNB Florida, and Florida Banks, and higher
investment securities. The MountainBank acquisition, which closed October 3, 2003, added
approximately $877.7 million in earning assets. The CNB Florida and Florida Banks
acquisitions, which closed July 16, 2004, added approximately $1.7 billion in earning
assets. Comparing the third quarter of 2004 to the corresponding period in 2003, average
loans increased $2.8 billion, or 59.1%, resulting from both the internally generated loans
as well as the loans that were added from the bank acquisitions. TSFG increased its
investment portfolio to leverage available capital and to manage the interest rate and
prepayment risks associated with the acquisitions of CNB Florida, Florida Banks and
MountainBank.

The
provision for loan losses totaled $9.4 million and $5.6 million in the third quarters of
2004 and 2003, respectively. The higher provision for loan losses was primarily
attributable to increased loan growth, increased specific reserves on nonperforming loans,
and lower provision expense in 2003 due to the liquidation of nonperforming loans on which
allocated reserves exceeded net losses incurred. Net loan charge-offs declined to 0.51%
for the third quarter 2004 versus 0.57% for the third quarter 2003.

Noninterest
income for the three months ended September 30, 2004 and 2003 included certain pre-tax
gains on asset sales, which totaled $311,000 and $6.0 million, respectively. See
Earnings Review  Noninterest Income for details on the gains on asset
sales. Noninterest income, excluding these gains on asset sales, increased 9.2% to $23.8
million for the third quarter of 2004 compared with $21.8 million for the third quarter of
2003. Customer fee income, bank-owned life insurance, and merchant processing income drove
the increases in noninterest income. The increase in noninterest income, excluding gains
on certain asset sales, was partially offset by a decrease in mortgage banking income from
lower origination volumes due to higher mortgage loan rates.

For
the third quarters 2004 and 2003, noninterest expenses included pre-tax other
non-operating items of $5.7 million and $3.0 million, respectively. See Earnings
Review  Noninterest Expenses for details on the other non-operating items.
Noninterest expenses, excluding non-operating items, increased 35.2% to $64.2 million for
the third quarter 2004 from $47.5 million for the third quarter 2003, which was primarily
attributable to the October 2003 acquisition of MountainBank, the July 2004 acquisitions
of CNB Florida, and Florida Banks, and the acquisition of two insurance companies.
Salaries, wages, and employee benefits increased to $32.2 million in the third quarter
2004 from $23.7 million in the third quarter 2003, primarily due to acquisitions, higher
health insurance costs, and higher short-term incentive accruals.

# Market Risk and
Asset/Liability Management

Market
risk is the risk of loss from adverse changes in market prices and interest rates.
TSFGs market risk arises principally from interest rate risk inherent in its core
banking activities. Interest rate risk is the risk to net income represented by the impact
of changes in market interest rates. TSFG has risk management policies and practices to
monitor and limit exposure to interest rate risk. These policies and practices are
described in the annual report on Form 10-K for the year ended December 31, 2003. At
September 30, 2004, the overall interest rate risk position of TSFG falls within the
interest rate risk guidelines established by its Asset/Liability Committee
(ALCO).

TSFGs
primary tool used to monitor and manage interest rate risk is a balance sheet and earnings
simulation model. This model is used to derive the net interest income at risk analysis
and interest sensitivity gap. The model takes into account interest rate changes as well
as estimated changes in the mix and volume of assets and liabilities. The models
inputs (such as interest rates, the shape of the yield curve, and the projected levels and
mix of loans and deposits) are updated on a regular basis.

TSFG
considers the net interest income at risk analysis to be its best gauge of the sensitivity
of its earnings to changes in interest rates. The net interest income at risk analysis
simulates TSFGs consolidated balance sheet and consolidated statements of income
under several different rate scenarios over a twelve-month period. It reports the
estimated impact on net interest income with rates remaining flat, rates gradually
increasing 100 and 200 basis points, and rates decreasing 100 basis points over the next
twelve-month period. These rates assume a parallel shift in the treasury yield curve,
except for lower limits in the declining rate scenario as discussed below. Computation of
the prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, call features, and loan
and securities prepayments, and should not be relied upon as indicative of actual results.
Further, these



computations do not contemplate any additional actions TSFG could undertake
in response to changes in interest rates. Table 17 shows the estimated effect that the
indicated changes in interest rates would have on net interest income as projected for the
next twelve months using the most likely projected balance sheet.

Table 17
NET INTEREST INCOME AT RISK ANALYSIS

| |   
| | --
|
| | 2 
| | 1 
| | Fl
| | (1

As
indicated in Table 17, the risk to net interest income is nominal under each of these
interest rate scenarios. The net interest income at risk analysis indicates that TSFG will
benefit from an increase in interest rates.

Although
net interest income declines in the 100 basis point declining rate scenario, lower limits
are in place in the model, which limit the rate declines and the impact on net interest
income. Due to the low level of current interest rates, many of the key rates (such as
Federal Funds and LIBOR), to which much of the balance sheet is indexed, are not lowered
the full 100 basis points. The floors placed on these key rates restrict the reduction in
both interest income and expense in the declining rate scenario. In addition, many deposit
rates are reaching what management believes to be an acceptable lower limit, thus limiting
the interest expense reduction from repricing deposits by the entire 100 basis points.

Interest
sensitivity gap (the static GAP position) measures the amount of
rate-sensitive assets and rate-sensitive liabilities that either mature or are subject to
change as of a point-in-time and is not necessarily indicative of positions on other
dates. It is used to periodically review the static repricing structure of assets and
liabilities. Management believes that the analysis provided by the static GAP position is
limited, as it does not take into account a number of important factors, such as projected
changes in the balance sheet. Most importantly, it only shows the timing of the next
repricing opportunity, not the differing magnitude of rate changes on both assets and
liabilities. In other words, it assumes that all rate-sensitive assets and liabilities
adjust equally when rates change, which is an inaccurate assumption. In addition, it
ignores actions that may be taken by management in response to future rate changes. For
these reasons, TSFG relies principally on its net increase income at risk simulation analysis, a dynamic
model, to evaluate and manage interest rate risk.

The
impact of rising rates on TSFGs money market accounts demonstrates why TSFG believes
the net interest income at risk analysis to be superior to the static gap analysis. At
September 30, 2004, the static gap analysis reflects $2.3 billion in money market accounts
in the 0-3 month column, the majority of which are money market accounts that reprice with
the prime interest rate. However, these accounts increase only 40% of the total increase
in prime, not the full amount. By contrast, TSFGs assets that reprice will reflect
most, if not all, of the full rate increase. Contrary to the static gap analysis, this
relative impact of rising rates is taken into account in the net interest income at risk
analysis.

Table 18
shows TSFGs static GAP position at September 30, 2004 based on its most
likely rate scenario, which assumes a 100 basis point rate increase over the next
twelve months. The carrying amounts of rate-sensitive assets and liabilities are presented
in the periods in which they next reprice to market rates or mature, ignoring the
magnitude of the repricing. For assets, projected repayments, anticipated principal
prepayments, and potential calls are taken into account. To reflect anticipated
prepayments, certain asset categories are shown using estimated cash flows rather than
contractual cash flows. For core deposits without contractual maturities (i.e., interest
checking, savings, money market, and noninterest-bearing deposit accounts), Table 18
presents principal cash flows based on managements judgment concerning their most
likely runoff. The actual maturities and runoff could vary substantially if future
prepayments, runoff, and call options exercised differ from TSFGs historical
experience or managements estimates.

TSFG
changed its most likely rate scenario to an up 100 basis point scenario (over
the next twelve months) from a flat scenario at December 31, 2003. In the up 100 basis
point scenario, prepayment speeds on mortgage-backed securities slow down, agency
securities are less likely to be called, and borrowings are more likely to be called,
resulting in a larger static gap liability-sensitive position than presented in the flat
rate scenario at year-end.



Table 18
INTEREST SENSITIVITY GAP ANALYSIS
(dollars in thousands)

|                                               |  |  |   |            |  
|---------------------------------------------- |  |  | - | ---------- | -
|
|Interest-sensitive assets                      |  |  |   |            |  
|Earning assets                                 |  | 
|Loans                                          |  |  | $ | 4,898,723  |  
|Investment securities (1)                      |  |  |   | 406,581    |  
|Interest-bearing bank balances                 |  |  |   | 850        |  
|                                               |  |  |   |            |  
|Total earning assets                           |  |  | $ | 5,306,154  |  
|                                               |  |  |   |            |  
|                                               |  | 
|Interest-sensitive liabilities                 |  | 
|Interest-sensitive liabilities                 |  | 
|Interest-bearing deposits                      |  | 
|Interest-bearing checking                      |  |  | $ | --         |  
|Savings                                        |  |  |   | --         |  
|Money market accounts                          |  |  |   | 2,262,132  |  
|Time deposits                                  |  |  |   | 953,191    |  
|                                               |  |  |   |            |  
|Total interest-bearing deposits                |  |  |   | 3,215,323  |  
|Noninterest-bearing deposits (2)               |  |  |   | --         |  
|Borrowings                                     |  |  |   | 3,913,532  |  
|                                               |  |  |   |            |  
|Total interest-sensitive liabilities           |  |  |   | 7,128,855  |  
|                                               |  |  |   |            |  
|                                               |  | 
|Periodic interest-sensitive gap                |  |  |   | (1,822,701 | )
|                                               |  | 
|Notional amount of interest rate swaps         |  |  |   | (478,155   | )
|                                               |  |  |   |            |  
|                                               |  | 
|Periodic interest-sensitive gap after interest |  | 
|rate swaps                                     |  |  | $ | (2,300,856 | )
|                                               |  |  |   |            |  
|                                               |  | 
|Cumulative interest -sensitive gap             |  |  | $ | (2,300,856 | )
|                                               |  |  |   |            |  

(1)    
          Investment securities exclude the unrealized loss on the available for sale of
          securities of $21.2 million (pre-tax).(2)    Noninterest-bearing deposits respond
          in part to changes in interest rates.

As
indicated in Table 18, at September 30, 2004, on a cumulative basis through twelve months,
rate-sensitive liabilities exceeded rate-sensitive assets, resulting in a
liability-sensitive position of $2.1 billion, or 15.2% of total assets. The position
indicated by the static gap has no direct reflection on net interest income. Although the
static gap reflects a liability-sensitive position, the net interest income at risk
analysis shows TSFG with an asset-sensitive position, and one in which TSFG will benefit
from an increase 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 borrowings and fixed rate
deposits. 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. In 2003, TSFG
increased its use of derivatives. For both the first nine months of 2004 and 2003, gains
on trading and derivative activities totaled $2.1 million.

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. 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 19 shows the fair value of TSFGs derivative assets and
liabilities and their related notional amount. Derivative transactions are measured in
terms of the notional amount, but this amount is not recorded on the balance sheets and is
not, when viewed in isolation, a meaningful measure of the risk profile of the instrument.
The notional amount is not exchanged, but is used only as the basis upon which interest
and other payments are calculated.

Table 19
SUMMARY OF DERIVATIVE ASSETS AND LIABILITIES
(dollars in thousands)

|                                                              | September 30, 2004 |  |  
|------------------------------------------------------------- | ------------------ |  | -
|
|
|Cash flow hedges                                              |                    |  |  
|Interest rate swaps associated with borrowing activities      |                    |  | $
|                                                              |                    | 
|Fair value hedges                                             |                    | 
|Interest rate swaps associated with borrowing activities      |                    |  |  
|Interest rate swaps associated with deposit taking activities |                    |  |  
|                                                              |                    | 
|                                                              |                    | 
|Other derivatives                                             |                    |  |  
|                                                              |                    |  |  
|                                                              |                    |  | $
|                                                              |                    |  |  

# 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 September 30, 2004, commercial and retail loan commitments totaled $1.9 billion.
Documentary letters of credit are typically issued in connection with customers
trade financing requirements and totaled $2.7 million



at September 30, 2004. Unused
business credit card lines, which totaled $16.9 million at September 30, 2004, 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 September 30, 2004 was $107.2 million.

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

Derivatives.
          See Market Risk and Asset/Liability Management  Derivative and
          Hedging Activities for information on the off balance sheet notional
          amounts of TSFGs derivatives.

Credit
Life & Disability Insurance.Carolina First Guaranty Reinsurance, Ltd.
(CFGRL), a wholly-owned subsidiary of TSFG, offers credit life and disability
insurance up to a single policy limit of $100,000 to customers of the Subsidiary Banks. As
of September 30, 2004, CFGRL had in force insurance not recorded on the consolidated
balance sheets of $23.3 million. A loss reserve, determined based on reported and past
loss experience of in-force policies, totaled $141,000 at September 30, 2004.

# 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, principal and interest payments on
loans, loan sales or securitizations, 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 substantial majority of TSFGs securities are pledged.
Management believes the projected cash flows from the securities portfolio are sufficient,
under different interest rate scenarios, including a rising rate scenario, to provide much
of the necessary funding estimated for the remainder of 2004.

Proper
liquidity management is crucial to ensure that TSFG is able to take advantage of new
business opportunities as well as meet the demands of its customers. In this process, TSFG
focuses on assets and liabilities and on the manner in which they combine to provide
adequate liquidity to meet our needs. Table 20 summarizes future contractual obligations
as of September 30, 2004. Table 20 does not include payments that may be required under
employment and deferred compensation agreements. In addition, Table 20 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 nine months ended
September 30, 2004).



Table 20
CONTRACTUAL OBLIGATIONS
(dollars in thousands)

|                                   | Payments Due by Period |  |   |           | 
|---------------------------------- | ---------------------- |  | - | --------- | 
|
|Time deposits                      |                        |  | $ | 2,784,191 | 
|Short-term borrowings              |                        |  |   | 1,805,308 | 
|Long-term debt                     |                        |  |   | 2,531,902 | 
|Operating leases                   |                        |  |   | 126,584   | 
|                                   |                        |  |   |           | 
|Total contractual cash obligations |                        |  | $ | 7,247,985 | 
|                                   |                        |  |   |           | 

Net
cash provided by operations and deposits from customers have been the primary sources of
liquidity for TSFG. Liquidity is also enhanced by the ability to acquire new deposits
through the Subsidiary Banks established branch network. In addition, TSFG can raise
deposits on the Internet through Bank CaroLine. 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 have access to borrowing from the FHLB and maintain short-term lines of
credit from unrelated banks. FHLB advances, outstanding as of September 30, 2004, totaled
$1.0 billion. At September 30, 2004, the Subsidiary Banks had $1.3 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 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 September 30, 2004, the Subsidiary Banks had unused, unsecured short-term
lines of credit from unrelated banks totaling $617.8 million (which are withdrawable at
the lenders option).

The
Federal Reserve Bank provides back-up 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 September 30, 2004, the
Subsidiary Banks had qualifying collateral to secure advances up to $902.8 million of
which none was outstanding.

At
September 30, 2004, the parent company had unused short-term lines of credit totaling
$35.0 million. These lines of credit, which are withdrawable at the lenders option,
mature May 14, 2005 for $15.0 million, June 30, 2005 for $10.0 million, and September 30,
2005 for $10.0 million.

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 September 30, 2004, see Off-Balance Sheet
Arrangements. Increased demand for funds under these agreements would reduce
TSFGs liquidity and could require additional sources of liquidity.

# Recently Adopted
Accounting Pronouncements

Accounting for
Investments in Limited Liability Companies

Effective
June 30, 2004, TSFG adopted Emerging Issues Task Force Issue (EITF) No. 03-16,
Accounting for Investments in Limited Liability Companies, which provided
guidance for determining whether an investment in a limited liability company
(LLC) should be accounted for using the cost or equity method of accounting.
This guidance specified that the provisions of the American Institute of Certified Public
Accountants Statement of Position (SOP) 78-9 (SOP 78-9),
Accounting for Investments in Real Estate Ventures, and related guidance would
apply to LLCs. SOP 78-9 requires noncontrolling investments be accounted for using the
equity method of accounting unless the investors interest is so minor that they have
virtually no influence over partnership operating and financial policies, and accordingly,
accounting for the investment using the cost method of accounting may be appropriate.
Guidance has stated that investments of more than three to five percent are considered to
be more than minor and, therefore, should



be accounted for using the equity method of
accounting. The initial adoption of this issue did not have a material impact on the
financial condition or results of operations of TSFG.

Accounting for
Investments Other Than Common Stock

Effective
September 30, 2004, TSFG adopted EITF No. 02-14, Whether an Investor Should Apply
the Equity Method of Accounting to Investments Other Than Common Stock, which
provided guidance for circumstances when an investor has the ability to exercise
significant influence over the operating and financial policies of an investee and that
the equity method of accounting should be applied only when the investment is common stock
and/or in-substance common stock. The initial adoption of this issue did not have an
impact on the financial condition or results of operations of TSFG.

# Recently Issued
Accounting Pronouncements

The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments

In
March 2004, the Financial Accounting Standards Board (FASB) issued EITF No.
03-1 (EITF 03-1), The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, which provided guidance for evaluating whether
an investment is other-than-temporarily impaired and its application to investments
classified as either available for sale or held to maturity under FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost or equity method of accounting. In September
2004, the FASB issued FASB Staff Position (FSP) EITF No. 03-1-1, a delay of
the effective date for the measurement and recognition guidance contained in paragraphs
10-20 of EITF 03-1 until the FASB issues final guidance, expected in the fourth quarter
2004.

Paragraphs
10 through 20 of EITF 03-1 provide guidance on when impairment of debt and equity
securities is considered other-than-temporary. This guidance generally states 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. We are currently evaluating the impact of the
initial adoption of this guidance on the financial condition or results of operations of
TSFG.

TSFG
adopted the guidance of EITF 03-1, excluding paragraphs 10-20 effective as of September
30, 2004. As a result of this adoption, TSFG provides additional disclosures, which are
found in Item 1, Note 9 to the consolidated financial statements. The initial adoption of
this issue, which excludes paragraphs 10-20 did not have a material impact on the
financial condition or results of operations of TSFG.

# Item 3.  Quantitative and
Qualitative Disclosures about Market Risk

See
Market Risk and Asset/Liability 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.  Disclosure
Controls and Procedures

Evaluation of
Disclosure Controls and Procedures

TSFGs
Chief Executive Officer and Chief Financial Officer have evaluated TSFGs disclosure
controls and procedures as of September 30, 2004, and they concluded that these controls
and procedures are effective.

Changes in Internal
Controls

There
have been no changes in internal control over financial reporting during the third quarter
of 2004 that have materially affected, or are reasonably likely to materially affect, the
internal control over financial reporting.



# PART II.   OTHER
INFORMATION

# Item 1   Legal Proceedings

See
Note 12 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 September 30, 2004.

# Issuer Purchases of Equity Securities

|Period                                  | TotalNumberof SharesPurchased | AveragePricePaid perShare | TotalNumber ofShares Purchased asPart of PubliclyAnnouncedPlans orPrograms | MaximumNumber ofShares thatMay Yet BePurchasedUnder Plansor Programs(2)
|--------------------------------------- | ----------------------------- | ------------------------- | -------------------------------------------------------------------------- | -----------------------------------------------------------------------
|July 1, 2004 to July 31, 2004           |                               |                           |                                                                            | --                                                                     
|August 1, 2004 to August 31, 2004       |                               |                           |                                                                            | 836                                                                    
|September 1, 2004 to September 30, 2004 |                               |                           |                                                                            | --                                                                     
|                                        |                               |                           |                                                                            |                                                                        
|Total                                   |                               |                           |                                                                            | 836                                                                    
|                                        |                               |                           |                                                                            |                                                                        

(1)    
          These shares were canceled in connection with option exercises.  Pursuant to TSFG's stock option plans, participants
may exercise stock option grants by surrendering shares of TSFG common stock the participants already own as payment
of the option exercise price.  Shares so surrendered by participants of TSFG's employee stock option plans are repurchases
pursuant to the terms of the applicable stock option plan and not pursuant to publicly announced share repurchase programs.(2)    In February of 2003, TSFG announced a
stock repurchase program authorizing TSFG to repurchase up to 1 million shares
of its common stock.  In April of 2003, TSFG announced a stock repurchase
program authorizing TSFG to repurchase up to 1 million shares of its common
stock.  Neither of these stock repurchase programs has an expiration date and
each respective program will expire upon completion of repurchases totaling the
amount authorized to repurchase.  At September 30, 2004, there are approximately
290,000 shares remaining under the February 2003 authorization and 1 million
shares under the April 2003 authorization.

# Item 3   Defaults Upon
Senior Securities

None.

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

None.

# Item 5   Other Information

| | TSFG
has hired Timothy K. Schools as Executive Vice President, Corporate Development.
Schools has executed an employment agreement dated October 4, 2004 with TSFG
providing for a rolling three-year term and certain severance and change of control
benefits that include, under certain circumstances, the extension of welfare benefits for
up to two years after termination of employment and payment of up to twice base salary and
annual bonus (with the annual bonus amount being equal to the average of the annual bonus
over the three years prior to termination). Schools has also executed a supplemental
executive retirement agreement dated October 4, 2004 that provides certain retirement
benefits based on the average of the three highest years of base salary and annual bonus
during the ten years prior to termination of employment. The normal retirement benefit is
forty percent (sixty percent after five years of service) of the three-year average amount
and is payable for 180 months. The agreement also provides for early termination, death
and disability benefits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Item 6   Exhibits and
Reports on Form 8-K

(a)    Exhibits

|Exhibit No. |  | Description                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Employment
Contract  between TSFG and William P. Crawford,  Jr.                                                                                                                                                                                          
|10.2        |  | Employment Contract
between TSFG and J.W. Davis                                                                                                                                                                                                          
|10.3        |  | Employment Contract
between TSFG and Mary A. Jeffrey                                                                                                                                                                                                     
|10.4        |  | Employment Contract
between TSFG and J. Stanley Ross                                                                                                                                                                                                     
|10.5        |  | Employment Contract
between TSFG and Timothy K. Schools                                                                                                                                                                                                  
|10.6        |  | Employment Contract
between TSFG and Kendall L. Spencer                                                                                                                                                                                                  
|10.7        |  | Employment Contract
between TSFG and Michael W. Sperry                                                                                                                                                                                                   
|10.8        |  | Supplemental Executive Retirement Agreement between TSFG and William P. Crawford, Jr.                                                                                                                                                                    
|10.9        |  | Supplemental Executive Retirement Agreement between TSFG and Mary A. Jeffrey                                                                                                                                                                             
|10.10       |  | Supplemental Executive Retirement Agreement between TSFG and J. Stanley Ross                                                                                                                                                                             
|10.11       |  | Supplemental Executive Retirement Agreement between TSFG and Timothy K. Schools                                                                                                                                                                          
|10.12       |  | Supplemental Executive Retirement Agreement between TSFG and Kendall L. Spencer                                                                                                                                                                          
|10.13       |  | Supplemental Executive Retirement Agreement between TSFG and Michael W. Sperry                                                                                                                                                                           
|31.1        |  | Certificate  of Principal  Executive  Officer  pursuant to Rule  13a-14a/15(d)-14(a)  of
                      Securities  Exchange Act of 1934, as amended,  as adopted pursuant to Section 302 of the
                      Sarbanes Oxley Act of 2002.
|31.2        |  | Certificate  of Principal  Financial  Officer  pursuant to Rule  13a-14a/15(d)-14(a)  of
                      Securities  Exchange Act of 1934, as amended,  as adopted pursuant to Section 302 of the
                      Sarbanes Oxley Act of 2002.
|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.                                                                                         

(b)    
          Reports on Form 8-K

| | Form
8-K dated July 20, 2004 furnishing under Item 12 TSFGs second quarter earnings
release for 2004.                                           
| | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Form 8-K dated July 16, 2004 announcing under Items 2 and 7 that TSFG had completed its
acquisition of CNB Florida Bancshares, Inc.              
|
| | Form
8-K dated July 16, 2004 announcing under Items 2 and 7 that TSFG had completed its
acquisition of Florida Banks, Inc.                       
|
| | Form
8-K/A dated August 5, 2004 amending and restating under Item 2 certain information about
TSFGs acquisition of Florida Banks, Inc.          
|
| | Form
8-K dated October 19, 2004 furnishing under Item 2.02 TSFGs third quarter earnings
release for 2004.                                       
|
| | Form
8-K dated October 27, 2004 furnishing under Item 7.01 certain information about
TSFGs announcement to acquire Pointe Financial Corporation.



# 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: November 8, 2004 | /s/ William S. Hummers III
                                                              William S. Hummers III
                                                              Vice Chairman and Executive Vice President
                                                              (Principal Accounting and Chief Financial Officer)



# INDEX TO EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                                                                              
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1        |  | Employment
Contract  between TSFG and William P. Crawford,  Jr.                                                                                                                                                                                          
|10.2        |  | Employment Contract
between TSFG and J.W. Davis                                                                                                                                                                                                          
|10.3        |  | Employment Contract
between TSFG and Mary A. Jeffrey                                                                                                                                                                                                     
|10.4        |  | Employment Contract
between TSFG and J. Stanley Ross                                                                                                                                                                                                     
|10.5        |  | Employment Contract
between TSFG and Timothy K. Schools                                                                                                                                                                                                  
|10.6        |  | Employment Contract
between TSFG and Kendall L. Spencer                                                                                                                                                                                                  
|10.7        |  | Employment Contract
between TSFG and Michael W. Sperry                                                                                                                                                                                                   
|10.8        |  | Supplemental Executive Retirement Agreement between TSFG and William P. Crawford, Jr.                                                                                                                                                                    
|10.9        |  | Supplemental Executive Retirement Agreement between TSFG and Mary A. Jeffrey                                                                                                                                                                             
|10.10       |  | Supplemental Executive Retirement Agreement between TSFG and J. Stanley Ross                                                                                                                                                                             
|10.11       |  | Supplemental Executive Retirement Agreement between TSFG and Timothy K. Schools                                                                                                                                                                          
|10.12       |  | Supplemental Executive Retirement Agreement between TSFG and Kendall L. Spencer                                                                                                                                                                          
|10.13       |  | Supplemental Executive Retirement Agreement between TSFG and Michael W. Sperry                                                                                                                                                                           
|31.1        |  | Certificate  of Principal  Executive  Officer  pursuant to Rule  13a-14a/15(d)-14(a)  of
                      Securities  Exchange Act of 1934, as amended,  as adopted pursuant to Section 302 of the
                      Sarbanes Oxley Act of 2002.
|31.2        |  | Certificate  of Principal  Financial  Officer  pursuant to Rule  13a-14a/15(d)-14(a)  of
                      Securities  Exchange Act of 1934, as amended,  as adopted pursuant to Section 302 of the
                      Sarbanes Oxley Act of 2002.
|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.