---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
 20549

Form 10-K

||X|   | Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934     
|----- | -----------------------------------------------------------------------------------------
|     
|      | For the fiscal year ended December 31, 2004 or                                           
|     
||   | | Transition report pursuant to Section 12 or 15(d)
 of the Securities Exchange Act of 1934
|     
|      | For the transition period ________________ to ________________                           

Commission File Number: 0-15083

|The South Financial Group, Inc.                       
|------------------------------------------------------
|(Exact Name of Registrant as Specified in its Charter)

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

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

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

Securities registered pursuant to Section 12(b)
 of the Act:

|None                  | None                                       
|--------------------- | -------------------------------------------
|(Title of Each Class) | (Name of each exchange on which registered)

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

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

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

The
 aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant,
 computed by reference to the closing price of such stock on June 30, 2004, was approximately $1.6 billion.

The
 number of shares of the Registrants common stock, $1.00 par value, outstanding on March 1, 2005
 was 71,683,258.

DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Proxy Statement
relating to the 2005 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission are specifically identified and incorporated by reference into Part II and III.

The Exhibit Index begins on page 103.



INDEX

|         |  | Page                                                                                          
|-------- |  | ----------------------------------------------------------------------------------------------
|PART I   |  |                                                                                               
|         | 
|Item 1   |  | Business                                                                                      
|Item 2   |  | Properties                                                                                    
|Item 3   |  | Legal Proceedings                                                                             
|Item 4   |  | Submission of Matters to a Vote of Shareholders                                               
|         | 
|PART II  | 
|         | 
|Item 5   |  | Market for the Registrant's Common Equity, Related Shareholder Matters, and Issuer            
|         |  | Purchases of Equity Securities                                                                
|Item 6   |  | Selected Financial Data                                                                       
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations         
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                                    
|Item 8   |  | Financial Statements and Supplementary Data                                                   
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|Item 9A  |  | Controls and Procedures                                                                       
|Item 9B  |  | Other Information                                                                             
|         | 
|PART III | 
|         | 
|Item 10  |  | Directors and Executive Officers of the Registrant                                            
|Item 11  |  | Executive Compensation                                                                        
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|Item 13  |  | Certain Relationships and Related Transactions                                                
|Item 14  |  | Principal Accountant Fees and Services                                                        
|         | 
|PART IV  | 
|         | 
|Item 15  |  | Exhibits and Financial Statement Schedules                                                    



# PART I

# Item 1.     Business

# The Company

The
South Financial Group, Inc. is a South Carolina corporation headquartered in Greenville,
South Carolina. TSFG refers to The South Financial Group, Inc. and its
subsidiaries, except where the context requires otherwise. TSFG was formed in 1986 and is
a financial holding company, as defined by the Gramm-Leach-Bliley Act of 1999. TSFG
operates principally through Carolina First Bank, a South Carolina-chartered commercial
bank, and Mercantile Bank, a Florida-chartered commercial bank.

TSFGs
subsidiaries provide a full range of financial services, including banking, cash
management, insurance, investments, mortgage, and trust services, designed to meet the
financial needs of its customers. TSFG currently conducts business through 76 branch
offices in South Carolina, 54 in Florida, and 24 in North Carolina. At December 31, 2004,
TSFG had $13.8 billion in assets, $8.1 billion in loans, $7.7 billion in deposits, $1.4
billion in shareholders equity, and $2.3 billion in market capitalization.

TSFG
began its operations in 1986 with the de novo opening of Carolina First Bank in
Greenville. Its opening was undertaken, in part, in response to opportunities resulting
from the takeovers of several South Carolina-based banks by larger southeastern regional
bank holding companies in the mid-1980s. In the late 1990s, TSFG perceived a similar
opportunity in Florida where banking relationships were in a state of flux due to the
acquisition of several larger Florida banks. In 1999, TSFG entered the Florida market with
the same strategy of capitalizing on the environment created by these acquisitions.

TSFG
has pursued a strategy of growth through internal expansion and the acquisition of
financial institutions and branch locations in selected market areas. TSFG seeks to expand
selectively in fast-growing markets in the Southeast, concentrating its growth in
metropolitan statistical areas (MSAs). TSFG has emphasized internal growth
through the acquisition of market share from the large out-of-state bank holding companies
and other competitors. It attempts to acquire market share by providing quality banking
services and personal service to individuals and business customers. Since inception, TSFG
has consummated 19 acquisitions of financial institutions, five non-bank financial service
companies, and two insurance agencies. Approximately 45% of TSFGs total asset growth
has come from acquisitions. TSFG expects to continue to seek similar acquisitions that fit
its acquisition criteria. On October 27, 2004, TSFG signed a definitive agreement to
acquire Pointe Financial Corporation (Pointe), which operates 10 branch
offices in Dade, Broward, and Palm Beach counties in Florida and had approximately $413
million in total assets at December 31, 2004. This acquisition is expected to close in the
second quarter of 2005.

At
December 31, 2004 and 2003, TSFG had no non-consolidated special purpose entities.

# Available Information

All
of TSFGs electronic filings with the Securities and Exchange Commission
(SEC), including the 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 accessible at no cost
on TSFGs web site, www.thesouthgroup.com, through the Investor Relations link. In
addition, through this same link, TSFG makes available its Corporate Governance
Guidelines, Code of Conduct, Code of Ethics for Senior Executive and Financial Officers,
Whistleblower Policy, and charters for Board Committees, including the Executive, Audit,
Compensation, Nominating and Corporate Governance, and Capital and Risk Management
Committees. TSFGs SEC filings are also available through the SECs web site at
www.sec.gov.

# Subsidiary Banks

TSFG
manages its banking subsidiaries by dividing its franchise into banking markets run by
market presidents. This structure allows TSFG to operate like a community bank focusing on
personal customer service. However, because of the size of the overall organization,
TSFGs subsidiary banks can also offer a full range of sophisticated products and
services more typical of larger regional banks.

1



Carolina
First Bank. Carolina First Bank, headquartered in Greenville, South Carolina, engages
in a general banking business through Carolina First Bank, which serves South Carolina and
coastal and western North Carolina. Carolina First Bank operated through 100 branches with
$9.2 billion in assets, $5.0 billion in loans, and $4.7 billion in deposits at December
31, 2004.

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

| |  | the Greenville and Anderson
metropolitan area (located in the Upstate region of South Carolina);                                      
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the Hendersonville
and Asheville metropolitan area (located in the Western region of North Carolina);                                 
| |  | the
Rock Hill, or greater South Charlotte, metropolitan area (located in the Piedmont region
of South Carolina);                      
| |  | the Columbia metropolitan area (located in the Midlands region of
South Carolina);                                                    
| |  | the Myrtle Beach, Georgetown, and Wilmington metropolitan areas
(located in Coastal region of South Carolina and North Carolina ); and
| |  | the Charleston and Hilton Head metropolitan areas (located in the lower Coastal region of South Carolina).                            

These
principal market areas represent the largest MSAs in the states. In addition,
approximately one-fourth of Carolina First Bank branch locations are in other counties,
which are not a part of these metropolitan areas.

Myrtle
Beach and Hilton Head Island are coastal resort areas that serve a significant number of
tourists primarily during the summer months. Because of the seasonal nature of these
market areas, most of the businesses, including financial institutions, are subject to
moderate swings in activity between the winter and summer months. Otherwise, Carolina
First Banks business is not subject to significant seasonal factors.

Carolina
First Bank targets small and middle market businesses and consumers in its market areas.
Carolina First Bank provides a full range of commercial and consumer banking services,
including deposit accounts, secured and unsecured loans through direct and indirect
channels, residential mortgage originations, cash management programs, trust functions,
safe deposit services, and certain insurance and brokerage services. In 1999, Carolina
First Bank began offering Internet banking services, including bill payment, through
Carolina First Banks web site and Bank CaroLine, an Internet-only banking product.
Carolina First Banks deposits are insured by the Federal Deposit Insurance
Corporation (FDIC).

Mercantile
Bank. Mercantile Bank, headquartered in Orlando, Florida, engages in a general banking
business through 54 branches with $4.9 billion in assets, $3.2 billion in loans, and
$3.0 billion in deposits at December 31, 2004. It currently operates in five principal
Florida market areas:

| |  | the Orlando metropolitan area
(located in the Central Florida region);       
| | - | -----------------------------------------------------------------------------
| |  | the Tampa Bay metropolitan area (located in the
Tampa Bay region);           
| |  | the Gainesville metropolitan area (located in the North Central
region);     
| |  | the Jacksonville metropolitan area (located in the North Florida region); and
| |  | the Broward County area (located in the South Florida region).               

TSFG
entered Florida in 1999 with two acquisitions in central Florida and a de novo branch in
Jacksonville. It operated as Citrus Bank, the name of the larger acquired company, until
2002. In 2002, TSFG expanded into the Tampa Bay market with the acquisitions of Gulf West
Banks, Inc. (Gulf West), the bank holding company for Mercantile Bank, and
Central Bank of Tampa. Following the Gulf West acquisition, TSFG changed the name of its
Florida banking operation to Mercantile Bank.

Mercantile
Bank targets small and middle market businesses and consumers in its market areas.
Mercantile Bank provides a full range of commercial and consumer banking services,
including deposit accounts, secured and unsecured loans through direct and indirect
channels, residential mortgage originations, cash management programs, trust functions,
safe deposit services, and certain insurance and brokerage services. In 2000, Mercantile
Bank began offering Internet banking services, including bill payment, through Mercantile
Banks web site. Mercantile Banks deposits are FDIC insured.

2



# Non-Bank Subsidiaries

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

American
Pensions, Inc. In 2003, TSFG acquired American Pensions, Inc. (API), which
is a benefit plan administrator headquartered in Mount Pleasant, South Carolina. At
December 31, 2004, API had 197 corporate accounts and managed $313.2 million in plan
assets.

Carolina
First Community Development Corporation. In 2003, Carolina First Bank formed a
subsidiary, Carolina First Community Development Corporation (CFCDC), to
underwrite low-income community business loans. CFCDC has been certified by the Department
of the Treasury as a qualified Community Development Entity and meets the eligibility
requirements for participation in the New Markets Tax Credit Program.

CF
Investment Company. CF Investment Company (CF Investment), headquartered
in Greenville, South Carolina, is licensed through the Small Business Administration, as a
Small Business Investment Company. CF Investments principal focus is investing in
companies that have a bank-related technology or service that TSFG or its subsidiaries can
use. As of December 31, 2004, CF Investment had total assets of $1.5 million.

CF
Technology Services Company. In January 2000, TSFG formed CF Technology Services
Company (CF Technology), which is headquartered in Lexington, South Carolina.
It is responsible for substantially all of TSFGs technology requirements and related
matters. Its mission is to create customer and shareholder value by developing and
delivering superior technology and financial-based products and services. CF Technology
strives to provide competitive advantages, increase revenue, produce efficiencies, and
strengthen customer relationships through innovative use of information technology. CF
Technology has adopted security and business recovery processes to safeguard vital
corporate assets and information.

Gardner
Associates, Inc. In 2002, TSFG acquired Gardner Associates, Inc., which operates an
insurance agency business primarily in the Midlands area of South Carolina. TSFG intends
to utilize Gardner Associates, Inc. as a platform to build its insurance-related business
in that market area.

REIT
Subsidiaries. In 1999, 2001 and 2003, TSFG formed three real estate investment trust
subsidiaries (REITs), which have issued preferred and debt securities to
institutional investors as a means of raising regulatory capital. They do not engage in
other activities apart from the internal management of their assets and liabilities.

South
Financial Asset Management, Inc. In December 2002, TSFG formed South Financial Asset
Management, Inc. (SFAM) for the purpose of engaging in an asset management
business. SFAM is a registered investment advisor and targets large endowments, pension
funds and similar entities for fund management.

# Business Segments

Item 8,
Note 34 to the Consolidated Financial Statements discusses TSFGs business segments,
which information is incorporated herein by reference.

# Competition

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

The
banking industry continues to consolidate, which presents opportunities for TSFG to gain
new business. However, consolidation may further intensify competition if additional
financial services companies enter TSFGs market areas through the acquisition of
local financial institutions.

3



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

# Employees

At
December 31, 2004, TSFG and its subsidiaries employed 2,308 full-time equivalent
employees. TSFG provides a variety of benefit programs including retirement and stock
ownership plans as well as health, life, disability, and other insurance. TSFG also
maintains training, educational, and affirmative action programs designed to prepare
employees for positions of increasing responsibility. TSFG believes that its relations
with employees are good.

# Monetary Policy

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

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

# Impact of Inflation

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

# Supervision and
Regulation

General

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

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

4



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

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

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

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

The
Gramm-Leach-Bliley Act of 1999 (GLB) covers a broad range of issues, including
a repeal of most of the restrictions on affiliations among depository institutions,
securities firms and insurance companies. GLB also permits bank holding companies to elect
to become financial holding companies. A financial holding company may engage in or
acquire companies that engage in a broad range of financial services, including securities
activities such as underwriting, dealing, investment and merchant banking, insurance
underwriting and sales, and brokerage activities. In order to become a financial holding
company, the bank holding company and all of its affiliated depository institutions must
be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment
Act rating. TSFG became a financial holding company in 2001.

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

5



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

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

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

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

CF
Investment Company. CF Investment is licensed through the Small Business
Administration as a Small Business Investment Company. It is subject to regulation and
supervision by the Small Business Administration.

Other
Regulations. Interest and certain other charges collected or contracted for by TSFG
subsidiaries are subject to state usury laws and certain federal laws concerning interest
rates. TSFGs loan operations are also subject to certain federal laws applicable to
credit transactions, such as the federal Truth-In-Lending Act governing disclosures of
credit terms to consumer borrowers. The deposit operations of Carolina First Bank and
Mercantile Bank are also subject to the Right to Financial Privacy Act, which imposes a
duty to maintain confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve to implement that act,
which govern automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of automated teller machines
and other electronic services.

Dividends

The
holders of TSFGs common stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available. As a legal entity
separate and distinct from its subsidiaries, TSFG depends on the payment of dividends from
its subsidiaries for its revenues. Current federal law prohibits, except under certain
circumstances and with prior regulatory approval, an insured depository institution from
paying dividends or making any other capital distribution if, after making the payment or
distribution, the institution would be considered undercapitalized, as that
term is defined in applicable regulations. South Carolina and Florida banking regulations
restrict the amount of dividends that the subsidiary banks can pay to TSFG, and may
require prior approval before declaration and payment of any excess dividend.

6



Capital
Adequacy

TSFG.       
          The Federal Reserve has adopted risk-based capital guidelines for bank holding
          companies. Under these guidelines, the minimum ratio of total capital to
          risk-weighted assets (including certain off-balance sheet activities, such as
          standby letters of credit) is 8%. At least half of the total capital is required
          to be tier 1 capital, principally consisting of common
          stockholders equity, non-cumulative preferred stock, a limited amount of
          cumulative perpetual preferred stock, and mandatorily redeemable preferred
          stock, less certain goodwill items. The remainder (tier 2 capital) may
          consist of a limited amount of subordinated debt and intermediate-term preferred
          stock, certain hybrid capital instruments and other debt securities, perpetual
          preferred stock, and a limited amount of the allowance for loan losses. In
          addition to the risk-based capital guidelines, the Federal Reserve has adopted a
          minimum tier 1 (leverage) capital ratio under which a bank holding
          company must maintain a minimum level of tier 1 capital (as determined
          under applicable rules) to average total consolidated assets of at least 3% in
          the case of bank holding companies which have the highest regulatory examination
          ratios and are not contemplating significant growth or expansion. All other bank
          holding companies, including TSFG, are required to maintain a ratio of at least
          4.0%. At December 31, 2004, TSFGs capital levels exceeded both the
          risk-based capital guidelines and the applicable minimum leverage capital ratio.

Carolina
First Bank and Mercantile Bank. Carolina First Bank and Mercantile Bank are subject to
capital requirements imposed by the FDIC. The FDIC requires state-chartered nonmember
banks to comply with risk-based capital standards substantially similar to those required
by the Federal Reserve, as described above. The FDIC also requires state-chartered
nonmember banks to maintain a minimum leverage ratio similar to that adopted by the
Federal Reserve. Under the FDICs leverage capital requirement, state nonmember banks
that (i) receive the highest rating during the examination process and (ii) are
not anticipating or experiencing any significant growth are required to maintain a minimum
leverage ratio of 3% of tier 1 capital to total assets; all other banks, including
Carolina First Bank and Mercantile Bank, are required to maintain an absolute minimum
leverage ratio of not less than 4%. As of December 31, 2004, Carolina First Bank and
Mercantile Bank exceeded each of the applicable regulatory capital requirements.

Deposit
Insurance Assessments

Carolina
First Bank and Mercantile Bank are subject to insurance assessments imposed by the FDIC.
The FDIC has a risk-based assessment schedule where the actual assessment to be paid by
each FDIC-insured institution is based on the institutions assessment risk
classification. This classification is determined based on whether the institution is
considered well capitalized, adequately capitalized or
undercapitalized, as such terms have been defined in applicable federal
regulations adopted to implement the prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and whether
such institution is considered by its supervisory agency to be financially sound or to
have supervisory concerns. The assessment rate for the first quarter 2005 is 0.0144%
(annualized) for both BIF-insured deposits and SAIF-insured deposits. This rate is
set quarterly and may change during the year. Carolina First Banks total deposits
that were formerly associated with thrift institutions (approximately 30% of total
deposits) are subject to SAIF insurance assessments imposed by the FDIC.

Other
Safety and Soundness Regulations

Prompt
Corrective Action. Current law provides the federal banking agencies with broad powers
to take prompt corrective action to resolve problems of insured depository institutions.
The extent of these powers depends upon the capitalization of the institutions. Under
uniform regulations defining such capital levels issued by each of the federal banking
agencies, a bank is considered well capitalized if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a tier 1 risk-based capital ratio of
6% or greater, (iii) a leverage ratio of 5% or greater, and (iv) is not subject
to any order or written directive to meet and maintain a specific capital level for any
capital measure. An adequately capitalized bank is defined as one that has
(i) a total risk-based capital ratio of 8% or greater, (ii) a tier 1
risk-based capital ratio of 4% or greater, and (iii) a leverage ratio of 4% or
greater. A bank is considered (A) undercapitalized if it has (i) a
total risk-based capital ratio of less than 8%, (ii) a tier 1 risk-based capital
ratio of less than 4% or (iii) a leverage ratio of less than 4%;
(B) significantly undercapitalized if the bank has (i) a total
risk-based capital ratio of less than 6%, (ii) a tier 1 risk-based capital ratio of
less than 3%, or (iii) a leverage ratio of less than 3%; and
(C) critically undercapitalized if the bank has a ratio of tangible
equity to total assets equal to or less than 2%. As of December 31, 2004, Carolina First
Bank and Mercantile Bank each met the definition of well capitalized.

Brokered
Deposits. Current federal law also regulates the acceptance of brokered deposits by
insured depository institutions to permit only a well capitalized depository
institution to accept brokered deposits without prior regulatory approval. Under FDIC
regulations, well capitalized insured depository institutions may accept
brokered deposits without restriction, adequately capitalized insured
depository institutions may accept brokered deposits with a waiver from the FDIC (subject
to certain restrictions on payments of interest rates) while undercapitalized
insured depository institutions may not accept brokered deposits.

7



Transactions
Between TSFG, its Subsidiaries, and Affiliates

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

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

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

Anti-Money
Laundering Legislation

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

Sarbanes-Oxley

On
July 30, 2002, the Sarbanes-Oxley Act of 2002 was signed into law. It mandated sweeping
reforms and implemented a number of requirements for public companies, including but not
limited to, corporate governance, auditing and accounting, executive compensation, and
enhanced timely disclosure of corporate information. These changes are intended to allow
shareholders, investors, analysts, and others to more effectively monitor the performance
of companies and directors.

On
May 27, 2003, final rules and amendments, which govern managements reporting on
internal control over financial reporting and certification of disclosures in Exchange Act
periodic reports, were signed into law. For TSFG, these rules took effect for the year
ended December 31, 2004. Among the reforms and new requirements are the following:

| |  | It requires a statement of managements responsibility for establishing and
maintaining adequate internal control over financial reporting.     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | It requires a statement identifying the framework used by management to evaluate the
effectiveness of internal control over financial reporting.
| |  | It requires that management discuss
its assessment of the effectiveness of internal control over financial reporting.                           
| |  | It
requires a statement that the issuers independent auditor has issued an attestation
report on managements assessment.                      

8



TSFG
believes it has complied with the reforms and new requirements.

Additional
Information

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

# Item 2.     Properties

TSFGs
principal executive offices are located at 102 South Main Street, Greenville, South
Carolina. TSFG leases approximately 111,000 square feet of this location, which also
houses Carolina First Banks Greenville main office branch. The majority of
TSFGs administrative functions presently reside at this location. TSFG owns a
100,000 square foot building in Lexington, South Carolina, the headquarters for CF
Technology, which houses the technology and operations departments. TSFG leases the land
for the CF Technology building under a 30 year lease. In addition, TSFG leases non-banking
office space in 17 locations in South Carolina and Florida.

At
December 31, 2004, TSFG operated 154 branch offices, including 76 in South Carolina, 54 in
Florida, and 24 in North Carolina. Of these locations, TSFG or one of its subsidiaries
owns 87 locations, which includes 8 locations with land leases, and leases 67 locations.
In addition, TSFG leases one stand-alone ATM location.

TSFG
believes that its physical facilities are adequate for its current operations.

# Item 3.     Legal Proceedings

See
Item 8, Legal Proceedings included in Note 24 to the Consolidated
Financial Statements for a discussion of legal proceedings, which information is
incorporated herein by reference.

# Item 4.     Submission of
Matters to a Vote of Shareholders

No
matter was submitted to a vote of security holders by solicitation of proxies or otherwise
during the fourth quarter of 2004.

# PART II

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

# Market for Common Stock
and Related Matters.

TSFGs
common stock trades on The Nasdaq Stock Market under the symbol TSFG. At December 31,
2004, TSFG had 9,101 shareholders of record and 71,252,346 shares outstanding. See
Item 7, Capital Resources and Dividends and Item 8, Notes 27
and 28 to the Consolidated Financial Statements for a discussion of capital stock and
dividends, which information is incorporated herein by reference.

|                       | Three Months Ended |                  |  |  | 
|---------------------- | ------------------ | ---------------- |  |  | 
|
|2004                   |                    |                  |  |  | 
|Common stock price:    |                   
|High                   |                    | $          32.61 |  |  | 
|Low                    |                    | 27.95            |  |  | 
|Close                  |                    | 32.53            |  |  | 
|Cash dividend declared |                    | 0.16             |  |  | 
|Volume traded          |                    | 16,947,410       |  |  | 

9



|                       | Three Months Ended |                  |  |  | 
|---------------------- | ------------------ | ---------------- |  |  | 
|
|2003                   |                    |                  |  |  | 
|Common stock price:    |                   
|High                   |                    | $          29.58 |  |  | 
|Low                    |                    | 24.50            |  |  | 
|Close                  |                    | 27.75            |  |  | 
|Cash dividend declared |                    | 0.15             |  |  | 
|Volume traded          |                    | 22,312,042       |  |  | 

Unregistered Sales of Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

|ISSUER PURCHASES OF EQUITY SECURITIES |  |  |  |       
|------------------------------------- |  |  |  | ------
|
|October 1, 2004 to October 31, 2004   |  |  |  | 8,074 
|November 1, 2004 to November 30, 2004 |  |  |  | 3,448 
|December 1, 2004 to December 31, 2004 |  |  |  | --    
|                                      |  |  |  |       
|Total                                 |  |  |  | 11,522
|                                      |  |  |  |       

|(1) | These shares were canceled in  connection  with option  exercises.  Pursuant to TSFG's stock option  plans,  participants  may
    exercise stock options by  surrendering  shares of TSFG common stock owned by the  participants  as payment of the option  exercise
    price.  Shares  surrendered by  participants  are  repurchased  pursuant to the terms of the  applicable  stock option plan and not
    pursuant to publicly announced share repurchase programs.                                                                                                                                                                             
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In February of 2003, TSFG announced a stock  repurchase  program  authorizing TSFG to repurchase up to 1 million shares of its
    common stock. In April of 2003, TSFG announced a stock repurchase program  authorizing TSFG to repurchase up to 1 million shares of
    its common stock.  Neither of these stock repurchase  programs has an expiration date and each respective  program will expire upon
    completion of repurchases  totaling the amount  authorized to repurchase.  At December 31, 2004, there are 289,502 shares remaining
    under the February 2003 authorization and 1 million shares under the April 2003 authorization.

See Equity  Compensation  Plan Data in the  Registrants'  Proxy Statement  relating to the 2005 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission, which information is incorporated herein by reference.

10



# Item 6.     Selected Financial Data

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

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

|                                       | Years Ended December 31, |  |   |            |   |   |           
|-------------------------------------- | ------------------------ |  | - | ---------- | - | - | ----------
|
|Income Statement Data                  |                          |  |   |            |   |   |           
|Net interest income                    |                          |  | $ | 366,728    |   | $ | 272,591   
|Noninterest income                     |                          |  |   | 94,767     |   |   | 95,490    
|                                       |                          |  |   |            |   |   |           
|Total revenue                          |                          |  |   | 461,495    |   |   | 368,081   
|                                       |                          |  |   |            |   |   |           
|Provision for loan losses              |                          |  |   | 34,987     |   |   | 20,581    
|Noninterest expenses                   |                          |  |   | 250,244    |   |   | 207,170   
|Income from continuing   operations    |                          |  |   | 119,607    |   |   | 95,058    
|Net income                             |                          |  |   | 119,117    |   |   | 95,058    
|                                       |                          | 
|Per Common Share Data                  |                          | 
|Basic:                                 |                          | 
|Income from continuing      operations |                          |  | $ | 1.85       |   | $ | 1.93      
|Net income                             |                          |  |   | 1.84       |   |   | 1.93      
|Diluted:                               |                          | 
|Income from continuing      operations |                          |  |   | 1.81       |   |   | 1.89      
|Net income                             |                          |  |   | 1.80       |   |   | 1.89      
|Average common shares outstanding:     |                          | 
|Basic                                  |                          |  |   | 64,592     |   |   | 49,204    
|Diluted                                |                          |  |   | 66,235     |   |   | 50,328    
|Book value (December 31)               |                          |  | $ | 19.66      |   | $ | 16.59     
|Market price (December 31)             |                          |  |   | 32.53      |   |   | 27.75     
|Cash dividends declared                |                          |  |   | 0.61       |   |   | 0.57      
|                                       |                          | 
|Balance Sheet Data (Year End)          |                          | 
|Total assets                           |                          |  | $ | 13,789,814 |   | $ | 10,719,401
|Securities                             |                          |  |   | 4,310,088  |   |   | 4,007,571 
|Loans held for investment              |                          |  |   | 8,107,757  |   |   | 5,732,205 
|Allowance for loan losses              |                          |  |   | 96,918     |   |   | 73,287    
|Intangible assets                      |                          |  |   | 611,450    |   |   | 353,079   
|Deposits                               |                          |  |   | 7,665,537  |   |   | 6,028,649 
|Long-term debt                         |                          |  |   | 2,962,143  |   |   | 2,702,879 
|Shareholders' equity                   |                          |  |   | 1,400,603  |   |   | 979,869   
|                                       |                          | 
|Balance Sheet Data (Averages)          |                          | 
|Total assets                           |                          |  | $ | 12,200,614 |   | $ | 9,260,767 
|Securities (excludes unrealized        |                          | 
|gains (losses) on available            |                          | 
|for sale securities)                   |                          |  |   | 4,158,202  |   |   | 3,471,324 
|Loans held for investment              |                          |  |   | 6,909,545  |   |   | 4,864,168 
|Total earning assets                   |                          |  |   | 11,101,951 |   |   | 8,425,590 
|Deposits                               |                          |  |   | 6,893,753  |   |   | 5,147,627 
|Shareholders' equity                   |                          |  |   | 1,171,121  |   |   | 709,139   
|                                       |                          | 
|Performance Ratios                     |                          | 
|Net interest margin (tax-equivalent)   |                          |  |   | 3.34       | % |   | 3.27      
|Return on average assets               |                          |  |   | 0.98       |   |   | 1.03      
|Return on average equity               |                          |  |   | 10.17      |   |   | 13.40     
|Tangible equity to tangible assets     |                          |  |   | 5.99       |   |   | 6.05      
|                                       |                          | 
|Asset Quality                          |                          | 
|Nonperforming assets                   |                          |  | $ | 55,976     |   | $ | 60,774    
|Nonperforming assets as a % of loans   |                          | 
|held for investment and foreclosed     |                          | 
|property                               |                          |  |   | 0.69       | % |   | 1.06      
|Net charge-offs to average loans       |                          | 
|held for investment                    |                          |  |   | 0.46       |   |   | 0.62      
|Allowance for loan losses as a % of    |                          | 
|loans held for investment              |                          |  |   | 1.20       |   |   | 1.28      
|                                       |                          | 
|Operations Data                        |                          | 
|Branch offices                         |                          |  |   | 154        |   |   | 134       
|Employees (full-time equivalent)       |                          |  |   | 2,308      |   |   | 1,918     

11



# Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion and analysis are presented to assist in understanding the financial
condition, changes in financial condition, results of operations, and cash flows of The
South Financial Group, Inc. and its subsidiaries (collectively, TSFG), except
where the context requires otherwise. TSFG may also be referred to herein as
we, us, or our. This discussion should be read in
conjunction with the audited consolidated financial statements and accompanying notes
presented in Item 8 of this report and the supplemental financial data appearing
throughout this report. Percentage calculations contained herein have been calculated
based upon actual, not rounded, results.

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

Forward-Looking Statements

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

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

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

12



Non-GAAP Financial
Information

This
report also contains financial information determined by methods other than in accordance
with Generally Accepted Accounting Principles (GAAP). TSFGs management
uses these non-GAAP measures to analyze TSFGs performance. In particular, TSFG
presents operating noninterest income as a percentage of operating total revenue,
operating efficiency ratio, and certain designated net interest income amounts on a
tax-equivalent basis (in accordance with common industry practice). Management uses
operating measures in the calculation of certain of TSFGs ratios to analyze on a
consistent basis and over a longer period of time the performance of which it considers to
be its core banking operations. Management believes that the presentation of net interest
income on a tax-equivalent basis aids in the comparability of net interest income arising
from both taxable and tax-exempt sources.   TSFG also presents loan and deposit growth, excluding loans/deposits acquired net of
dispositions (organic). 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 $13.8 billion in total assets with 154 branch
offices in South Carolina, Florida, and North Carolina at December 31, 2004. TSFG operates
primarily through two subsidiary banks:

| |  | Carolina First Bank, the largest South Carolina-headquartered commercial bank, operates in
South Carolina, North Carolina, and on the Internet under the brand name, Bank CaroLine;
and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mercantile Bank operates in the
Jacksonville, Orlando, Tampa Bay, Gainesville, and Ft. Lauderdale Florida markets.                                                                     

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.

Approximately
45% of TSFGs total asset growth has come through acquisitions. TSFG will continue to
consider acquisitions that meet its acquisition criteria of strategic franchise
enhancement, accretion to cash operating earnings per share within 12 months, and
consistency with TSFGs 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, which had approximately $413
million in assets at December 31, 2004. This acquisition is expected to close in the
second quarter of 2005.

TSFG
has pursued a strategy of growth through internal expansion and the acquisition of
financial institutions and branch locations in selected market areas. TSFG seeks to expand
selectively in fast-growing markets in the Southeast, concentrating its growth in
metropolitan statistical areas (MSAs). 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 42% of TSFGs total deposits will be in Florida.

For
2004, net income totaled $119.1 million, up 25.3%, from $95.1 million for 2003. Strong
loan growth, net interest margin expansion, operating efficiency improvements, and
effective merger integration drove the increase. For 2004, net income per diluted share
totaled $1.80, a 4.8% decrease from $1.89 per diluted share for 2003. For the same period,
average diluted shares outstanding increased 31.6%, 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
2004, net interest income, TSFGs primary source of revenue, accounted for 79.5% 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 2004 increased
34.5% over 2003, principally due to strong organic loan growth (which improved the earning
asset mix), growth from acquisitions, and a seven basis point increase in the net interest
margin.

13



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 decreased to $94.8 million for 2004, down 0.8% from $95.5 million for 2003. For
2004, noninterest income included $11.7 million in gains on available for sale securities
(including equity investments), a $10.4 million other-than-temporary impairment of Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation perpetual
preferred stock, and a $2.4 million gain on disposition of land associated with a
conservation grant, compared with $16.5 million in gains on available for sale securities
(including equity investments) and a $601,000 gain on the sale of a branch office in 2003.
Excluding these non-operating items, noninterest income increased by 16.1% for 2004,
compared with 2003. For 2004, 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 represented 76.3% of noninterest income,
excluding non-operating items.

While
growing revenues, TSFG has also focused on controlling expenses and successfully
integrating acquisitions. For 2004, noninterest expenses totaled $250.2 million, which
included $13.4 million of non-operating expenses (principally merger-related costs,
conservation grant of land and loss on early extinguishment of debt). Noninterest
expenses, excluding the non-operating items, increased by 19.3% for 2004, compared with
2003. Personnel expense, the largest component, accounts for half of total noninterest
expenses, excluding non-operating items.

TSFGs
strong loan growth continued during 2004. Loans held for investment at December 31, 2004
increased 41.4% over December 31, 2003. Adjusting for net acquired loans held for
investment, organic loan growth for 2004 was 16.2%. TSFGs loan growth was
well-diversified throughout its markets.

At
December 31, 2004, nonperforming assets as a percentage of loans held for investment and
foreclosed property declined to 0.69% from 1.06% at December 31, 2003. TSFGs
nonperforming asset ratio improved each quarter since December 31, 2002. Net loan
charge-offs as a percentage of loans held for investment totaled 0.46% for 2004, down from
0.62% for 2003. Loan portfolio credit quality can significantly impact earnings.
TSFGs provision for loan losses increased to $35.0 million for 2004 from $20.6
million for 2003, primarily as a result of the increased provision associated with strong
loan growth and higher charge-offs in the second half of 2004.

TSFG
gained core deposits and enhanced its deposit mix, reflecting acquisitions and successful
sales and promotional campaigns. Average deposit transaction account balances increased
40.5% during 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 64.8% for 2004 from 61.8% for 2003. For 2004, organic transaction deposit
growth, which excludes the net acquired transaction deposits, totaled 6.9%.

TSFGs
tangible equity to tangible asset ratio decreased to 5.99% at December 31, 2004 from 6.05%
at December 31, 2003, primarily due to an increase in the net unrealized loss on available
for sale securities.

Critical Accounting
Policies and Estimates

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

14



Allowance
for loan losses

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

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

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

Fair
Value of Certain Financial Instruments

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

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

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

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

15



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

Income
Taxes

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

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

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. There have been no events or circumstances since June 30, 2004 that indicate
there may be impairment. 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.

16



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

Please
see 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 the past three years.
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)

|                                    | AcqusitionDate | TotalAssets(1) | SharesIssued | PurhchasePrice Paidin Cash | IdentifiableIntangibleAssets(2) | Goodwill(2)
|----------------------------------- | -------------- | -------------- | ------------ | -------------------------- | ------------------------------- | -----------
|Bank Acquisitions                   |                |                |              |                            |                                 |            
|CNB Florida                         |                |               
|Lake City, Florida                  |                |                | 07/16/04     |                            |                                 | $          
|Florida Banks                       |                |               
|Jacksonville, Florida               |                |                | 07/16/04     |                            |                                 |            
|MountainBank Financial Corporation  |                |               
|Hendersonville, North Carolina      |                |                | 10/03/03     |                            |                                 |            
|Central Bank of Tampa               |                |               
|Tampa, Florida                      |                |                | 12/31/02     |                            |                                 |            
|Rock Hill Bank & Trust              |                |               
|Rock Hill Bank, South Carolina      |                |                | 10/31/02     |                            |                                 |            
|Gulf West Banks, Inc.               |                |               
|St. Petersburg, Florida             |                |                | 08/31/02     |                            |                                 |            
|                                    |                |               
|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     |                            |                                 |            
|Gardner Associates, Inc.            |                |               
|Columbia, South Carolina            |                |                | 09/20/02     |                            |                                 |            

|(1) | Book value at the acquisition date.                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Carrying  amount (identifiable  intangible  assets are not  reported  net of  accumulated
     amortization) at December  31,  2004.                                                                                                                             
|(3) | TSFG acquired  substantially  all of the assets and  liabilities.  TSFG agreed to pay a cash earnout based on recoveries  with
     respect to certain loans and net amounts recovered under RHBT Financial Corporation's ("RHBT") blanket bond insurance policy.
|(4) | 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.                                                         

17



|(5) | TSFG agreed to issue annual earnout shares,  valued at the time of issuance at approximately  $45,000,  for each of August 31,
     2005, 2006, and 2007, based on revenue retention.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Of this  amount,  up to 59,211  of these  shares  are  subject  to  forfeiture  back to TSFG if  certain  five-year  financial
     performance targets are not met.                 

On
October 31, 2002, TSFG acquired substantially all of the assets and deposits of Rock Hill
Bank & Trust (Rock Hill Bank), which was a wholly-owned subsidiary of
RHBT. Under the asset sale agreement, Rock Hill Bank received shares of TSFG common stock
and the right to receive a cash earnout essentially equal to 30% of the net improvement in
the aggregate charge-offs and reserves in a specified loan pool and 50% of net amounts
recovered under RHBTs blanket bond insurance policy with respect to such loans. As
of December 31, 2004, TSFG had incurred no obligation under the cash earnout associated
with the net improvements in the specified loan pool and in 2003 paid $1.3 million
associated with the net amounts recovered under RHBTs blanket bond insurance policy
with respect to such loans.

As
part of its acquisition strategy, TSFG considers acquisitions in its targeted footprint in
fast-growing markets. Table 2 summarizes the geographic focus for TSFGs acquisitions
completed during the past three years.

Table 2
SUMMARY OF BANK ACQUISITIONS - GEOGRAPHIC FOCUS

|                                   | AcquisitionDate | NumberofBranches | Geographic Focus
|---------------------------------- | --------------- | ---------------- | ----------------
|CNB Florida                        |                 | 07/16/04         |                 
|Florida Banks                      |                 | 07/16/04         |                 
|MountainBank Financial Corporation |                 | 10/03/03         |                 
|Central Bank of Tampa              |                 | 12/31/02         |                 
|Rock Hill Bank & Trust             |                 | 10/31/02         |                 
|Gulf West Banks, Inc.              |                 | 08/31/02         |                 

For
additional information regarding TSFGs acquisitions, please see Item 8, Note 4 to
the Consolidated Financial Statements.

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.

Pending
Acquisition

On
October 27, 2004, TSFG signed a definitive agreement to acquire Pointe, a bank holding
company headquartered in Boca Raton, Florida. At December 31, 2004, Pointe had total
assets of approximately $413 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 growth prospects. The transaction, which is expected to close in
the second quarter of 2005, will be accounted for using the purchase method of accounting
and is subject to regulatory approvals.

18



Sales

In
the fourth quarter 2004, TSFG made the decision to sell substantially all of the assets
and all liabilities of Carolina First Guaranty Reinsurance, Ltd. (CFGRL).
CFGRL was a wholly-owned captive reinsurance subsidiary, which provided credit-related
insurance services to customers of TSFG. In connection with the sale, which was completed
on December 1, 2004, TSFG sold $219,000 in assets, $622,000 in liabilities, and paid cash
of $403,000. Since CFGRL was immaterial to TSFGs financial statements, presentation
as a discontinued operation was not warranted.

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 was not
warranted. For the period from January 1, 2004 to June 28, 2004, Community National
Banks net income totaled $91,000.

# Balance Sheet Review

Loans

TSFG
focuses its lending activities on small and middle market businesses and individuals in
its geographic markets. At December 31, 2004, outstanding loans totaled $8.1 billion,
which equaled 106.0% of total deposits and 58.9% 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 December 31, 2004, less than 5% of the
portfolio is unsecured. The portfolio contains no highly leveraged
transactions, as defined by regulatory authorities.

Loans
held for investment increased $2.4 billion, or 41.4%, to $8.1 billion at December 31, 2004
from $5.7 billion at December 31, 2003. This increase included $1.4 million in net
acquired loans held for investment ($714.6 million from the acquisition of CNB Florida,
$772.3 million from the acquisition of Florida Banks, $2.0 million from a branch
acquisition, and $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 held for investment, totaled 16.2%. 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 $8.3 million to $21.3 million at December 31, 2004
from $29.6 million at December 31, 2003, primarily related to lower mortgage originations.

19



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)

|                                               | December 31, |  |   |           |  
|---------------------------------------------- | ------------ |  | - | --------- | -
|
|Commercial, financial and agricultural         |              |  | $ | 1,584,198 |  
|Real estate--construction (1)                  |              |  |   | 1,007,061 |  
|Real estate--residential mortgage (1-4 family) |              |  |   | 1,278,310 |  
|Commercial secured by real estate (1)          |              |  |   | 3,109,242 |  
|Consumer                                       |              |  |   | 1,128,946 |  
|Lease financing receivables                    |              |  |   | --        |  
|                                               |              |  |   |           |  
|Loans held for investment                      |              |  |   | 8,107,757 |  
|Loans held for sale                            |              |  |   | 21,302    |  
|Allowance for loan losses                      |              |  |   | (96,918   | )
|                                               |              |  |   |           |  
|Total net loans                                |              |  | $ | 8,032,141 |  
|                                               |              |  |   |           |  
|                                               |              | 
|Percentage of Loans Held for Investment        |              | 
|Commercial, financial and agricultural         |              |  |   | 19.5      | %
|Real estate--construction (1)                  |              |  |   | 12.4      |  
|Real estate--residential mortgage (1-4 family) |              |  |   | 15.8      |  
|Commercial secured by real estate (1)          |              |  |   | 38.4      |  
|Consumer                                       |              |  |   | 13.9      |  
|Lease financing receivables                    |              |  |   | --        |  
|                                               |              |  |   |           |  
|Total                                          |              |  |   | 100.0     | %
|                                               |              |  |   |           |  

|(1) | These  categories  include loans to businesses  other than real estate  companies where  owner-occupied  real estate is pledged on
     loans to finance operations, equipment, and facilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20



Table 4
LOAN PORTFOLIO COMPOSITION BASED ON LOAN PURPOSE
(dollars in thousands)

|                                        | December 31, |  |   |           |   |  
|--------------------------------------- | ------------ |  | - | --------- | - | -
|
|Commercial Loans                        |              |  |   |           |   |  
|Commercial and industrial               |              |  | $ | 2,077,646 |   | $
|Owner - occupied real estate (1)        |              |  |   | 825,582   |   |  
|Commercial real estate                  |              |  |   | 3,246,729 |   |  
|                                        |              |  |   |           |   |  
|                                        |              |  |   | 6,149,957 |   |  
|                                        |              |  |   |           |   |  
|Consumer Loans                          |              | 
|Indirect - sales finance                |              |  |   | 790,372   |   |  
|Direct retail                           |              |  |   | 466,484   |   |  
|Home equity                             |              |  |   | 535,988   |   |  
|                                        |              |  |   |           |   |  
|                                        |              |  |   | 1,792,844 |   |  
|                                        |              |  |   |           |   |  
|                                        |              | 
|Mortgage Loans                          |              |  |   | 164,956   |   |  
|                                        |              |  |   |           |   |  
|                                        |              | 
|Total loans held for investment         |              |  | $ | 8,107,757 |   | $
|                                        |              |  |   |           |   |  
|                                        |              | 
|Percentage of Loans Held for Investment |              | 
|Commercial and industrial               |              |  |   | 25.6      | % |  
|Owner - occupied real estate (1)        |              |  |   | 10.3      |   |  
|Commercial real estate                  |              |  |   | 40.0      |   |  
|Consumer                                |              |  |   | 22.1      |   |  
|Mortgage                                |              |  |   | 2.0       |   |  
|                                        |              |  |   |           |   |  
|Total                                   |              |  |   | 100.0     | % |  
|                                        |              |  |   |           |   |  

|(1) | In Table 3, these loans are included in the "Real  estate-construction"  and "Commercial secured by real estate" categories,  which
    also include loans to non-real estate industry borrowers.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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.

21



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
strong population growth and household 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 on
markets we are familiar with and on borrowers who have proven track records and who we
believe possess the financial means to weather adverse market conditions.  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)

|                                                           | December 31,2004 | December 31, 2003 |   |          
|---------------------------------------------------------- | ---------------- | ----------------- | - | ---------
|
|Commercial Real Estate Loans by Geographic Diversification |                  |                   |   |          
|Western North Carolina (Hendersonville/Asheville)          |                  |                   | $ | 545,533  
|North Coastal South Carolina (Myrtle Beach)                |                  |                   |   | 376,494  
|Upstate South Carolina (Greenville)                        |                  |                   |   | 358,693  
|Tampa Bay Florida                                          |                  |                   |   | 330,130  
|Midlands South Carolina (Columbia)                         |                  |                   |   | 291,139  
|South Coastal South Carolina (Charleston)                  |                  |                   |   | 264,178  
|Central Florida (Orlando)                                  |                  |                   |   | 245,398  
|Northeast Florida (Jacksonville)                           |                  |                   |   | 244,989  
|Alachua Florida (Gainesville)                              |                  |                   |   | 151,233  
|Greater South Charlotte South Carolina (Rock Hill)         |                  |                   |   | 110,965  
|North Central Florida                                      |                  |                   |   | 105,409  
|South Florida (Ft. Lauderdale)                             |                  |                   |   | 102,969  
|Other (1)                                                  |                  |                   |   | 119,599  
|                                                           |                  |                   |   |          
|Total commercial real estate loans                         |                  |                   | $ | 3,246,729
|                                                           |                  |                   |   |          
|                                                           |                  |                  
|Commercial Real Estate Loans by Product Type               |                  |                  
|Commercial construction/development                        |                  |                   | $ | 965,838  
|1-4 family residential investment property                 |                  |                   |   | 328,558  
|Mixed use                                                  |                  |                   |   | 313,612  
|Undeveloped land                                           |                  |                   |   | 301,165  
|Retail                                                     |                  |                   |   | 266,584  
|Hotel/motel                                                |                  |                   |   | 242,525  
|Multi-family residential                                   |                  |                   |   | 171,929  
|Residential construction                                   |                  |                   |   | 152,988  
|Other (1)                                                  |                  |                   |   | 503,530  
|                                                           |                  |                   |   |          
|Total commercial real estate loans                         |                  |                   | $ | 3,246,729
|                                                           |                  |                   |   |          

|(1)   | Other includes all loans in categories smaller than the lowest percentages shown above.                                                    
|----- | -------------------------------------------------------------------------------------------------------------------------------------------
|Note: | At December 31, 2004 and December 31, 2003, average loan size for commercial real estate loans totaled $370,000 and $324,000,
respectively.

22



Table
6 presents maturities of certain loan classifications based on collateral type at December
31, 2004. The table also provides the breakdown between those loans with a predetermined
interest rate and those loans with a floating interest rate.

Table 6
SELECTED LOAN MATURITY AND INTEREST SENSITIVITY
(dollars in thousands)

|                                       | One Yearor Less | Over One ButLess ThanFive Years | OverFiveYears | Total      
|-------------------------------------- | --------------- | ------------------------------- | ------------- | -----------
|Commercial secured by real estate      |                 | $386,988                        |               | $   847,179
|Commercial, financial and agricultural |                 | 451,787                         |               | 602,223    
|Real estate--construction              |                 | 219,231                         |               | 562,468    
|Total of loans with:                   |                
|Floating interest rates                |                 | 938,982                         |               | 1,635,616  
|Predetermined interest rates           |                 | 119,024                         |               | 376,254    

Table 7 summarizes TSFGs loan
relationships, including unused loan commitments, which are greater than $10 million.

Table 7
LOAN RELATIONSHIPS GREATER THAN $10 MILLION

|                  |  |    | Outstanding Principal Balance |             
|----------------- |  | -- | ----------------------------- | ------------
|
|December 31, 2004 |  | 90 |                               | $1.5 billion
|December 31, 2003 |  | 72 |                               | 1.1 billion 

TSFG
has set a house-lending limit of $25 million, below the legal lending limit of $73.0
million for Carolina First Bank and $67.5 million for Mercantile Bank, respectively, at
December 31, 2004. In accordance with TSFGs lending policies, approval from the
Board of Directors must be received in order for a lending commitment to be made in excess
of $25 million. At December 31, 2004, TSFG has two relationships in excess of the
house-lending limit of $25 million, which totaled $43.6 million and $29.1 million. The
Board of Directors granted approval for both of these relationships. The 20 largest
relationships have an aggregate outstanding principal balance of $251.5 million, or 3.1%
of total loans held for investment, at December 31, 2004, down from 4.9% of total loans
held for investment at December 31, 2003.

At
December 31, 2004, the loan portfolio included commitments totaling $376.5 million in
shared national credits (multi-bank credit facilities of $20 million or more).
Outstandings under these commitments totaled $135.0 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.

23



Table
8 presents credit quality indicators.

Table 8
CREDIT QUALITY INDICATORS
(dollars in thousands)

|                                                    | December 31, |  |   |           |  
|--------------------------------------------------- | ------------ |  | - | --------- | -
|
|Loans held for investment                           |              |  | $ | 8,107,757 |  
|Allowance for loan losses                           |              |  |   | 96,918    |  
|                                                    |              | 
|Nonaccrual loans - commercial (1)                   |              |  | $ | 38,015    |  
|Nonaccrual loans - consumer                         |              |  |   | 2,312     |  
|Nonaccrual loans - mortgage loans (2)               |              |  |   | 4,755     |  
|Restructured loans                                  |              |  |   | --        |  
|                                                    |              |  |   |           |  
|Total nonperforming loans                           |              |  |   | 45,082    |  
|Foreclosed property (other real estate owned and    |              | 
|personal property repossessions) (3)                |              |  |   | 10,894    |  
|                                                    |              |  |   |           |  
|Total nonperforming assets                          |              |  | $ | 55,976    |  
|                                                    |              |  |   |           |  
|Loans past due 90 days or more (mortgage and        |              | 
|consumer with interest still accruing) (2)          |              |  | $ | 3,764     |  
|                                                    |              |  |   |           |  
|                                                    |              | 
|Total nonperforming assets as a percentage of loans |              | 
|held for investment and foreclosed property         |              |  |   | 0.69      | %
|                                                    |              |  |   |           |  
|Allowance for loan losses to nonperforming loans    |              |  |   | 2.15      | x
|                                                    |              |  |   |           |  

|(1) | At December 31, 2004, nonaccrual loans - commercial included $4.7 million in restructured loans.                                                                                                                                                                                                                                                
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Effective  September 30, 2004,  TSFG began placing  residential  mortgage loans in nonaccrual  status when they become  150-days
       delinquent.  Previously,  these loans were not placed in nonaccrual status (unless  impairment was evident),  but any associated
       accrued interest was reserved. See (3) below.                   
|(3) | At December 31, 2004,  personal  property  repossessions  totaled $652,000 and were included in nonperforming  assets.  Personal
       property  repossessions totaled $1.0 million, $1.3 million, $2.7 million, and $1.7 million at December 31, 2003, 2002, 2001, and
       2000, respectively, and were excluded from nonperforming assets.

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 as a
percentage of average loans held for investment decreased to 0.46% for 2004 from 0.62% for
2003, primarily due to the disposition of fully-reserved Rock Hill Workout Loans in 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. The 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 remain stable or decline slightly. TSFG expects its first
quarter 2005 net loan charge-off ratio to remain comparable to the second half of 2004 and
then decline in the remainder of 2005.

24



Allowance for Loan
Losses

The
allowance for loan losses represents managements estimate of probable losses
inherent in the lending portfolio. The adequacy of the allowance 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 reviewed for impairment
and impairment is measured in accordance with SFAS No. 114, Accounting by Creditors
for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15 (SFAS
114), and assigned specific allocations. To allow for modeling error, a range of
probable loss ratios (from 95% to 105% of the adjusted historical loss ratio) is then
derived for each segment. The resulting percentages are then applied to the dollar amounts
of loans in each segment to arrive at each segments range of probable loss levels.

The
Allowance for each portfolio segment is set at an amount within its range that reflects
managements best judgment of the extent to which historical loss levels are more or
less accurate indicators of current losses in the portfolio. Managements judgments
evolve from an assessment of various issues, including but not limited to the pace of loan
growth, emerging portfolio concentrations, risk management system changes, entry into new
markets, new product offerings, loans acquired from acquisitions, loan portfolio quality
trends, 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 1.20% at December 31,
2004 from 1.28% at December 31, 2003. This decline was primarily due to charge-offs of
losses on Rock Hill Workout Loans, which were reserved at the time of acquisition. The
allowance coverage increased to 2.15 times nonperforming loans at December 31, 2004 from
1.47 times at December 31, 2003. See Credit Quality.

25



Table 9,
which summarizes the changes in the Allowance, and Table 10, which reflects the
allocation of the Allowance at the end of each year, provides additional information with
respect to the activity in the Allowance.

Table 9
SUMMARY OF LOAN LOSS EXPERIENCE
(dollars in thousands)

|                                                        | At and For The Year Ended December 31, |  |   |           |   |  
|------------------------------------------------------- | -------------------------------------- |  | - | --------- | - | -
|
|Allowance for loan losses, beginning of year            |                                        |  | $ | 73,287    |   | $
|Purchase accounting acquisitions                        |                                        |  |   | 20,682    |   |  
|Allowance adjustment for loans sold                     |                                        |  |   | (506      | ) |  
|Charge-offs:                                            |                                        | 
|Commercial, financial and agricultural                  |                                        |  |   | 20,882    |   |  
|Real estate--construction                               |                                        |  |   | 2,513     |   |  
|Secured by real estate                                  |                                        |  |   | 6,822     |   |  
|Consumer                                                |                                        |  |   | 6,786     |   |  
|Credit cards                                            |                                        |  |   | --        |   |  
|                                                        |                                        |  |   |           |   |  
|Total loans charged-off                                 |                                        |  |   | 37,003    |   |  
|                                                        |                                        |  |   |           |   |  
|Recoveries:                                             |                                        | 
|Commercial, financial and agricultural                  |                                        |  |   | 2,762     |   |  
|Real estate--construction                               |                                        |  |   | 719       |   |  
|Secured by real estate                                  |                                        |  |   | 984       |   |  
|Consumer                                                |                                        |  |   | 1,006     |   |  
|Credit cards                                            |                                        |  |   | --        |   |  
|                                                        |                                        |  |   |           |   |  
|Total loans recovered                                   |                                        |  |   | 5,471     |   |  
|                                                        |                                        |  |   |           |   |  
|Net charge-offs                                         |                                        |  |   | 31,532    |   |  
|Additions to reserve through provision expense          |                                        |  |   | 34,987    |   |  
|                                                        |                                        |  |   |           |   |  
|Allowance for loan losses, end of year                  |                                        |  | $ | 96,918    |   | $
|                                                        |                                        |  |   |           |   |  
|                                                        |                                        | 
|Average loans held for investment                       |                                        |  | $ | 6,909,545 |   | $
|Loans held for investment (period end)                  |                                        |  |   | 8,107,757 |   |  
|Net charge-offs as a percentage of average loans held   |                                        | 
|for investment                                          |                                        |  |   | 0.46      | % |  
|Allowance for loan losses as a percentage of loans held |                                        | 
|for investment                                          |                                        |  |   | 1.20      |   |  

Table 10 
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)

|                                               | December 31, |         |  |         | 
|---------------------------------------------- | ------------ | ------- |  | ------- | 
|
|Commercial, financial and agricultural         |              | $20,077 |  | $16,568 | 
|Real estate--construction                      |              | 12,763  |  | 7,551   | 
|Real estate--residential mortgage (1-4 family) |              | 2,092   |  | 804     | 
|Commercial secured by real estate              |              | 39,404  |  | 26,182  | 
|Consumer                                       |              | 17,325  |  | 18,162  | 
|Unallocated                                    |              | 5,257   |  | 4,020   | 
|                                               |              |         |  |         | 
|Total                                          |              | $96,918 |  | $73,287 | 
|                                               |              |         |  |         | 

|Note: | See Table 3 for composition of loan portfolio.
|----- | ----------------------------------------------

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
designed to reduce interest rate risk associated with the investment securities and other
balance sheet items. Table 11 shows the carrying values of the investment securities
portfolio at the end of each of the last five years.

26



Table 11   
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
(dollars in thousands)

|                                                      | December 31, |                 |  |                 | 
|----------------------------------------------------- | ------------ | --------------- |  | --------------- | 
|
|Trading Account(at fair value)                        |              |                 |  |                 | 
|U.S. Treasury                                         |              | $            -- |  | $            -- | 
|U.S. Government agencies                              |              | --              |  | 460             | 
|State and municipal                                   |              | --              |  | 20              | 
|Other investments                                     |              | --              |  | --              | 
|                                                      |              |                 |  |                 | 
|                                                      |              | --              |  | 480             | 
|                                                      |              |                 |  |                 | 
|Securities Available for Sale (at fair value)         |             
|U.S. Treasury                                         |              | 234,538         |  | 246,659         | 
|U.S. Government agencies                              |              | 930,046         |  | 866,968         | 
|Mortgage-backed securities                            |              | 2,502,440       |  | 2,375,557       | 
|State and municipals                                  |              | 272,535         |  | 127,181         | 
|Other investments:                                    |             
|Corporate bonds                                       |              | 141,970         |  | 148,517         | 
|Federal Home Loan Bank stock                          |              | 72,733          |  | 50,411          | 
|Federal National Mortgage Association preferred stock |              | 50,062          |  | 54,678          | 
|Community bank stocks                                 |              | 14,899          |  | 23,487          | 
|Federal Home Loan Mortgage Corp. preferred stock      |              | 11,990          |  | 12,130          | 
|NetBank, Inc. common stock                            |              | 122             |  | 4,778           | 
|Other equity investments                              |              | 3,508           |  | 5,628           | 
|                                                      |              |                 |  |                 | 
|                                                      |              | 4,234,843       |  | 3,915,994       | 
|                                                      |              |                 |  |                 | 
|Securities Held to Maturity (at amortized cost)       |             
|U.S. Government agencies                              |              | --              |  | --              | 
|State and municipal                                   |              | 75,145          |  | 90,745          | 
|Other investments                                     |              | 100             |  | 352             | 
|                                                      |              |                 |  |                 | 
|                                                      |              | 75,245          |  | 91,097          | 
|                                                      |              |                 |  |                 | 
|Total                                                 |              | $4,310,088      |  | $4,007,571      | 
|                                                      |              |                 |  |                 | 

At
December 31, 2004, TSFGs investment securities portfolio declined to 31.3% of total
assets from 37.4% at December 31, 2003. This decline is partially attributable to the July
2004 acquisitions. During 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 $4.2 billion in
2004, 19.8% above the average of $3.5 billion for 2003. 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 tax-equivalent portfolio yield increased in 2004 to 4.08% from 3.91% in
2003. The securities yield increased in part due to a $6.5 million decrease in
mortgage-backed securities (MBS) premium amortization for 2004 compared to
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
2005, TSFG expects loan growth to outpace deposit growth. The projected cash flows from
the securities portfolio are estimated to be 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.

27



The
duration of the debt securities portfolio decreased to approximately 3.2 years at December
31, 2004 from approximately 3.5 years at December 31, 2003.

Nearly
all of these securities are rated AAA so the credit risk is minimal. Approximately 50% of
MBS are collateralized mortgage obligations (CMOs), the majority of which are
short-term with a total duration of 2.9 years. TSFG manages the MBS portfolio to maintain
a short duration and repricing horizon. At December 31, 2004, approximately 29% 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 98.3% of total securities at December 31, 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 $29.5 million at
December 31, 2004, compared with an $11.5 million loss at December 31, 2003. This increase
in unrealized loss was due in part to a $14.0 million increase in the MBS unrealized loss
from increases in long-term interest rates during 2004. In addition, TSFGs
unrealized gain on its investment in NetBank common stock decreased by $4.6 million. TSFG
sold 346,000 shares of NetBank common stock during 2004 and recognized a gain of $3.8
million. 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 December 31, 2004 since TSFG acquired these entities and canceled
the stock investment effective with the acquisition closing date of July 16, 2004 (see
Acquisitions), which also contributed to the increase in unrealized loss
during 2004. Partially offsetting this decrease were decreases in TSFGs unrealized
losses on its perpetual preferred stock investments in Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation, which totaled $5.7 million at
December 31, 2003. In December 2004, TSFG recorded other-than-temporary impairments of
$10.4 million on these perpetual preferred stock investments. See Item 1, Note 9 to the
consolidated financial statements for additional information.

Table 12
shows the contractual maturity schedule for securities held to maturity and securities
available for sale at December 31, 2004. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations. The table
also reflects the weighted average yield of the investment securities.

28



Table 12
INVESTMENT SECURITIES MATURITY SCHEDULE
(dollars in thousands)

Available for Sale--Fair Value

|                           | WithinOne Year | After OneBut WithinFive Years | After FiveBut WithinTen Years | AfterTen Years | NoContracturalMaturity | Total
|-------------------------- | -------------- | ----------------------------- | ----------------------------- | -------------- | ---------------------- | -----
|U.S. Treasury              |                |                               | $                             | --             |                        | $    
|U.S. Government agencies   |                |                               |                               | --             |                        |      
|Mortgage-backed securities |                |                               |                               | 534            |                        |      
|State and municipal        |                |                               |                               | 16,883         |                        |      
|Other investments (1)      |                |                               |                               | --             |                        |      
|                           |                |                               |                               |                |                        |      
|                           |                |                               | $                             | 17,417         |                        | $    
|                           |                |                               |                               |                |                        |      
|                           |                |                              
|Weighted average yield     |                |                              
|U.S. Treasury              |                |                               |                               | --             | %                      |      
|U.S. Government agencies   |                |                               |                               | --             |                        |      
|Mortgage-backed securities |                |                               |                               | 6.19           |                        |      
|State and municipal        |                |                               |                               | 1.52           |                        |      
|Other investments (1)      |                |                               |                               | --             |                        |      
|                           |                |                               |                               |                |                        |      
|                           |                |                               |                               | 2.07           | %                      |      
|                           |                |                               |                               |                |                        |      

Held to Maturity--Amortized Cost

|                       | WithinOne Year | After OneBut WithinFive Years | After FiveBut WithinTen Years | AfterTen Years | NoContracturalMaturity | Total
|---------------------- | -------------- | ----------------------------- | ----------------------------- | -------------- | ---------------------- | -----
|State and municipal    |                |                               | $                             | 12,406         |                        | $    
|Other investments      |                |                               |                               | --             |                        |      
|                       |                |                               |                               |                |                        |      
|                       |                |                               | $                             | 12,406         |                        | $    
|                       |                |                               |                               |                |                        |      
|                       |                |                              
|Weighted average yield |                |                              
|State and municipal    |                |                               |                               | 2.63           | %                      |      
|Other investments      |                |                               |                               | --             |                        |      
|                       |                |                               |                               |                |                        |      
|                       |                |                               |                               | 2.63           | %                      |      
|                       |                |                               |                               |                |                        |      

|(1) | Approximately $153 million of these securities have no contractual  maturity or yield and accordingly are excluded from the "Other
     Investments" yield calculation, as well as the overall "Available for Sale" yield calculation.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Community
Bank Stocks. At December 31, 2004, TSFG had equity investments in 13 community banks
located in the Southeast with a $10.3 million cost basis and pre-tax market value of $14.9
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 $611.5 million at December 31, 2004, up from $353.1 million at December 31,
2003, principally from the CNB Florida and Florida Banks acquisitions. See Item 1, Notes
14 and 15 to the consolidated financial statements for the types and balances of
intangible assets.

29



Deposits

Deposits
remain TSFGs primary source of funds for loans and investments. Average deposits
provided funding for 62.1% of average earning assets in 2004 and 61.1% in 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 certificates of deposit, which are included in deposits.

Table 13
shows the breakdown of total deposits by type of deposit and the respective percentage of
total deposits.

Table 13
TYPES OF DEPOSITS
(dollars in thousands)

|                                    | December 31, |  |   |           |  
|----------------------------------- | ------------ |  | - | --------- | -
|
|Noninterest-bearing demand deposits |              |  | $ | 1,237,877 |  
|Interest-bearing checking           |              |  |   | 816,933   |  
|Money market accounts               |              |  |   | 2,704,287 |  
|Savings accounts                    |              |  |   | 192,769   |  
|Brokered deposits                   |              |  |   | 1,211,465 |  
|Time deposits under $100,000        |              |  |   | 856,386   |  
|Time deposits of $100,000 or more   |              |  |   | 645,820   |  
|                                    |              |  |   |           |  
|Total deposits                      |              |  | $ | 7,665,537 |  
|                                    |              |  |   |           |  
|                                    |              | 
|Percentage of Deposits              |              | 
|Noninterest-bearing demand deposits |              |  |   | 16.1      | %
|Interest-bearing checking           |              |  |   | 10.7      |  
|Money market accounts               |              |  |   | 35.3      |  
|Savings accounts                    |              |  |   | 2.5       |  
|Brokered deposits                   |              |  |   | 15.8      |  
|Time deposits under $100,000        |              |  |   | 11.2      |  
|Time deposits of $100,000 or more   |              |  |   | 8.4       |  
|                                    |              |  |   |           |  
|Total deposits                      |              |  |   | 100.0     | %
|                                    |              |  |   |           |  

At
December 31, 2004, deposits were up $1.6 billion from December 31, 2003. This increase was
primarily attributable to net acquired deposits ($755.6 million from the acquisition of
CNB Florida, $855.0 million from the acquisition of and Florida Banks, $9.5 million from
an August 2004 branch acquisition, and $60.0 million sold in connection with the
disposition of Community National Bank), which accounted for 95.3% of the increase in
deposits.

The
increase in deposits is partially due to an increase of $513.6 million in brokered
deposits, which included a significant amount of brokered deposits acquired with 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 2004, TSFGs organic growth in noninterest-bearing deposits, which
excluded net acquired noninterest deposits, totaled approximately 13%. For this same
period, organic growth in transaction account deposits, which excluded net acquired
transaction account deposits, totaled approximately 7%.

Table
17 in Results of Operations  Net Interest Income details average
balances for the deposit portfolio for both 2004 and 2003. During 2004, average money
market accounts increased $899.0 million, or 55.7%, and average noninterest demand
deposits increased $270.2 million, or 35.2%. On average, time deposits increased $458.1
million, or 23.3%, which included a $423.1 million increase in average brokered
certificates of deposit.

30



As
part of its overall funding strategy, TSFG focuses on the mix of deposits and, in
particular, increasing the level of transaction accounts (i.e., noninterest-bearing,
interest-bearing checking, money market, and savings accounts). For 2004, transaction
accounts made up 64.8% of average deposits, compared with 61.8% for 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 in achieving this goal.

At
December 31, 2004, total deposits for Bank CaroLine, an Internet banking division of
Carolina First Bank, totaled $24.7 million, down from $43.8 million as of December 31,
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 decreased, due to attrition and customer loss
from the MountainBank acquisition.

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.

Table 14
shows a maturity schedule for time deposits of $100,000 or more at December 31, 2004.

Table 14
MATURITY DISTRIBUTION OF TIME DEPOSITS OF $100,000 OR MORE
(dollars in thousands)

|                               | 
|------------------------------ | 
|Three months or less           | 
|Over three through six months  | 
|Over six through twelve months | 
|Over twelve months             | 
|                               | 
|Total outstanding              | 
|                               | 

Borrowed
Funds

Table
15 shows the breakdown of total borrowings by type

Table 15
TYPE OF BORROWINGS
(dollars in thousands)

|                                                     | December 31, |            |  |             | 
|---------------------------------------------------- | ------------ | ---------- |  | ----------- | 
|
|Short-Term Borrowings                                |              |            |  |             | 
|Federal funds purchased and repurchase agreements    |              | $1,583,495 |  | $   834,866 | 
|FHLB advances                                        |              | --         |  | --          | 
|Commercial paper                                     |              | 29,405     |  | 36,949      | 
|Treasury, tax and loan note                          |              | 14,111     |  | 11,781      | 
|Lines of credit and other                            |              | --         |  | 7,349       | 
|                                                     |              |            |  |             | 
|                                                     |              | 1,627,011  |  | 890,945     | 
|                                                     |              |            |  |             | 
|Long-Term Borrowings                                 |             
|Repurchase agreements                                |              | 1,665,134  |  | 1,494,800   | 
|FHLB advances                                        |              | 1,047,040  |  | 980,680     | 
|Subordinated notes                                   |              | 155,695    |  | 135,075     | 
|Mandatorily redeemable preferred stock of subsidiary |              | 89,800     |  | 89,800      | 
|Employee stock ownership plan note payable           |              | 800        |  | 1,100       | 
|Note payable                                         |              | 900        |  | 927         | 
|Purchase accounting premiums, net of amortization    |              | 2,774      |  | 497         | 
|                                                     |              |            |  |             | 
|Total long-term debt                                 |              | 2,962,143  |  | 2,702,879   | 
|Debt associated with trust preferred securities      |              | --         |  | --          | 
|                                                     |              |            |  |             | 
|Total long-term borrowings                           |              | 2,962,143  |  | 2,702,879   | 
|                                                     |              |            |  |             | 
|                                                     |             
|Total borrowings                                     |              | $4,589,154 |  | $3,593,824  | 
|                                                     |              |            |  |             | 

31



TSFG
uses both short-term and long-term borrowings to fund growth of earning assets in excess
of deposit growth. In 2004, average borrowings totaled $4.0 billion, compared with $3.3
billion in 2003. This increase was primarily attributable to an increased reliance on
short-term borrowings to support earning asset growth, including increases in investment
securities. TSFG has and may continue to enter into interest rate swap agreements to hedge
interest rate risk related to borrowings.

Table 16
shows balance and interest rate information on TSFGs short-term borrowings.

Table 16 
SHORT-TERM BORROWINGS 
(dollars in thousands)

|Year Ended December 31,                           | MaximumOutstandingat anyMonth End | AverageBalance | AverageInterest Rate | EndingBalance | InterestRate atYearEnd
|------------------------------------------------- | --------------------------------- | -------------- | -------------------- | ------------- | ----------------------
|2004                                              |                                   |                |                      |               |                       
|Federal funds purchased and repurchase agreements |                                   |                | $                    | 1,715,306     |                       
|FHLB advances                                     |                                   |                |                      | 205,000       |                       
|Treasury, tax and loan note                       |                                   |                |                      | 110,377       |                       
|Commercial paper                                  |                                   |                |                      | 39,743        |                       
|Line of credit to unaffiliated bank and other     |                                   |                |                      | 7,349         |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |                |                      |               |                       
|2003                                              |                                   |                |                      |               |                       
|Federal funds purchased and repurchase agreements |                                   |                | $                    | 1,062,102     |                       
|FHLB advances                                     |                                   |                |                      | 5,000         |                       
|Treasury, tax and loan note                       |                                   |                |                      | 18,387        |                       
|Commercial paper                                  |                                   |                |                      | 39,431        |                       
|Line of credit to unaffiliated bank and other     |                                   |                |                      | 7,350         |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |                |                      |               |                       
|2002                                              |                                   |                |                      |               |                       
|Federal funds purchased and repurchase agreements |                                   |                | $                    | 1,521,495     |                       
|FHLB advances                                     |                                   |                |                      | 29,600        |                       
|Treasury, tax and loan note                       |                                   |                |                      | 25,697        |                       
|Commercial paper                                  |                                   |                |                      | 40,559        |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |                |                      |               |                       
|                                                  |                                   |               
|                                                  |                                   |                |                      |               |                       

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. In August
2003, TSFG recorded a loss on early extinguishment of debt totaling $2.7 million for
prepayment penalties for FHLB advances totaling $40.0 million with a fixed interest rate
of 6.27%. On August 31, 2002, TSFG redeemed $26.3 million of 9.00% Subordinated Notes due
2005. In connection with the redemption, TSFG recorded a $354,000 loss on early
extinguishment of debt. TSFG continues to evaluate the relative cost and benefit of
incurring prepayment penalties from the early extinguishment of debt.

32



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 $660,000 at December 31, 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 and
impact earnings. The related estimated net realizable value of the other real estate
owned, included in other assets, totaled $300,000 at December 31, 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 10.2% of total assets, compared with $979.9 million,
or 9.1% of total assets, at December 31, 2003. Shareholders equity increased during
2004 primarily from the issuance of common stock for the CNB Florida and Florida Banks
acquisitions, as well as the retention of earnings. Cash dividends paid and the increase
in unrealized loss in the available for sale investment portfolio partially offset these
increases. TSFG has approximately 1.3 million shares remaining under its stock repurchase
authorization.

TSFGs
unrealized loss on securities, net of tax, which is included in accumulated other
comprehensive loss, was $18.5 million as of December 31, 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.

Book value per share at  December  31,  2004 and 2003 was $19.66 and $16.59,  respectively.  Tangible  book value per share at
December 31, 2004 and 2003 was $11.08 and $10.61,  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 December
31, 2004. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators, that, if undertaken, could have a
direct material effect on our consolidated financial statements.

Table
17 sets fourth 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 December 31, 2004, trust
preferred securities included in tier 1 capital totaled $135.5 million, which included $20
million acquired from the acquisition of Florida Banks. For further information regarding
the regulatory capital of TSFG and its Subsidiary Banks, see Item 8, Note 26 to
the Consolidated Financial Statements.

33



Table 17
CAPITAL RATIOS

|                          | December 31, 2004 | Well CapitalizedRequirement
|------------------------- | ----------------- | ---------------------------
|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 |                   | 8                          
|Leverage ratio            |                   | 6                          
|                          |                  
|Mercantile Bank           |                  
|Total risk-based capital  |                   | 11                         
|Tier 1 risk-based capital |                   | 8                          
|Leverage ratio            |                   | 7                          

On
November 10, 2004, TSFG filed a universal shelf registration statement
registering up to $750.0 million of securities to provide additional flexibility in
managing capital levels, both in terms of debt and equity. No securities have been offered
or sold under this shelf registration to date.

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 December 31, 2004, TSFGs tangible equity to
tangible asset ratio was at 5.99%, 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 December 31, 2004 with a stated value of $100,000 per
share. At December 31, 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.

# Results of Operations

Net
Interest Income

Net
interest income is TSFGs primary source of revenue. Net interest income is the
difference between the interest earned on assets, including loan fees and dividends on
investment securities, and the interest incurred for the liabilities to support such
assets. The net interest margin measures how effectively a company manages the difference
between the yield on earning assets and the rate paid on funds used to support those
assets. Fully tax-equivalent net interest income adjusts the yield for assets earning
tax-exempt income to a comparable yield on a taxable basis. Table 18 presents average
balance sheets and a net interest income analysis on a tax equivalent basis for each of
the years in the three-year period ended December 31, 2004. Table 19 provides
additional analysis of the effects of volume and rate on net interest income.

34



Table 18
COMPARATIVE AVERAGE BALANCES - YIELDS AND COSTS
(dollars in thousands)

|                                     | Years December 31, |  |   |            |  |   |         |  | 
|------------------------------------ | ------------------ |  | - | ---------- |  | - | ------- |  | 
|
|
|Assets                               |                    |  |   |            |  |   |         |  | 
|Earning assets                       |                    | 
|Loans (1)                            |                    |  | $ | 6,927,336  |  | $ | 376,742 |  | 
|Investment securities,               |                    | 
|taxable (2)                          |                    |  |   | 3,876,099  |  |   | 157,171 |  | 
|Investment securities,               |                    | 
|nontaxable (2)(3)                    |                    |  |   | 282,103    |  |   | 12,446  |  | 
|Federal funds sold and interest-     |                    | 
|bearing bank balances                |                    |  |   | 16,413     |  |   | 229     |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total earning assets                 |                    |  |   | 11,101,951 |  |   | 546,588 |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Non-earning assets                   |                    |  |   | 1,098,663  |  |   |         |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total assets                         |                    |  | $ | 12,200,614 |  |   |         |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|                                     |                    | 
|Liabilities and Shareholders' Equity |                    | 
|Liabilities                          |                    | 
|Interest-bearing liabilities         |                    | 
|Interest-bearing deposits            |                    | 
|Interest-bearing checking            |                    |  | $ | 735,461    |  | $ | 3,641   |  | 
|Savings                              |                    |  |   | 183,403    |  |   | 633     |  | 
|Money market                         |                    |  |   | 2,513,187  |  |   | 41,031  |  | 
|Time deposits                        |                    |  |   | 2,423,520  |  |   | 51,314  |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total interest-bearing               |                    | 
|deposits                             |                    |  |   | 5,855,571  |  |   | 96,619  |  | 
|Borrowings                           |                    |  |   | 4,025,563  |  |   | 78,885  |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total interest-bearing               |                    | 
|liabilities                          |                    |  |   | 9,881,134  |  |   | 175,504 |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Noninterest-bearing liabilities      |                    | 
|Noninterest-bearing deposits .       |                    |  |   | 1,038,182  |  |   |         |  | 
|Other noninterest-bearing            |                    | 
|liabilities                          |                    |  |   | 110,177    |  |   |         |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total liabilities                    |                    |  |   | 11,029,493 |  |   |         |  | 
|Minority interest in consolidated    |                    | 
|subsidiary (4)                       |                    |  |   | --         |  |   |         |  | 
|Shareholders' equity                 |                    |  |   | 1,171,121  |  |   |         |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Total liabilities and                |                    | 
|shareholders' equity                 |                    |  | $ | 12,200,614 |  |   |         |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|                                     |                    | 
|Net interest margin (tax-equivalent) |                    |  |   |            |  | $ | 371,084 |  | 
|Less: tax-equivalent adjustment (3)  |                    |  |   |            |  |   | 4,356   |  | 
|                                     |                    |  |   |            |  |   |         |  | 
|Net interest interest                |                    |  |   |            |  | $ | 366,728 |  | 
|                                     |                    |  |   |            |  |   |         |  | 

|(1)   | Nonaccrual loans are included in average balances for yield computations.                                                                                                                                                                                                                                                                      
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)   | The average balances for investment securities exclude the unrealized gain or
          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.                                                                                                                                                                                                                                                                                              

35



Table 19
RATE/VOLUME VARIANCE ANALYSIS
 (dollars in thousands)

|                                             | 2004 Compared to 2003 | 2003 Compared to 2002 |   |         |   |  
|-------------------------------------------- | --------------------- | --------------------- | - | ------- | - | -
|
|Earning assets                               |                       |                       |   |         |   |  
|Loans                                        |                       |                       | $ | 96,133  |   | $
|Investment securities, taxable               |                       |                       |   | 29,111  |   |  
|Investment securities, nontaxable            |                       |                       |   | 4,785   |   |  
|Federal funds sold and interest-bearing bank |                       |                      
|balances                                     |                       |                       |   | (250    | ) |  
|                                             |                       |                       |   |         |   |  
|Total interest income                        |                       |                       |   | 129,779 |   |  
|                                             |                       |                       |   |         |   |  
|                                             |                       |                      
|Interest-bearing liabilities                 |                       |                      
|Interest-bearing deposits                    |                       |                      
|Interest-bearing checking                    |                       |                       |   | (183    | ) |  
|Savings                                      |                       |                       |   | (41     | ) |  
|Money market                                 |                       |                       |   | 14,256  |   |  
|Time deposits                                |                       |                       |   | 6,243   |   |  
|                                             |                       |                       |   |         |   |  
|Total interest-bearing deposits              |                       |                       |   | 20,275  |   |  
|Borrowings                                   |                       |                       |   | 13,692  |   |  
|                                             |                       |                       |   |         |   |  
|Total interest expense                       |                       |                       |   | 33,967  |   |  
|                                             |                       |                       |   |         |   |  
|Net interest income                          |                       |                       | $ | 95,812  |   | $
|                                             |                       |                       |   |         |   |  

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

Fully
tax-equivalent net interest income increased by $95.8 million, or 34.8%, in 2004 compared
to 2003. This increase was attributable to a 31.8% increase in average earning assets and
a 7 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 2004 to 2003, average loans increased $2.0 billion, or
40.9%, resulting from both 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. For 2004, interest income from securities represented
approximately 30% of TSFGs total interest income. Fully tax-equivalent net interest
income increased by $54.7 million, or 24.8%, in 2003 compared to 2002.

The
net interest margin, which increased to 3.34% in 2004 from 3.27% in 2003, also contributed
to the increase in net interest income. Average loans increased to 62.4% of average
earning assets in 2004 from 58.3% in 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 4.08% from 3.91% and also contributed to TSFGs improved net interest
margin in 2004 compared to 2003. This improved yield was due in part to a $6.5 million
decrease in MBS premium amortization when comparing these same periods (see
Securities for additional details). When comparing 2003 and 2002, the lower
net interest margin, which declined to 3.27% in 2003 from 3.72% in 2002, partially offset
the net interest income increase from higher earning assets.

The
Federal Reserve increased the federal funds target rate by 25 basis points on December 14,
2004, November 10, 2004, September 21, 2004, August 10, 2004, and June 30, 2004 following
a three-year period of declining rates. At December 31, 2004, adjustable rate loans
constitute 64.3% of the loan portfolio and 79.9% 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.

36



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 2004 by six 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 December 31, 2004 balance of
approximately $2.2 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 33.9%, during 2004 compared with 2003. The
growth in deposits 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 2004, average
time deposits increased $458.1 million, or 23.3%, which includes a $423.1 million increase
in average brokered deposits. This increase in average deposits followed a 33% increase
during 2003 compared with 2002.

Average
borrowings increased by $766.4 million, or 23.5%, during 2004 compared with 2003, due to
increases in repurchase agreements and federal funds purchased. These borrowings were used
to fund the growth in earning assets. This increase in average borrowings followed a 62.5%
increase during 2003 compared with 2002.

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. In
August 2003, TSFG recorded a $2.7 million loss on the early extinguishment of
approximately $40.0 million in FHLB advances with a fixed rate of 6.27%, thereby enhancing
net interest income. In addition, in 2002, TSFG redeemed $26.3 million of 9.00%
Subordinated Notes due 2005 and recorded a $354,000 loss on early extinguishment of debt
in connection with the redemption. 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 $35.0 million, $20.6 million, and $22.3
million in 2004, 2003, and 2002, 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. TSFG expects
the provision for loan losses to increase in 2005, principally in connection with
projected loan growth.

Net
loan charge-offs were $31.5 million, or 0.46% of average loans held for investment in
2004, compared with $30.3 million, or 0.62% of average loans held for investment in 2003,
up from $19.5 million, or 0.49% during 2002. The allowance for loan losses equaled 1.20%
and 1.28% of loans held for investment as of December 31, 2004 and 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.

37



Noninterest
Income

Table
20 shows the components of noninterest income during the three years ended December 31,
2004.

Table 20
COMPONENTS OF NONINTEREST INCOME 
(dollars in thousands)

|                                                                     | December 31, |  |  
|-------------------------------------------------------------------- | ------------ |  | -
|
|Service charges on deposit accounts                                  |              |  | $
|Debit card income                                                    |              |  |  
|Customer service fee income                                          |              |  |  
|                                                                     |              |  |  
|Total customer fee income                                            |              |  |  
|                                                                     |              |  |  
|                                                                     |              | 
|Brokerage income                                                     |              |  |  
|Trust income                                                         |              |  |  
|                                                                     |              |  |  
|Total brokerage and trust income                                     |              |  |  
|                                                                     |              |  |  
|                                                                     |              | 
|Bank-owned life insurance                                            |              |  |  
|Merchant processing fees                                             |              |  |  
|Mortgage banking income                                              |              |  |  
|Insurance income                                                     |              |  |  
|Gain (loss) on trading and derivative activities                     |              |  |  
|Other                                                                |              |  |  
|                                                                     |              |  |  
|Noninterest income, excluding non-operating items                    |              |  |  
|                                                                     |              |  |  
|Impairment of perpetual preferred stock                              |              |  |  
|Gain on available for sale securities                                |              |  |  
|Gain on equity investments                                           |              |  |  
|Gain on disposition of assets and liabilities                        |              |  |  
|                                                                     |              |  |  
|Non-operating noninterest income                                     |              |  |  
|                                                                     |              |  |  
|Total noninterest income                                             |              |  | $
|                                                                     |              |  |  
|                                                                     |              | 
|Total noninterest income as a percentage of total revenue (1)        |              |  |  
|Noninterest income, excluding non-operating noninterest income, as a |              | 
|percentage of total revenue (2)                                      |              |  |  

|(1) | Calculated as noninterest income, divided by the sum of net interest income and
                    noninterest income.                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Calculated as noninterest income excluding non-operating noninterest income,
                    divided by the sum of tax-equivalent net interest income and noninterest income,
                    excluding non-operating noninterest income.

Total
customer fee income rose 22.6% in 2004 compared with 2003. This increase followed a 33.6%
increase in 2003 compared with 2002. Service charges on deposit accounts, the largest
contributor to noninterest income, rose 17.7% in 2004. This increase followed a 31.8%
increase in 2003. The 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 40.5% for 2004.

In
2004, brokerage income decreased 8.9%, due to higher than normal levels in 2003. This
follows a 54.2% increase in 2003, primarily from the addition of brokers. Trust income
increased $497,000, or 15.1% in 2004. At December 31, 2004 and 2003, the market values of
assets administered by the trust department totaled $823.3 million and $759.3 million,
respectively.

Bank-owned
life insurance increased $2.9 million, or 34.8%, in 2004, due to additional life insurance
policies, increases in cash value, and receipt of life insurance proceeds (which is not
expected to recur). TSFG purchased an additional $15.0 million of life insurance on
certain officers in December 2004, added $30.8 million from the acquisitions of CNB
Florida and Florida Banks, purchased $25.0 million in October 2003, and added $13.8
million from the acquisition of MountainBank. The cash surrender value totaled $246.8
million at December 31, 2004, up from $192.2 million at December 31, 2003.

38



Merchant
processing fees increased $1.4 million, or 19.9%, in 2004, primarily from increased sales
efforts.

Table
21 shows the components of mortgage banking income for the three years ended December 31,
2004.

Table 21
COMPONENTS OF MORTGAGE BANKING INCOME
(dollars in thousands)

|                                                                               | Years Ended December 31, |  |  
|------------------------------------------------------------------------------ | ------------------------ |  | -
|
|Origination income and secondary marketing operations                          |                          |  | $
|Mortgage servicing loss, net of related amortization and subservicing payments |                          |  |  
|Loss on sale of portfolio mortgage loans                                       |                          |  |  
|Recovery (impairment) on mortgage servicing rights                             |                          |  |  
|                                                                               |                          |  |  
|Total mortgage banking income                                                  |                          |  | $
|                                                                               |                          |  |  

In
2004, mortgage origination income and secondary marketing operations declined 46.3%,
compared with 2003. This follows a 42.5% increase in 2003. Mortgage loans originated by
TSFG originators totaled $513.1 million, $689.5 million, and $531.0 million in 2004, 2003,
and 2002, respectively. The decrease in mortgage banking income for 2004 was principally
the result of lower origination volumes due to higher mortgage loan rates. The increase in
mortgage origination volumes and income for 2003 was primarily due to low mortgage loan
rates.

TSFGs
mortgage banking strategy is to sell most of the loans it originates in the secondary
market with servicing rights released. At December 31, 2004, TSFGs servicing
portfolio included 2,510 loans having an aggregate principal balance of $155.2 million,
down from $229.3 million at December 31, 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 net mortgage servicing loss improved due to lower amortization of mortgage servicing
rights as prepayments slowed. Mortgage servicing rights, net of the valuation allowance,
totaled $1.1 million and $1.8 million at December 31, 2004 and 2003, respectively. At
December 31, 2004 and 2003, the valuation allowance for capitalized mortgage servicing
rights totaled $1.6 million and $1.8 million, respectively.

Insurance
income increased $955,000, or 26.8%, in 2004 following a 110.0% increase in 2003,
principally from acquiring agencies and leveraging TSFGs customer base.

TSFG
uses derivatives as economic hedges of on-balance sheet assets and liabilities or
forecasted transactions, which result in realized gains and losses included in earnings.
Such activities may result in volatility in realized gains and losses on trading and
derivative activities. The gain on trading and derivative activities totaled $3.2 million
and $1.8 million in 2004 and 2003, respectively. In 2002 a loss totaling $934,000 was
recognized. See Market Risk and Asset/Liability Management  Derivatives and
Hedging Activities.

In
the fourth quarter 2004, TSFG recorded $9.9 million and $511,000 in other-than-temporary
impairments on its perpetual preferred stock investments in Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation, respectively. See Item 8, Note 9
to the Consolidated Financial Statements for additional information.

In
2004, the gain on equity investments included a $3.8 million gain realized from the sale
of 346,000 shares of NetBank common stock, a $2.3 million gain from the sale of community
bank stock, and was partially offset by impairment losses in other investments totaling
$1.4 million. In 2003, the gain on equity investments included $3.9 million from the sale
of 367,096 shares of NetBank common stock and a $1.5 million gain from the sale of
community bank stock and corporate bonds. In 2002, the gain on equity investments included
a $4.7 million gain on the sale of 450,000 shares of NetBank common stock, partially
offset by a $1.2 million write-down on RHBT common stock.

39



During
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. In 2003,
Carolina First Bank completed the sale of its branch office in Powdersville, South
Carolina. In connection with the sale of this branch, TSFG recorded a gain of $601,000 and
transferred deposits of $6.4 million.

Other
noninterest income includes income related to benefits administration, international
banking services, and other services. The increase in other noninterest income in 2004
compared with 2003 was largely due to increases in benefits administration fees (due to
the American Pensions, Inc. acquisition), which increased $938,000, and business referral
fees, which increased $782,000.

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 20.8%, or
19.3% excluding non-operating items, for 2004 over 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
22 shows the components of noninterest expenses and TSFGs efficiency ratio, a
measure of TSFGs expenses relative to total revenues.

Table 22
COMPONENTS OF NONINTEREST EXPENSES
(dollars in thousands)

|                                                     | Years Ended December 31, |  |  
|---------------------------------------------------- | ------------------------ |  | -
|
|Salaries and wages                                   |                          |  | $
|Employee benefits                                    |                          |  |  
|Occupancy                                            |                          |  |  
|Furniture and equipment                              |                          |  |  
|Professional fees                                    |                          |  |  
|Merchant processing expense                          |                          |  |  
|Telecommunications                                   |                          |  |  
|Amortization of intangibles                          |                          |  |  
|Other                                                |                          |  |  
|                                                     |                          |  |  
|Noninterest expenses, excluding non-operating items  |                          |  |  
|                                                     |                          |  |  
|Merger-related costs                                 |                          |  |  
|Employment contract payments                         |                          |  |  
|Impairment (recovery) loss from write-down of assets |                          |  |  
|Conservation grant of land                           |                          |  |  
|Loss on early extinguishment of debt                 |                          |  |  
|                                                     |                          |  |  
|Non-operating noninterest expenses                   |                          |  |  
|                                                     |                          |  |  
|Total noninterest expenses                           |                          |  | $
|                                                     |                          |  |  
|                                                     |                          | 
|Efficiency ratio (1)                                 |                          |  |  
|Efficiency ratio, operating basis (2)                |                          |  |  
|                                                     |                          | 

|(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 tax-equivalent net interest income and noninterest income, excluding
                    non-operating items (see Table 20).

Salaries,
wages, and employee benefits rose $17.6 million, or 17.5%, in 2004 after rising 34.2% in
2003. Full-time equivalent employees as of December 31, 2004 increased to 2,308 from 1,918
and 1,700 at December 31, 2003 and 2002, respectively. 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 short-term and long-term
discretionary incentive accruals. The discretionary nature of TSFGs incentive
accruals may result in increased volatility in personnel expense in future periods.

40



Occupancy
and furniture and equipment expense increased 16.2% in 2004 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 $2.6 million in 2004 following a $1.9 million increase in 2003,
and was primarily attributable to the addition of core deposit intangibles from bank
acquisitions. 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
in 2004 and 2003, excluding Allied Assurance of South Carolina, Inc.

During
2004, TSFG executed a conservation grant of land in North Carolina and expensed the fair
value of the contribution of $3.4 million.

TSFG
incurred pre-tax merger-related costs, in connection with TSFGs acquisitions in
2004, 2003 and 2002. See Item 8, Note 31 to the Consolidated Financial
Statements.

In
2004, TSFG recorded a loss on early extinguishment of debt totaling $1.4 million for
prepayment penalties for repurchase agreement borrowings. In 2003, TSFG recorded a loss on
early extinguishment of debt for prepayment penalties for FHLB advances. In 2002, TSFG
recorded a loss on early extinguishment of debt for unamortized issuance costs associated
with redeeming subordinated notes. See Borrowed Funds.

Other
noninterest expenses rose 22.4% in 2004 after an increase of 28.1% in 2003. The overall
increase in other noninterest expenses was principally attributable to increases in loan
collection, travel, insurance, advertising, debit card, and supplies expense.

Income
Taxes

The
effective income tax rate as a percentage of pretax income was 32.1% in 2004, 30.8% in
2003, and 31.2% in 2002. The blended statutory federal and state income tax rate was
approximately 37.0% during all three periods. TSFG anticipates the effective income tax
rate to increase to between 34% and 35% for 2005.

For
further information concerning income tax expense, refer to Item 8, Note 19 to
the Consolidated Financial Statements.

# Risk Management

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

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

Our
Corporate Governance Guidelines, Code of Conduct, Code of Ethics for Senior Executive and
Financial Officers, Whistleblower Policy, and charters for Board Committees, including the
Executive, Audit, Compensation, Nominating and Corporate Governance, and Capital and Risk
Management Committees, are accessible at no cost on TSFGs web site,
www.thesouthgroup.com, through the Investor Relations link.

41



Market
Risk and Asset/Liability Management

Market
risk is the risk of loss from adverse changes in market prices of fixed income securities,
equity securities, other earning assets, and derivative financial instruments as a result
of changes in interest rates or other factors. TSFGs market risk arises principally
from interest rate risk inherent in its core banking activities. Interest rate risk is the
risk to net income represented by the impact of changes in market interest rates. TSFG has
risk management policies and systems to monitor and limit exposure to interest rate risk.

TSFG
manages its exposure to fluctuations in interest rates through policies established by our
Asset/Liability Committee (ALCO), reviewed by the Investment Committee, and
approved by the Board of Directors. The primary goal of the Subsidiary Banks ALCO is
to monitor and limit exposure to interest rate risk through implementation of strategies,
which attempt to position the balance sheet and/or earnings to manage interest rate risk
and maintain adequate liquidity and capital. At December 31, 2004, the overall interest
rate risk position of TSFG falls within the interest rate risk guidelines established by
ALCO.

TSFG
has expanded its measures of interest rate risk to include both the short-term and
long-term effects of changes in interest rates through the use of its simulation model.
The simulation model is used to analyze the sensitivity of net interest income to an
immediate change in interest rates measured over a 12 month time horizon. The model also
measures the sensitivity of the economic value of equity (EVE) to an
instantaneous change in interest rates. EVE is a measurement of the inherent, long-term
economic value of TSFG at a given point in time.

The
simulation model assumes a static balance sheet and takes into account interest rate
changes as well as related assumption changes for various rate scenarios. Factors
considered in the model assumptions include contractual maturities, prepayments, repricing
characteristics, deposit retention, and the relative sensitivity of assets and liabilities
to changes in market interest rates. The models assumptions are updated on a regular
basis. Computation of prospective effects of hypothetical interest rate changes are based
on numerous assumptions and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any additional actions TSFG could undertake
in response to changes in interest rates.

In
analyzing net interest income, TSFG calculates net interest income under several different
rate scenarios over a twelve-month period. It reports a case in which interest rates
remain flat and reports variations that occur when rates immediately increase 100 and 200
basis points and decrease 100 basis points. These rates assume an instantaneous shift in
all yield curves as well. Table 23 shows the effect that the indicated changes in interest
rates would have on net interest income as projected for the next twelve months using a
static balance sheet for each set of interest rate scenarios, compared to the flat
interest rate scenario.

Table 23
NET INTEREST INCOME AT RISK ANALYSIS

|Interest Rate Scenario | Annualized Hypothetical Percentage Change inNet Interest Income
|---------------------- | ---------------------------------------------------------------
|                       | 2                                                              
|                       | 1                                                              
|                       |                                                                
|                       | (1                                                             

The
overall net interest income profile shows minimal changes in net interest income if rates
immediately increase 100 basis points. The down 100 basis point scenario reflects greater
variation due to pricing factors, which limit the rate declines and the impact on net
interest income. In addition, many transaction deposit rates have reached what management
believes to be an acceptable lower limit thus limiting the interest expense reduction from
repricing these deposits by the entire 100 basis points.

Table
23 above assumes an instantaneous shift in all yield curves, however as rates increased in
the second half of 2004 short-term rates increased more quickly than long-term rates. In
evaluating interest rate risk, TSFG considers various rate scenarios which take into
account changes in the shape of the yield curve, forecasts by groups of economists and
projections based on movements in the futures markets. All of these scenarios indicate
that TSFGs net interest income is minimally impacted by changes in interest rates.

42



In
addition to the standard scenarios used to analyze net interest income, TSFGs ALCO
analyzes the potential impact of other scenarios. The starting point for these
what-if scenarios is our base forecast. This base forecast consolidates all
balance sheet information that we are presently aware of with our most likely
interest rate projections. The what-if scenarios are then used to gauge the
impact of changes in interest rates and/or balance sheet items on the earnings of TSFG
compared to the base forecast. Strategies can be formulated based on the information
provided by the earnings simulation if either a scenario seems likely to occur or we
choose to undertake the proposed transaction. TSFG updates its base forecast quarterly
based on economic changes that occurred during the past quarter as well as changes in the
economic outlook for the coming year.

TSFG
also calculates EVE under several different rate scenarios. It reports a case in which
interest rates remain flat and reports variations that occur when rates immediately
increase 100 and 200 basis points and decrease 100 basis points. These rates assume an
instantaneous shift in all the yield curves. Table 24 shows the effect that the indicated
changes in interest rates would have on economic value of equity as projected using a
static balance sheet for each set of interest rate scenarios compared to the flat interest
rate scenario. The economic value of equity represents the fair value of net assets and is
in no way indicative of TSFGs shareholders equity.

Table 24
ECONOMIC VALUE OF EQUITY RISK ANALYSIS

|Interest Rate Scenario | Annualized Hypothetical Percentage Change inEconomic Value of Equity
|---------------------- | --------------------------------------------------------------------
|                       | 2                                                                   
|                       | 1                                                                   
|                       |                                                                     
|                       | (1                                                                  

The
interest sensitivity gap (GAP position) measures the difference between rate
sensitive assets and rate sensitive liabilities maturing or whose rates are subject to
change during a given time frame. In general, an asset sensitive position would indicate
that net interest income would benefit from increases in market interest rates.
Conversely, a liability sensitive position generally indicates that net interest income
would benefit from decreases in market interest rates. The static gap position is limited
because it does not take into account a number of important factors, such as the degree of
changes in interest rates, the timing of the implementation of such changes, or changes in
managements expectations or intentions. In addition, it is not necessarily
indicative of positions on other dates.

Table
25 shows TSFGs financial instruments that are sensitive to changes in interest rates
as well as TSFGs interest sensitivity gap at December 31, 2004 and 2003. The
carrying amounts of rate-sensitive assets and liabilities are presented in the periods in
which they next reprice to market rates or mature. For assets, projected repayments,
anticipated principal prepayments, and potential calls are taken into account. To reflect
anticipated prepayments, certain asset categories are shown in Table 25 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 25 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 calls differ from TSFGs historical
experience and managements judgment.

43



Table 25
INTEREST SENSITIVITY GAP ANALYSIS
(dollars in thousands)

|                                               | 0-3Months | 4-12Months | One toThree Years | AfterThree Years | Total
|---------------------------------------------- | --------- | ---------- | ----------------- | ---------------- | -----
|Interest-Sensitive Assets                      |           |            |                   |                  |      
|Earning assets                                 |           |           
|Loans                                          |           |            | $                 | 5,300,099        |      
|Investment securities (1)                      |           |            |                   | 666,703          |      
|Federal funds sold and interest-bearing        |           |           
|bank balances                                  |           |            |                   | 4,669            |      
|                                               |           |            |                   |                  |      
|Total earning assets                           |           |            | $                 | 5,971,471        |      
|                                               |           |            |                   |                  |      
|                                               |           |           
|Interest-Sensitive Liabilities                 |           |           
|Liabilities                                    |           |           
|Interest-sensitive liabilities                 |           |           
|Interest-bearing deposits                      |           |           
|Interest checking                              |           |            | $                 | --               |      
|Savings                                        |           |            |                   | --               |      
|Money market                                   |           |            |                   | 2,335,975        |      
|Time deposits                                  |           |            |                   | 704,636          |      
|                                               |           |            |                   |                  |      
|Total interest-bearing deposits                |           |            |                   | 3,040,611        |      
|Noninterest-bearing deposits(2)                |           |            |                   | --               |      
|Borrowings                                     |           |            |                   | 3,991,771        |      
|                                               |           |            |                   |                  |      
|Total interest-sensitive liabilities           |           |            |                   | 7,032,382        |      
|                                               |           |            |                   |                  |      
|Periodic interest-sensitive gap                |           |            |                   | (1,060,911       | )    
|Notional amount of interest rate swaps         |           |            |                   | (776,940         | )    
|                                               |           |            |                   |                  |      
|Periodic interest-sensitive gap after interest |           |           
|rate swaps                                     |           |            | $                 | (1,837,851       | )    
|                                               |           |            |                   |                  |      
|Cumulative interest-sensitive gap              |           |            | $                 | (1,837,851       | )    
|                                               |           |            |                   |                  |      

|(1) | Investment securities exclude the unrealized loss on available for sale
          securities of $29.5 million.
|--- | --------------------------------------------------------------------------------------------------------------
|(2) | Noninterest-bearing deposits respond in
          part to changes in interest rates.                          

As
indicated in Table 25, as of December 31, 2004, on a cumulative basis through twelve
months, rate-sensitive liabilities exceeded rate-sensitive assets, resulting in a
liability-sensitive position of $1.78 billion, or 12.88% of total assets. This static gap
liability-sensitive position resulted primarily from the increase in adjustable rate
borrowings which primarily reprice on a quarterly basis.

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

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

TSFG
uses futures, options, and other derivatives as economic hedges of on-balance sheet assets
and liabilities or forecasted transactions, which do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) as amended by SFAS No. 137, 138, and 149.
Accordingly, these derivatives are reported at fair value on the consolidated balance
sheet with realized gains and losses included in earnings. Such activities may result in
increased volatility in realized gains and losses on trading activities. In 2003, TSFG
increased its use of derivatives. For 2004 and 2003, gains on trading and derivative
activities totaled $3.2 million and $1.8 million, respectively.

44



As part of our mortgage activities, TSFG orginates
certain residential loans and commits these loans for sale.  The commitments to originate residential loans
and the sales commitments are freestanding derivative instruments and are generally funded within 90 days. The fair value of
these commitments was not significant at December 31, 2004.

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

In
accordance with SFAS 133, TSFG records derivatives at fair value, as either assets or
liabilities, on the consolidated balance sheets, included in other assets or other
liabilities. 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. See Item 8, Note 17 to the Consolidated Financial Statements for the fair
value of TSFGs derivative assets and liabilities and their related notional amounts.

Economic
Risk

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

Credit
Risk

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

Liquidity
Risks

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

Operational
Risk

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

45



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

In
addition, in 2004 TSFG added a risk management division. This group benefits from the
direction of both a sub committee of the corporate board and a committee of executive
management. In addition to evaluating and measuring risk tolerances of various business
units it will evaluate risks involved in new product role out and acquisitions.

Compliance
and Litigation Risks

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

TSFGs
regulatory compliance risk is managed by our compliance group under the leadership of our
chief financial officer. This group works with our business lines regularly monitoring
activities and evaluating policies and procedures. See Item 1, Supervision and
Regulation for some of the laws and regulations, which impact TSFG and its
subsidiaries. TSFG has policies and control process that are designed to help ensure
compliance with applicable laws and regulations and limit litigation.

TSFGs
Audit Committee and Disclosure Committee help to ensure compliance with financial
reporting matters. Members of TSFGs Audit Committee possess specialized knowledge of
matters relating to accounting, auditing and financial reporting. The Board of Directors
designates members of its Audit Committee as financial experts, as defined by
the Sarbanes-Oxley Act of 2002. TSFGs Audit Committee is often involved in the
following: selecting the independent auditor, communicating with the independent auditor,
reviewing the financial statements and the results of the financial statement audit,
monitoring the performance of the independent auditor, and monitoring the work of the
internal audit function. The Audit Committee has chartered a Disclosure Committee to help
ensure that TSFGs internal controls and reporting systems are sufficient to satisfy
compliance with disclosure requirements related to TSFGs Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q.

# Off-Balance Sheet
Arrangements

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

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

For
commercial customers, loan commitments generally take the form of revolving credit
arrangements to finance customers working capital requirements. For retail
customers, loan commitments are generally lines of credit secured by residential property.
At December 31, 2004, commercial and retail loan commitments totaled $2.1 billion.
Documentary letters of credit are typically issued in connection with customers
trade financing requirements and totaled $2.4 million at December 31, 2004. Unused
business credit card lines, which totaled $17.6 million at December 31, 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 December 31, 2004 was $135.2 million.

46



TSFG
applies essentially the same credit policies and standards as it does in the lending
process when making these commitments. See Item 8, Note 24 to the Consolidated
Financial Statements for additional information regarding lending commitments.

Derivatives.       
          In accordance with SFAS 133, TSFG records derivatives at fair value, as either
          assets or liabilities, on the consolidated balance sheets. Derivative
          transactions are measured in terms of the notional amount, but this amount is
          not recorded on the balance 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.

See
Item 8, Note 17 of the Consolidated Financial Statements for additional
information regarding derivatives.

# Liquidity

Liquidity
management ensures that adequate funds are available to meet deposit withdrawals, fund
loan and capital expenditure commitments, maintain reserve requirements, pay operating
expenses, provide funds for dividends and debt service, manage operations on an ongoing
basis, and capitalize on new business opportunities. Funds are primarily provided by the
Subsidiary Banks through customers deposits, 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 rising rate scenarios, to provide much
of the necessary funding estimated for 2005.

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 26 summarizes future contractual
obligations as of December 31, 2004. Table 26 does not include payments, which may be
required under employment and deferred compensation agreements (see Item 8, Note 30 of the
Consolidated Financial Statements). In addition, Table 26 does not include payments
required for interest and income taxes (see Item 8, Consolidated Statements of Cash Flows
for details on interest and income taxes paid for 2004).

Table 26   
CONTRACTUAL OBLIGATIONS 
(dollars in thousands)

|                                   | Payments Due by Period |            |  |            | 
|---------------------------------- | ---------------------- | ---------- |  | ---------- | 
|
|Time deposits                      |                        | $2,713,671 |  | $1,234,479 | 
|Short-term borrowings              |                        | 1,627,011  |  | 1,627,011  | 
|Long-term debt                     |                        | 2,959,369  |  | 9,335      | 
|Operating leases                   |                        | 122,804    |  | 11,061     | 
|                                   |                        |            |  |            | 
|Total contractual cash obligations |                        | $7,422,855 |  | $2,881,886 | 
|                                   |                        |            |  |            | 

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 December 31, 2004, totaled
$1.0 billion. At December 31, 2004, the Subsidiary Banks had $1.5 billion of unused
borrowing capacity from the FHLB. This capacity may be used when the Subsidiary Banks have
available collateral to pledge. Until the Subsidiary Banks make collateral available
(other than cash) to secure additional FHLB advances, TSFG will fund its short-term needs
principally with deposits, including brokered certificates of deposit, 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 December 31, 2004, the Subsidiary
Banks had unused short-term lines of credit totaling $534.6 million (which are
withdrawable at the lenders option).

47



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 December 31, 2004, the
Subsidiary Banks had qualifying collateral to secure advances up to $968.1 million, of
which none was outstanding.

At
December 31, 2004, the parent company had three unused short-term lines of credit totaling
$35.0 million. These lines of credit are withdrawable at the lenders option and
mature May 15, 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 December 31, 2004, see Off-Balance Sheet
Arrangements.

# 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 Certain Loans or Debt Securities Acquired in a Transfer

Effective
January 1, 2005, TSFG adopted SOP No. 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer, which prohibits carry over
or creation of valuation allowances in the initial accounting of all loans acquired in a
transfer that are within the scope of this SOP. The prohibition of the valuation allowance
carryover applies to the purchase of an individual loan, a pool of loans, a group of
loans, and loans acquired in a purchase business combination. The initial adoption of this
issue did not have an impact on the financial condition or results of operations of TSFG.
TSFG is in the process of evaluating the impact related to its acquisition of Pointe,
which is expected to close in the second quarter of 2005.

# 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 first quarter
2005.

48



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 evaluating the impact of the initial
adoption of this guidance on the financial condition and 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 provided 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 and results of operations of TSFG.

Share-Based
Payment

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

| |  | Employee awards with cash-based settlement or repurchase features, such as a stock
appreciation right with a cash-settlement option;
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Awards for a fixed dollar amount settleable in the company's stock;                                                                 
| |  | Share-based awards with a
net-settlement feature for an amount in excess of the minimum tax withholding; and                        
| |  | Awards that vest or become exercisable based on the achievement of a condition other than
service, performance, or market condition.

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

| |  | Share-based
awards with net-settlement features for minimum tax withholdings;                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Awards that permit a
cashless exercise using a broker unrelated to the employer;                                                                                                                                                       
| |  | Awards containing a put
feature that give employees the right to require the company to repurchase the shares at
fair value, when the employee bears the risks and rewards normally associated with ownership for six months
or longer.

SFAS
123R is effective for public entities that do not file as small business issuers as of the
beginning of the first interim reporting period beginning after June 15, 2005. When we
adopt SFAS 123R as of July 1, 2005 we plan to use the modified prospective approach and
estimate pre-tax expense of approximately $1.0 million for both the third and fourth
quarters of 2005. Our estimate does not include any stock options that may be granted in the second
half of 2005.

Accounting
for Nonmonetary Transactions

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

# Item 7A.    Quantitative
and Qualitative Disclosures about Market Risk

See
Risk Management in Item 7, and Item 8, Notes 9, 17, and 33, for quantitative
and qualitative disclosures about market risk, which information is incorporated herein by
reference.

49



# Item 8.    Financial
Statements and Supplementary Data

# MANAGEMENTS
STATEMENT OF FINANCIAL RESPONSIBILITY

Management
of The South Financial Group, Inc. (TSFG) and subsidiaries is committed to
quality customer service, enhanced shareholder value, financial stability, and integrity
in all dealings. Management has prepared the accompanying consolidated financial
statements in conformity with U.S. generally accepted accounting principles. The
statements include amounts that are based on managements best estimates and
judgments. Other financial information in this report is consistent with the consolidated
financial statements. Both the Chief Executive Officer and the Chief Financial Officer
have certified that TSFGs 2004 Annual Report on Form 10-K fully complies with the
applicable sections of the Securities Exchange Act of 1934 and that the information
reported therein fairly represents, in all material respects, the financial position and
results of operations of TSFG.

In
meeting its responsibility, management relies on its internal control structure that is
supplemented by a program of internal audits. The internal control structure is designed
to provide reasonable assurance that financial records are reliable for preparing
financial statements and maintaining accountability for assets, and that assets are
safeguarded against unauthorized use or disposition. See Managements Report on
Internal Control over Financial Reporting that follows for additional discussion.

KPMG
LLP, independent registered public accounting firm, audited TSFGs consolidated
financial statements and the effectiveness of TSFGs internal control over financial
reporting in accordance with standards of the Public Company Accounting Oversight Board
(United States). KPMG LLP reviews the results of its audit with both management and the
Audit Committee of the Board of Directors of TSFG. The consolidated financial statements
have not been reviewed, or confirmed for accuracy or relevance, by the Federal Deposit
Insurance Corporation.

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

|Mack I. Whittle, Jr.President andChief Executive Officer | William S. Hummers III
                                      Executive Vice President
                            and Chief Financial Officer
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------

# MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management
of The South Financial Group, Inc. and subsidiaries (TSFG) is responsible for
establishing and maintaining adequate internal control over financial reporting.
TSFGs internal control system was designed to provide reasonable assurance to
TSFGs management and board of directors regarding the preparation and fair
presentation of published financial statements.

All
internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.

TSFGs
management assessed the effectiveness of TSFGs internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria
established in Internal Control  Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, we
believe that, as of December 31, 2004, TSFGs internal control over financial
reporting was effective.

TSFGs
independent auditors have issued an audit report on our assessment of internal control
over financial reporting. This report Report of Independent Registered Public
Accounting Firm appears on page 53.

|Mack I. Whittle, Jr.President andChief Executive Officer | William S. Hummers III
                                      Executive Vice President
                            and Chief Financial Officer
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------

50



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of The South Financial Group,
Inc. and subsidiaries (TSFG) as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in shareholders equity and comprehensive
income, and cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of TSFGs
management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of TSFG as of December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control
over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 9, 2005
expressed an unqualified opinion on managements assessment of, and the effective
operation of, internal control over financial reporting.

/s/ KPMG LLP
Greenville, South CarolinaMarch 9, 2005

51



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited managements assessment, included in the accompanying Managements
Report on Internal Control over Financial Reporting, that The South Financial Group, Inc.
and subsidiaries (TSFG) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control
 Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The South Financial Group, Inc.s management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of TSFGs internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

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

In
our opinion, managements assessment that TSFG maintained effective internal control
over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, TSFG maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of TSFG as of December
31, 2004 and 2003, and the related consolidated statements of income, changes in
shareholders equity and comprehensive income, and cash flows for each of the years
in the three-year period ended December 31, 2004, and our report dated March 9, 2005
expressed an unqualified opinion on those consolidated financial statements.

Greenville, South CarolinaMarch 9, 2005

52



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

|                                                                                   | 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 $76,552 in 2004 and $93,188 in 2003)                |              |  |  
|                                                                                   |              |  |  
|Total securities                                                                   |              |  |  
|                                                                                   |              |  |  
|Loans                                                                              |              | 
|Loans held for sale                                                                |              |  |  
|Loans held for investment                                                          |              |  |  
|Allowance for loan losses                                                          |              |  |  
|                                                                                   |              |  |  
|Net loans                                                                          |              |  |  
|                                                                                   |              |  |  
|Premises and equipment, net                                                        |              |  |  
|Accrued interest receivable                                                        |              |  |  
|Goodwill                                                                           |              |  |  
|Other 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                                                                     |              |  |  
|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 71,252,346 shares in 2004 and 59,064,375 shares in 2003            |              |  |  
|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.

53



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

|                                                                         | Year Ended December 31, |  |   |        
|------------------------------------------------------------------------ | ----------------------- |  | - | -------
|
|Interest Income                                                          |                         |  |   |        
|Interest and fees on loans                                               |                         |  | $ | 376,742
|Interest and dividends on securities:                                    |                         | 
|Taxable                                                                  |                         |  |   | 157,171
|Exempt from federal income taxes                                         |                         |  |   | 8,090  
|                                                                         |                         |  |   |        
|Total interest and dividends on securities                               |                         |  |   | 165,261
|Interest on short-term investments                                       |                         |  |   | 229    
|                                                                         |                         |  |   |        
|Total interest income                                                    |                         |  |   | 542,232
|                                                                         |                         |  |   |        
|Interest Expense                                                         |                         | 
|Interest on deposits                                                     |                         |  |   | 96,619 
|Interest on short-term borrowings                                        |                         |  |   | 18,908 
|Interest on long-term debt                                               |                         |  |   | 59,977 
|                                                                         |                         |  |   |        
|Total interest expense                                                   |                         |  |   | 175,504
|                                                                         |                         |  |   |        
|Net Interest Income                                                      |                         |  |   | 366,728
|Provision for loan losses                                                |                         |  |   | 34,987 
|                                                                         |                         |  |   |        
|Net interest income after provision for loan losses                      |                         |  |   | 331,741
|Noninterest Income                                                       |                         |  |   | 94,767 
|Noninterest Expenses                                                     |                         |  |   | 250,244
|                                                                         |                         |  |   |        
|Income before income taxes, minority interest, discontinued operations,  |                         | 
|and cumulative effect of change in accounting principle                  |                         |  |   | 176,264
|Income taxes                                                             |                         |  |   | 56,657 
|Income before minority interest, discontinued operations, and cumulative |                         | 
|effect of change in accounting principle                                 |                         |  |   | 119,607
|Minority interest in consolidated subsidiary, net of income tax          |                         |  |   | --     
|                                                                         |                         |  |   |        
|Income from continuing operations                                        |                         |  |   | 119,607
|Discontinued operations, net of income tax                               |                         |  |   | (490   
|Cumulative effect of change in accounting principle, net of income tax   |                         |  |   | --     
|                                                                         |                         |  |   |        
|Net Income                                                               |                         |  | $ | 119,117
|                                                                         |                         |  |   |        
|                                                                         |                         | 
|Average Common Shares Outstanding, Basic                                 |                         |  |   | 64,592 
|Average Common Shares Outstanding, Diluted                               |                         |  |   | 66,235 
|Per Common Share, Basic                                                  |                         | 
|Income from continuing operations                                        |                         |  | $ | 1.85   
|Discontinued operations                                                  |                         |  |   | (0.01  
|Cumulative effect of change in accounting principle                      |                         |  |   | --     
|                                                                         |                         |  |   |        
|Net income                                                               |                         |  | $ | 1.84   
|                                                                         |                         |  |   |        
|Per Common Share, Diluted                                                |                         | 
|Income from continuing operations                                        |                         |  | $ | 1.81   
|Discontinued operations                                                  |                         |  |   | (0.01  
|Cumulative effect of change in accounting principle                      |                         |  |   | --     
|                                                                         |                         |  |   |        
|Net income                                                               |                         |  | $ | 1.80   
|                                                                         |                         |  |   |        

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

54



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

|                                                   | Shares ofCommonStock | CommonStock | Surplus | RetainedEarningsandOther* | AccumulatedOtherComprehensiveIncome(Loss) | Total
|-------------------------------------------------- | -------------------- | ----------- | ------- | ------------------------- | ----------------------------------------- | -----
|Balance, December 31, 2001                         |                      |             |         | 41,228,976                |                                           |      
|Net income                                         |                      |             |         | --                        |                                           |      
|Other comprehensive income, net of tax of          |                      |            
|$                                           14,099 |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Comprehensive income                               |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Cash dividends declared ($0.50 per common share)   |                      |             |         | --                        |                                           |      
|Common stock activity:                             |                      |            
|Acquisitions                                       |                      |             |         | 7,846,353                 |                                           |      
|Repurchase of stock                                |                      |             |         | (2,141,907                | )                                         |      
|Exercise of stock options                          |                      |             |         | 341,895                   |                                           |      
|Dividend reinvestment plan                         |                      |             |         | 102,732                   |                                           |      
|Cancellation of stock                              |                      |             |         | (100,575                  | )                                         |      
|Restricted stock plan                              |                      |             |         | 59,096                    |                                           |      
|Employee stock purchase plan                       |                      |             |         | 10,805                    |                                           |      
|Miscellaneous                                      |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Balance, December 31, 2002                         |                      |             |         | 47,347,375                |                                           |      
|Net income                                         |                      |             |         | --                        |                                           |      
|Other comprehensive loss, net of tax of $15,796    |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Comprehensive income                               |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Cash dividends declared ($0.57 per common share)   |                      |             |         | --                        |                                           |      
|Common stock activity:                             |                      |            
|Issuance of stock, net                             |                      |             |         | 6,325,000                 |                                           |      
|Acquisitions                                       |                      |             |         | 5,634,760                 |                                           |      
|Repurchase of stock                                |                      |             |         | (1,274,808                | )                                         |      
|Exercise of stock options, including income        |                      |            
|tax benefit of $2,358                              |                      |             |         | 792,757                   |                                           |      
|Dividend reinvestment plan                         |                      |             |         | 135,330                   |                                           |      
|Restricted stock plan                              |                      |             |         | 66,860                    |                                           |      
|Employee stock purchase plan                       |                      |             |         | 23,511                    |                                           |      
|Director compensation                              |                      |             |         | 13,590                    |                                           |      
|Common stock purchased by trust for deferred       |                      |            
|compensation                                       |                      |             |         | --                        |                                           |      
|Deferred compensation payable in common stock .    |                      |             |         | --                        |                                           |      
|Miscellaneous                                      |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Balance, December 31, 2003                         |                      |             |         | 59,064,375                |                                           |      
|Net income                                         |                      |             |         | --                        |                                           |      
|Other comprehensive loss, net of tax of $6,627     |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Comprehensive income                               |                      |             |         | --                        |                                           |      
|                                                   |                      |             |         |                           |                                           |      
|Cash dividends declared ($0.61 per common share)   |                      |             |         | --                        |                                           |      
|Common stock activity:                             |                      |            
|Acquisitions                                       |                      |             |         | 10,754,557                |                                           |      
|Exercise of stock options, including income tax    |                      |            
|benefit of $5,421                                  |                      |             |         | 1,098,105                 |                                           |      
|Dividend reinvestment plan                         |                      |             |         | 117,660                   |                                           |      
|Restricted stock plan                              |                      |             |         | 197,607                   |                                           |      
|Employee stock purchase plan                       |                      |             |         | 11,393                    |                                           |      
|Director compensation                              |                      |             |         | 8,659                     |                                           |      
|Common stock purchased by trust for deferred       |                      |            
|compensation                                       |                      |             |         | --                        |                                           |      
|Deferred compensation payable in common stock .    |                      |             |         | --                        |                                           |      
|Miscellaneous                                      |                      |             |         | (10                       | )                                         |      
|                                                   |                      |             |         |                           |                                           |      
|Balance, December 31, 2004                         |                      |             |         | 71,252,346                |                                           | $    
|                                                   |                      |             |         |                           |                                           |      

*   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.

55



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

|                                                                        | Years Ended December 31, |  |  
|----------------------------------------------------------------------- | ------------------------ |  | -
|
|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                                               |                          |  |  
|Impairment of perpetual preferred stock                                 |                          |  |  
|Gain on sale of available for sale securities                           |                          |  |  
|Gain on equity investments                                              |                          |  |  
|(Gain) loss 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                                    |                          |  |  
|Deferred income tax expense (benefit)                                   |                          |  |  
|Minority interest in consolidated subsidiary                            |                          |  |  
|Cumulative effect of change in accounting principle                     |                          |  |  
|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 available for sale securities                               |                          |  |  
|Purchase of securities held to maturity                                 |                          |  |  
|Purchase of bank-owned life insurance                                   |                          |  |  
|Originations 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 acquisitions                       |                          |  |  
|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.

56



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

|                                                                                   | Years Ended December 31, |  |   |           
|---------------------------------------------------------------------------------- | ------------------------ |  | - | ----------
|
|Cash Flows from Financing Activities                                               |                          |  |   |           
|Deposits, net                                                                      |                          |  |   | 91,591    
|Federal funds purchased and repurchase agreements, net                             |                          |  |   | 629,351   
|Other short-term borrowings, net                                                   |                          |  |   | (13,563   
|Issuance of long-term debt                                                         |                          |  |   | 1,321,134 
|Payments of long-term debt                                                         |                          |  |   | (1,094,134
|Prepayment penalty on early extinguishment of debt                                 |                          |  |   | (1,429    
|Issuance of common stock, net                                                      |                          |  |   | --        
|Issuance of preferred stock associated with minority interest stock, net           |                          |  |   | --        
|Issuance of debt associated with trust preferred securities, net                   |                          |  |   | --        
|Cash dividends paid on common stock                                                |                          |  |   | (39,068   
|Cash dividends paid on minority interest                                           |                          |  |   | --        
|Repurchase of common stock                                                         |                          |  |   | --        
|Other common stock activity                                                        |                          |  |   | 16,827    
|                                                                                   |                          |  |   |           
|Net cash provided by financing activities                                          |                          |  |   | 910,709   
|                                                                                   |                          |  |   |           
|Net change in cash and cash equivalents                                            |                          |  |   | 18,274    
|Cash and cash equivalents at beginning of year                                     |                          |  |   | 186,242   
|                                                                                   |                          |  |   |           
|Cash and cash equivalents at end of year                                           |                          |  | $ | 204,516   
|                                                                                   |                          |  |   |           
|                                                                                   |                          | 
|Supplemental Cash Flow Data                                                        |                          | 
|Interest paid                                                                      |                          |  | $ | 178,350   
|Income taxes paid                                                                  |                          |  |   | 57,863    
|Significant non-cash investing and financing transactions:                         |                          | 
|Available for sale securities transferred to trading securities and                |                          | 
|subsequently sold                                                                  |                          |  |   | --        
|Debt associated with trust preferred securities transferred to      long-term debt |                          |  |   | --        
|Minority interest in consolidated subsidiary reclassified to long-term debt        |                          |  |   | --        
|Change in unrealized (loss) gain on available for sale securities                  |                          |  |   | (18,017   
|Loans transferred to other real estate owned                                       |                          |  |   | 10,868    
|Business combinations:                                                             |                          | 
|Fair value of assets acquired (includes cash and cash equivalents)                 |                          |  |   | 2,117,114 
|Fair value of common stock issued and stock options recognized                     |                          |  |   | (329,728  
|Basis of stock investment in acquiree, shares canceled effective with              |                          | 
|the acquisition closing date                                                       |                          |  |   | (8,970    
|Cash paid for common shares                                                        |                          |  |   | (4        
|                                                                                   |                          |  |   |           
|Liabilities assumed                                                                |                          |  |   | 1,778,412 
|                                                                                   |                          |  |   |           

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

57



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

NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

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

# Nature of Operations

TSFG
is a 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 December 31, 2004, TSFG
operated through 76 branch offices in South Carolina, 54 in Florida, and 24 in North
Carolina. In South Carolina, the branches are primarily located in the states
largest metropolitan areas. The Florida operations are concentrated in Jacksonville,
Orlando, Tampa Bay, Gainesville, and select South Florida markets. The North Carolina
branches are primarily located in the Hendersonville and Asheville areas of western North
Carolina and along the coast near Wilmington.

# Accounting Estimates and
Assumptions

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

# Principles of
Consolidation

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

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

# Reclassifications

Certain
prior year amounts have been reclassified to conform to the 2004 presentations.

58



# Business Combinations

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

# Cash and Cash Equivalents

Cash
and cash equivalents include cash and due from banks, interest-bearing bank balances, and
federal funds sold. Generally, both cash and cash equivalents have maturities of three
months or less, and accordingly, the carrying amount of these instruments is deemed to be
a reasonable estimate of fair value.

# Securities

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

Trading
securities are carried at fair value. Adjustments for realized and unrealized gains or
losses from both trading securities and derivative financial instruments used in trading
activities are included in noninterest income.

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

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

TSFG
determines the fair value of its securities based on quoted market prices from observable
market data, or if quoted market prices are not available, then the fair value is
estimated using quoted market prices for similar securities, or discounted cash flow
analysis. For privately held investments where market values are not readily available,
TSFGs management evaluates the fair value based on the investees ability to
generate cash through its operations or obtain alternative financing, and subjective
factors.

On
a quarterly basis, TSFG evaluates declines in the market value below cost of any available
for sale or held to maturity security for other-than-temporary impairment and, if
necessary, charges the unrealized loss to operations and establishes a new cost basis in
accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS 115) and the Securities and Exchange Commission Staff
Accounting Bulletin No. 59, Noncurrent Marketable Equity Securities (SAB
59). To determine whether impairment is other-than-temporary, TSFG considers the
reasons for the impairment, recent events specific to the issuer or industry, the severity
and duration of the impairment, volatility of fair value, changes in value subsequent to
period-end, external credit ratings, and forecasted performance of the investee. In
addition, TSFG considers whether it has the ability and intent to hold the investment
until a market price recovery and whether evidence indicating the cost of the investment
is recoverable outweighs evidence to the contrary. As the forecasted market price recovery
period lengthens, the uncertainties inherent in the estimate increase, impacting the
reliability of that estimate. To be included in assessment of recoverability, market price
recoveries must reasonably be expected to occur within an acceptable forecast period.
Ultimately, a lack of objective evidence to support recovery of a securitys cost
over a reasonable period of time will result in an other-than-temporary impairment charge.

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

59



# Loans Held for Sale

Loans
held for sale include residential mortgage loans intended to be sold in the secondary
market and other loans that management has an active plan to sell. Loans held for sale are
carried at the lower of cost or estimated fair value on an aggregate basis. In the event
management decides to sell loans, previously not held for sale, the loans are transferred
to loans held for sale at the lower of cost or estimated fair value. At the time of
transfer, if the market value is less than the cost, the difference related to the credit
quality of the loan is recorded as an adjustment to the allowance for loan losses.
Decreases in fair value are recognized in noninterest income.

Gains
or losses on sales of loans are recognized in noninterest income at the time of sale and
are determined by the difference between net sales proceeds and the carrying value of the
loans sold.

# Loans Held for Investment

Loans
held for investment are reported at their outstanding principal balances, adjusted for any
deferred fees (net of associated direct costs) and unamortized premiums or unearned
discounts. TSFG recognizes interest on the unpaid balance of the loans when earned. The
net amount of the nonrefundable loan origination fees, commitment fees, and certain direct
costs associated with the lending process are deferred and amortized to interest income
over the term of the loan. The premium or discount on purchased loans is amortized over
the expected life of the loans and is included in interest and fees on loans.

Loans
are considered to be impaired when, in managements judgment and based on current
information, the full collection of principal and interest becomes doubtful. A loan is
also considered impaired if its terms are modified in a troubled debt restructuring.
Impaired loans are placed in nonperforming status, and future payments are applied to
principal until such time as collection of the obligation is no longer doubtful. Interest
accrual resumes only when loans return to performing status. To return to performing
status, loans must be fully current, and continued timely payments must be a reasonable
expectation.

Loans
are charged-off (if unsecured) or written-down (if secured) when losses are reasonably
quantifiable. Commercial loans are generally placed in nonaccrual status (if secured) or
charged-off (if unsecured) when full collection of principal and interest becomes doubtful
or when they become 90-days delinquent. Consumer and mortgage loans are generally placed
in nonaccrual status (if secured) or charged-off (if unsecured) when they become
delinquent for 4 monthly payments. When loans are placed in nonaccrual status,
accrued but unpaid interest is charged against accrued interest income and other accrued
but unpaid charges or fees are charged to current expenses. Generally, loans are returned
to accrual status when the loan is brought current and ultimate collectibility of
principal and interest is no longer in doubt. TSFG defines past due loans based upon
contractual maturity dates for commercial loans. For consumer and mortgage loans, past
dues are defined as loans with two or more payments due.

# Allowance for Loan Losses

The
allowance for loan losses is based on managements ongoing evaluation of the loan
portfolio and reflects an amount that, in managements opinion, is adequate to absorb
probable losses in the existing portfolio. In evaluating the portfolio, management takes
into consideration numerous factors, including current economic conditions, prior loan
loss experience, the composition of the loan portfolio, and managements estimate of
credit losses. Loans are charged against the allowance at such time as they are determined
to be losses. Subsequent recoveries are credited to the allowance. Management considers
the year-end allowance appropriate and adequate to cover probable losses in the loan
portfolio; however, managements judgment is based upon a number of assumptions about
current events, which are believed to be reasonable, but which may or may not prove valid.
Thus, there can be no assurance that loan losses in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for loan losses
will not be required. In addition, various regulatory agencies periodically review
TSFGs allowance for loan losses as part of their examination process and could
require TSFG to adjust its allowance for loan losses based on information available to
them at the time of their examination.

# Concentrations of Credit
Risk

TSFGs
loan portfolio is composed primarily of loans to individuals and small and medium sized
businesses for various personal and commercial purposes primarily in South Carolina, the
western and coastal regions of North Carolina, and the Jacksonville, Orlando, Tampa Bay,
Gainesville, and select South Florida markets. The loan portfolio is diversified by
borrower and geographic area within this region. Industry concentrations parallel the mix
of economic activity in these markets, the most significant of which are the commercial
real estate, tourism, and automobile industries. Although the portfolio is affected by
economic conditions, repayment of loans therein is not excessively dependent on any
specific economic segment.

60



# Premises and Equipment

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

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

# Impairment of Long-Lived
Assets

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

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

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

# Intangible Assets

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

TSFG
tests for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). Potential impairment of goodwill exists when the
carrying amount of a reporting unit exceeds its implied fair value. The fair value for
each reporting unit is computed using one or a combination of the following three methods:
income, market value, or cost method. The income method uses a discounted cash flow
analysis to determine fair value by considering estimated future cash flows that the
reporting unit will generate over its remaining useful life. These cash flows are
discounted at a rate appropriate for the risk of the reporting unit. The market value
method uses recent transaction analysis or publicly traded comparable analysis for similar
companies to determine fair value. The cost method estimates the current cost to purchase
or replace the assets of the reporting unit. To the extent a reporting units
carrying amount exceeds its fair value, an indication exists that the reporting
units goodwill may be impaired, and a second step of impairment testing will be performed. 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 implied fair value. The loss recognized is limited to the
carrying amount of goodwill. Once an impairment loss is recognized, future increases in
fair value will not result in the reversal of previously recognized losses.

61



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

# Mortgage Servicing Rights

TSFG
recognizes the originated mortgage servicing rights (mortgage servicing rights
or MSRs) as assets by allocating total costs incurred between the originated
loan and the servicing rights retained based on their relative fair values in accordance
with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. TSFG also recognizes the purchased mortgage
servicing rights at fair value, which is presumed to be the price paid for the rights.
MSRs are amortized in proportion to the servicing income over the estimated life of the
related mortgage loans. The amortization method is designed to approximate a level-yield
method, taking into consideration the estimated prepayment of the underlying loans. For
purposes of measuring impairment, MSRs are reviewed for impairment based upon quarterly
external valuations. Such valuations are based on projections using a discounted cash flow
method that includes assumptions regarding prepayments, interest rates, servicing costs,
and other factors. Impairment is measured on a disaggregated basis for each strata of
rights, which are segregated by predominant risk characteristics, including interest rate
and loan type. TSFG has established an impairment valuation allowance to record estimated
impairment for MSRs. Subsequent increases in value are recognized only to the extent of
the impairment valuation allowance by strata.

# Derivative Financial
Instruments and Hedging Activities

TSFG
uses derivatives to manage exposure to interest rate risk and to assist our customers with
their risk management objectives. This includes managing risks associated with our
lending, investment, deposit taking, and borrowing activities. Derivatives used for
interest rate risk management include interest rate swaps, options, and futures contracts.
Interest rate swaps are generally entered into to convert specific fixed rate borrowings
to a floating rate index, or vice versa. We have also entered into swap contracts that
effectively convert exposure taken on through the issuance of equity-linked and
inflation-indexed certificates of deposit to Libor-based funding. We enter into forward sales
commitments to hedge the interest rate risk associated with our mortgage banking activities.  We may also, from time
to time, enter into certain option and futures contracts that are not designated as
hedging a specific asset, liability or forecasted transaction. Such options and futures
contracts typically have indices that relate to the pricing of specific on-balance sheet
instruments and forecasted transactions and may be more speculative in nature. TSFG has
policies in place that limit the amount of positions that may be outstanding for
trading-related purposes.

TSFG
also offers various derivatives, including interest rate, commodity, equity, credit, and
foreign exchange contracts, to our customers, however our exposure from such contracts is
typically neutralized by entering into offsetting financial contracts with third party
dealers. The customer derivatives and any offsetting financial contracts are treated as
trading instruments for purposes of accounting and reporting. Trading derivatives also
include derivatives we enter into for risk management purposes that do not otherwise
qualify for hedge accounting.

We
believe that effective use of derivative instruments to manage interest rate risk will
help minimize significant fluctuations in earnings, fair value of assets and liabilities,
and cash flows caused by interest rate volatility. We use derivatives to modify the
repricing characteristics of certain assets and liabilities so that changes in interest
rates do not have a significant adverse effect on net interest income and cash flows and
to better match the repricing profile of our interest bearing assets and liabilities. As a
result of interest rate fluctuations, certain interest-sensitive assets and liabilities
will gain or lose market value. In an effective fair value hedging strategy, the effect of
this change in value will generally be offset by a corresponding change in value on the
derivatives linked to the hedged assets and liabilities. In an effective cash flow hedging
strategy, the variability of cash flows due to interest rate fluctuations on floating rate
instruments is managed by derivatives that effectively lock-in the amount of cash payments
or receipts.

62



TSFGs
derivative activities, along with its other exposures to interest rate risk, are monitored
by our Asset/Liability Committee (ALCO) based upon the interest rate risk
guidelines we have established.

By
using derivative instruments, TSFG is also 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 and conducting periodic counterparty credit reviews. Market risk is the adverse
effect on the value of a financial instrument from a change in interest rates, implied
volatility of rates, counterparty credit risk and other market-driven factors. TSFG
manages the market risk associated with 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 trading and derivative activities used for interest rate risk
management activity is fully incorporated into our market risk sensitivity analysis.

All
derivatives are recognized on the consolidated balance sheet in either other assets or
other liabilities at their fair value in accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133) as amended
by SFAS No. 137, 138, and 149. On the date the derivative contract is entered into, TSFG
designates the derivative as (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment (fair value hedge), (2) a
hedge of a forecasted transaction or of the variability of cash flows to be received or
paid related to a recognized asset or liability (cash flow hedge), or
(3) an instrument with no hedging designation. Changes in fair value for derivatives
that qualify as fair value hedges are recorded along with the gain or loss on the hedged
asset or liability that is attributable to the hedge risk as noninterest income in the
consolidated statements of income. Changes in fair value for derivatives that qualify as
cash flow hedges are recorded through other comprehensive income (net of tax) in
shareholders equity to the extent that the hedge is effective. Changes in the fair
value of derivative instruments that fail to meet the criteria for hedge designation as a
hedge under SFAS 133 or fail to meet the criteria thereafter are recorded as
noninterest income in the consolidated statements of income.

For
all hedge relationships, ineffectiveness resulting from differences between the changes in
fair value or cash flows of the hedged item and changes in fair value of the derivative
are recognized as noninterest income in the consolidated statements of income. The net
interest settlement on derivatives designated as fair value or cash flow hedges is treated
as an adjustment to the interest income or expense of the hedged assets or liabilities.

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

TSFG
discontinues hedge accounting in accordance with SFAS 133 when the derivative is no longer
effective in offsetting changes in the fair value or cash flows of a hedged item; the
derivative expires or is sold, terminated or exercised; the derivative is dedesignated as
a hedge instrument because it is unlikely that a forecasted transaction will occur; or
management determines that designation of the derivative as a hedge instrument is no
longer appropriate.

When
hedge accounting is discontinued, the future gains and losses on derivatives are
recognized as noninterest income in the consolidated statements of income. When a fair
value hedge is discontinued, the hedged asset or liability is no longer adjusted for
changes in fair value and the existing basis adjustment is amortized or accreted over the
remaining life of the asset or liability. When a cash flow hedge is discontinued but the
hedged cash flows or forecasted transaction is still expected to occur, gains and losses
that were accumulated in other comprehensive income are amortized or accreted into
earnings. They are recognized in earnings immediately if the cash flow hedge was
discontinued because a forecasted transaction did not occur.

TSFG
may occasionally enter into a contract (the host contract) that contains a derivative that
is embedded in the financial instrument. If applicable, an embedded derivative is
separated from the host contract, recorded at fair value and can be designated as a hedge
that qualifies for hedge accounting; otherwise, the derivative is recorded at fair value
with gains and losses recognized in the consolidated statements of income.

63



# Other Investments

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

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

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

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

At
December 31, 2004, TSFGs investments in limited partnerships, LLCs and other
privately held companies accounted for under the cost and equity method of accounting
totaled $9.0 million and $7.0 million, respectively, and were included in other assets.

# Foreclosed Property

Other
real estate owned, included in other assets, is comprised of real estate properties
acquired in partial or total satisfaction of problem loans. In accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS 144), the property is classified as held for sale when the sale is
probable and is expected to occur within one year. The property is initially carried at
the lower of cost or estimated fair value less estimated selling costs. Principal losses
existing at the time of acquisition of such properties are charged against the allowance
for loan losses. Interest losses are charged to interest income. Subsequent write-downs
that may be required to the carrying value of these properties and gains and losses
realized from the sale of other real estate owned are included in other noninterest
income. Costs related to the development and improvements of such property are
capitalized, whereas the costs related to holding the property are charged to expense.
Other real estate owned totaled $10.2 million and $11.0 million at December 31, 2004
and 2003, respectively.

Personal
property repossessions are acquired in partial or total satisfaction of problem loans and
are included in other assets. These repossessions are initially carried at the lower of
cost or estimated fair value. Principal losses existing at the time of acquisition of such
personal properties are charged against the allowance for loan losses. Interest losses are
charged to interest income. Subsequent write-downs that may be required to the carrying
value of these foreclosed properties and gains and losses realized from their sale are
included in other noninterest income. Personal property repossessions totaled $652,000 and
$1.0 million at December 31, 2004 and 2003, respectively.

# Debt Issuance Costs

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

# Borrowed Funds

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

64



# Commitments and
Contingencies

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

# Deposit Accounts

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

# Income Taxes

TSFG
accounts for income taxes under the asset and liability method. The federal taxable
operating results of TSFG and its eligible subsidiaries are included in its consolidated
federal income tax return. Each subsidiary included in the consolidated federal income tax
return receives an allocation of federal income taxes due to the Parent Company or is
allocated a receivable from the Parent Company to the extent tax benefits are realized.
Where federal and state tax laws do not permit consolidated or combined income tax
returns, applicable separate subsidiary federal or state income tax returns are filed and
payment, if any, is remitted directly to the federal or state governments from such
subsidiary. In addition, TSFG periodically reviews the sustainability of its federal and
state income tax positions and, if necessary, in accordance with SFAS No. 5 (SFAS
5), Accounting for Contingencies, records contingent tax liabilities.

Deferred
income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective income tax basis and operating loss and income
tax credit carryforwards. Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled. The effect on deferred
income tax assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

# Comprehensive Income

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

# Stock-Based Compensation

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

The following table provides pro forma net income and earnings per
share information, as if TSFG had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock Based Compensation (SFAS 123) to
stock-based employee compensation option plans for the three years ended December 31, 2004
(dollars in thousands, except per share data).

65



|                                                                 | 2004 | 2003 | 2002
|---------------------------------------------------------------- | ---- | ---- | ----
|Net Income                                                       |      |      |     
|Net income, as reported                                          |      |      | $   
|Deduct:                                                          |      |     
|Total stock-based employee compensation expense determined under |      |     
|fair value based method for all option awards, net of income tax |      |      |     
|                                                                 |      |      |     
|Pro forma net income                                             |      |      | $   
|                                                                 |      |      |     
|                                                                 |      |     
|Basic Earnings Per Share                                         |      |     
|As reported                                                      |      |      | $   
|Pro forma                                                        |      |      |     
|                                                                 |      |     
|Diluted Earnings Per Share                                       |      |     
|As reported                                                      |      |      | $   
|Pro forma                                                        |      |      |     

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

|                                                               | 2004 | 2003 | 2002
|-------------------------------------------------------------- | ---- | ---- | ----
|Expected life (in years)                                       |      |      |     
|Expected volatility                                            |      |      |     
|Risk-free interest rate                                        |      |      |     
|Expected dividend yield                                        |      |      |     
|Weighted-average fair value of options granted during the year |      |      | $   

# Per Share Data

Basic
earnings per share is computed by dividing net income available to common shareholders by
the weighted-average number of shares of common stock outstanding during the year. Diluted
earnings per share is computed by dividing net income available to common shareholders by
the weighted average number of shares of common stock, common stock equivalents and other
potentially dilutive securities using the treasury stock method. Restricted stock grants
are considered as issued for purposes of calculating diluted net income per share in
accordance with SFAS No. 128, Earnings Per Share.

# Business Segments

TSFG
reports operating segments in accordance with SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131). Operating
segments are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and assess performance. SFAS 131 requires that a public
enterprise report a measure of segment profit or loss, certain specific revenue and
expense items, segment assets, information about the way that the operating segments were
determined and other items. TSFG has two reportable operating segments, Carolina First
Bank and Mercantile Bank (see Note 34).

# Risk and Uncertainties

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

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

66



# 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 Certain Loans or Debt Securities Acquired in a Transfer

Effective
January 1, 2005, TSFG adopted SOP No. 03-3 (SOP 03-3), Accounting for
Certain Loans or Debt Securities Acquired in a Transfer, which prohibits carry over
or creation of valuation allowances in the initial accounting of all loans acquired in a
transfer that are within the scope of this SOP. The prohibition of the valuation allowance
carryover applies to the purchase of an individual loan, a pool of loans, a group of
loans, and loans acquired in a purchase business combination. The initial adoption of this
issue did not have an impact on the financial condition or results of operations of TSFG.
TSFG is in the process of evaluating the impact related to its acquisition of Pointe,
which is expected to close in the second quarter of 2005.

# 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 first quarter
2005.

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 evaluating the impact of the initial
adoption of this guidance on the financial condition and 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 provided 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 and results of operations of TSFG.

Share-Based
Payment

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

67



| |  | Employee awards with cash-based settlement or repurchase features, such as a stock
appreciation right with a cash-settlement option;
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Awards for a fixed dollar amount settleable in the company's stock;                                                                 
| |  | Share-based awards with a
net-settlement feature for an amount in excess of the minimum tax withholding; and                        
| |  | Awards that vest or become exercisable based on the achievement of a condition other than
service, performance, or market condition.

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

| |  | Share-based
awards with net-settlement features for minimum tax withholdings;                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Awards that permit a
cashless exercise using a broker unrelated to the employer;                                                                                                                                                       
| |  | Awards containing a put
feature that give employees the right to require the company to repurchase the shares at
fair value, when the employee bears the risks and rewards normally associated with ownership for six months
or longer.

SFAS
123R is effective for public entities that do not file as small business issuers as of the
beginning of the first interim reporting period beginning after June 15, 2005. When we
adopt SFAS 123R as of July 1, 2005 we plan to use the modified prospective approach and
estimate pre-tax expense of approximately $1.0 million for both the third and fourth
quarters of 2005. Our estimate does not include any stock options that may be granted in the second
half of 2005.

Accounting
for Nonmonetary Transactions

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

NOTE 2. ACCUMULATED OTHER
COMPREHENSIVE (LOSS) INCOME

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

|                                                            | 2004 | 2003 | 2002
|----------------------------------------------------------- | ---- | ---- | ----
|Unrealized (Losses) Gains on Available for Sale Securities  |      |      |     
|Balance at beginning of year                                |      |      | $   
|Other comprehensive income (loss):                          |      |     
|Unrealized holding (losses) gains arising during the year   |      |      |     
|Income tax benefit (expense)                                |      |      |     
|Less: reclassification adjustment for net gains included in |      |     
|net income                                                  |      |      |     
|Income tax expense                                          |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|Balance at end of year                                      |      |      |     
|                                                            |      |      |     
|                                                            |      |     
|Unrealized Gains (Losses) on Cash Flow Hedges               |      |     
|Balance at beginning of year                                |      |      |     
|Other comprehensive income:                                 |      |     
|Unrealized gain on change in fair values                    |      |      |     
|Income tax expense                                          |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|                                                            |      |      |     
|Balance at end of year                                      |      |      |     
|                                                            |      |      |     
|                                                            |      |      | $   
|                                                            |      |      |     

68



NOTE 3.  SUPPLEMENTAL FINANCIAL INFORMATION TO CONSOLIDATED STATEMENTS OF INCOME

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

|                                                     | 2004 | 2003       | 2002
|---------------------------------------------------- | ---- | ---------- | ----
|Noninterest Income                                   |      |            |     
|Service charges on deposit accounts                  |      | $   36,332 |     
|Debit card income                                    |      | 4,211      |     
|Customer service fee income                          |      | 2,956      |     
|                                                     |      |            |     
|Total customer fee income                            |      | 43,499     |     
|                                                     |      |            |     
|                                                     |     
|Brokerage income                                     |      | 4,722      |     
|Trust income                                         |      | 3,779      |     
|                                                     |      |            |     
|Total brokerage and trust income                     |      | 8,501      |     
|                                                     |      |            |     
|                                                     |     
|Bank-owned life insurance                            |      | 11,215     |     
|Merchant processing income                           |      | 8,653      |     
|Mortgage banking income                              |      | 6,106      |     
|Insurance income                                     |      | 4,520      |     
|Impairment of perpetual preferred stock              |      | (10,367    | )   
|Gain on sale of available for sale securities        |      | 6,998      |     
|Gain on equity investments                           |      | 4,723      |     
|Gain (loss) on trading and derivative activities     |      | 3,209      |     
|Gain on disposition of assets and liabilities        |      | 2,350      |     
|Other                                                |      | 5,360      |     
|                                                     |      |            |     
|Total noninterest income                             |      | $   94,767 |     
|                                                     |      |            |     
|                                                     |     
|Noninterest Expenses                                 |     
|Salaries and wages                                   |      | $   90,221 |     
|Employee benefits                                    |      | 29,269     |     
|Occupancy                                            |      | 21,878     |     
|Furniture and equipment                              |      | 20,938     |     
|Professional fees                                    |      | 8,206      |     
|Merchant processing expense                          |      | 6,811      |     
|Telecommunications                                   |      | 4,834      |     
|Amortization of intangibles                          |      | 6,043      |     
|Merger-related costs                                 |      | 7,866      |     
|Conservation grant of land                           |      | 3,350      |     
|Loss on early extinguishment of debt                 |      | 1,429      |     
|Impairment (recovery) loss from write-down of assets |      | (277       | )   
|Other                                                |      | 49,676     |     
|                                                     |      |            |     
|Total noninterest expenses                           |      | $ 250,244  |     
|                                                     |      |            |     

NOTE 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 growth prospects. In connection with these acquisitions, CNB
Florida and Florida Banks were merged into Mercantile Bank.

69



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 was 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).

|                                                                | July 16, 2004 |          | 
|--------------------------------------------------------------- | ------------- | -------- | 
|
|Purchase price                                                  |               | $161,920 | 
|Fair value of net assets acquired (1)                           |               | 33,444   | 
|                                                                |               |          | 
|Excess of purchase price over fair value of net assets acquired |               | 128,476  | 
|Core deposit intangibles                                        |               | 10,571   | 
|Non-compete agreements                                          |               | 741      | 
|                                                                |               |          | 
|Goodwill                                                        |               | $117,164 | 
|                                                                |               |          | 

(1)    
          Includes direct acquisition costs incurred and deferred income taxes related to
          fair value adjustments.

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 the Mercantile Bank segment. The total amount of
goodwill expected to be deductible for income tax purposes is $11.3 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 7 for further details).

|                          | July 16, 2004 |            |  
|------------------------- | ------------- | ---------- | -
|
|Assets                    |               |            |  
|Cash and cash equivalents |               | $   80,833 |  
|Securities                |               | 3,718      |  
|Loans                     |              
|Loans held for sale       |               | 114        |  
|Loans held for investment |               | 714,605    |  
|Allowance for loan losses |               | (8,398     | )
|                          |               |            |  
|Net loans                 |               | 706,321    |  
|                          |               |            |  
|Intangible assets         |               | 128,476    |  
|                          |               |            |  
|Other assets              |               | 31,685     |  
|                          |               |            |  
|Total assets acquired     |               | 951,033    |  
|                          |               |            |  
|Liabilities               |              
|Deposits                  |               | 755,550    |  
|Borrowed funds            |               | 31,904     |  
|Other liabilities         |               | 1,659      |  
|                          |               |            |  
|Total liabilities assumed |               | 789,113    |  
|                          |               |            |  
|Net Assets Acquired       |               | $ 161,920  |  
|                          |               |            |  

70



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), a title insurance
agency 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.

# MountainBank Financial
Corporation

On
October 3, 2003, TSFG acquired MountainBank Financial Corporation (MBFC), a
bank holding company headquartered in Hendersonville, North Carolina. MBFC operated
primarily through 19 branches in western North Carolina. MBFC also operated Community
National Bank, a national bank headquartered in Pulaski, Virginia. TSFG sold substantially
all of the assets and liabilities of Community National Bank in 2004 (see Note 6 for
further details).

TSFG
issued 5,485,293 shares of common stock valued at $135.6 million, recorded outstanding
employee stock options valued at $5.0 million and director stock options valued at
$513,000, paid $24,000 in lieu of fractional shares, recorded net assets acquired of $41.4
million, recorded a core deposit intangible asset of $10.9 million, recorded a non-compete
agreement intangible asset of $1.2 million, and recorded goodwill of $87.6 million. The
core deposit intangible asset is amortized over 11 years on a sum-of-the-years digits
method. The non-compete agreement intangible is amortized on a straight-line basis over
its estimated useful life of 6 years. The intangible assets for MBFC were assigned to the
Carolina First Bank segment.

# Allied Assurance

On
September 22, 2003, TSFG acquired Allied Assurance of South Carolina, Inc.
(Allied), an insurance agency based in Columbia, South Carolina. TSFG issued
3,950 shares of common stock valued at $105,000 (including 1,585 shares with a fair value
of $45,000 earned in 2004 under earnout provision) and recorded goodwill of approximately
$128,000. TSFG agreed to issue annual earnout shares, valued at approximately $45,000, for
each of August 31, 2005, 2006, and 2007, based on revenue retention. If issued, the
earnout shares would increase goodwill. TSFG intends to use Allied to further its
insurance operations in the Midlands of South Carolina.

# American Pensions, Inc.

On
April 30, 2003, TSFG acquired American Pensions, Inc. (API), a benefit plan
administrator headquartered in Mount Pleasant, South Carolina. TSFG issued 159,839 shares
of common stock valued at $3.8 million (including 13,031 shares with a fair value of
$311,000 in lieu of the remaining earnout provision in 2004), recorded net liabilities
assumed of $476,000, recorded a non-compete agreement intangible asset of $350,000,
recorded a customer list intangible asset of $700,000, and recorded goodwill of $3.2
million. The non-compete agreement intangible is amortized on a straight-line basis over
its estimated useful life of 5 years. The customer list intangible is amortized on a
straight-line basis over its estimated useful life of 10 years. The goodwill associated
with API (a separate reporting unit under SFAS 142) is tested at least annually for
impairment.

# Central Bank of Tampa

On
December 31, 2002, TSFG acquired Central Bank of Tampa (CBT), a community bank
headquartered in Tampa, Florida. CBT operated through five branches in Tampa. TSFG issued
3,241,737 shares of TSFG common stock valued at $66.2 million, recorded net assets
acquired of $27.5 million, recorded a core deposit intangible asset of $2.7 million, and
recorded goodwill of $36.0 million. The core deposit intangible asset is amortized over 10
years on an accelerated basis until the straight-line amortization method is greater at
which time the straight-line method is used. All of the CBT intangible assets were
assigned to the Mercantile Bank segment.

71



# Rock Hill Bank &
Trust

On
October 31, 2002, TSFG acquired substantially all of the assets and deposits of Rock Hill
Bank & Trust (Rock Hill Bank), which was the wholly-owned banking
subsidiary of RHBT Financial Corporation (RHBT). Rock Hill Bank operated three
branches in York County, South Carolina.

Under
the asset sale agreement, Rock Hill Bank received 430,017 shares of TSFG common stock,
valued at $9.0 million, plus the right to receive a cash earnout essentially equal to 30%
of the net improvement in the aggregate charge-offs and reserves in the entire designated
loan pool and 50% of net amounts recovered under RHBTs blanket bond insurance policy
with respect to such loans. TSFG recorded net liabilities acquired totaling $18.2 million,
recorded a core deposit intangible of $1.2 million, and recorded goodwill of $26.2
million.

The
core deposit intangible asset is amortized over 10 years on an accelerated basis until the
straight-line amortization method is greater at which time the straight-line method is
used. All of the Rock Hill Bank intangible assets were assigned to the Carolina First Bank
segment.

As
of December 31, 2004, TSFG had incurred no obligation under the cash earnout associated
with the net improvements in the specified loan pool and in 2003 paid $1.3 million
associated with the net amounts recovered under RHBTs blanket bond insurance policy
with respect to such loans.

# Gardner Associates, Inc.

On
September 20, 2002, TSFG acquired Gardner Associates, Inc. (Gardner
Associates), an insurance agency based in Columbia, South Carolina. TSFG issued
189,800 shares of common stock valued at $3.9 million (including 11,568 shares with a fair
value of $241,000 earned in 2004 under an earnout provision), recorded net assets acquired
of $174,000, recorded a non-compete agreement intangible asset of $663,000, recorded a
customer list intangible asset of $858,000, and recorded goodwill of $2.2 million. The
non-compete agreement intangible is amortized on a straight-line basis over its estimated
useful life of 5 years. The customer list intangible is amortized on a straight-line basis
over its estimated useful life of 10 years. In addition, the principals of Gardner
Associates have the right to receive a maximum of 59,211 shares of TSFG common stock under
earnout provisions based on Gardner Associates five-year financial performance.
These 59,211 shares, which have been issued and deposited in an escrow account, are
subject to forfeiture back to TSFG if certain performance targets are not met.

# Gulf West

On
August 31, 2002, TSFG merged with Gulf West Banks, Inc. (Gulf West), a bank
holding company headquartered in St. Petersburg, Florida. Gulf West operated through
Mercantile Bank, a Florida-chartered, non-member bank with 15 locations in the greater
Tampa Bay area. TSFG issued 3,925,588 shares of TSFG common stock valued at $78.2 million,
recorded outstanding employee stock options valued at $6.5 million, recorded shares
issuable under employee stock purchase plan valued at $95,000, paid $32.4 million in cash,
recorded net assets acquired of $37.6 million, recorded a core deposit intangible of $8.4
million, and recorded goodwill of $71.2 million. The core deposit intangible asset is
amortized over 10 years on an accelerated basis until the straight-line amortization
method is greater at which time the straight-line method is used. All of the Gulf West
intangible assets were assigned to the Mercantile Bank segment.

# Amortization of Premiums
and Discounts

Premiums
and discounts that resulted from recording the assets and liabilities acquired through
bank 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 amortization decreased income before income taxes by $1.3 million,
$2.3 million, and $332,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.

72



# Pro Forma Financial
Information

The
following unaudited pro forma financial information presents the combined results of
operations of TSFG, CNB Florida, Florida Banks, and MBFC as if the mergers had occurred as
of the beginning of each year presented, after giving effect to certain adjustments,
including amortization of core deposit intangibles, non-compete agreement intangibles,
loan premiums, deposit premiums, and related income tax effects (in thousands, except per
common share). 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.

|                                                                                      | Years Ended December 31, |         
|------------------------------------------------------------------------------------- | ------------------------ | --------
|
|Net interest income                                                                   |                          | $399,647
|Noninterest income, excluding wholesale mortgage banking income                       |                          | 97,603  
|Wholesale mortgage banking income                                                     |                          | 2,266   
|Employment contract termination costs resulting from business combination and paid by |                         
|acquiree                                                                              |                          | 9,749   
|Net income                                                                            |                          | 105,171 
|Per common share:                                                                     |                         
|Net income, basic                                                                     |                          | 1.49    
|Net income, diluted                                                                   |                          | 1.46    

NOTE 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.

NOTE 6. DISPOSITION OF
ASSETS AND LIABILITIES

On
December 1, 2004, TSFG sold substantially all of the assets and all liabilities of
Carolina First Guaranty Reinsurance, Ltd. (CFGRL). CFGRL was a wholly-owned
captive reinsurance subsidiary, which provided credit-related insurance services to
customers of TSFG. In connection with the sale, TSFG sold $219,000 in assets, $622,000 in
liabilities, and paid cash of $403,000. Since CFGRL was immaterial to TSFGs
financial statements, presentation as a discontinued operation is not warranted.

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 markets. 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 gain or loss for financial reporting purposes. 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.

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.

In
June 2003, TSFG sold the deposits at its Powdersville, South Carolina branch office to an
unrelated financial institution. TSFG sold $6.4 million in deposits and recorded a gain
associated with the sale totaling $601,000.

NOTE 7. 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,
which is

73



expected to be completed by the first quarter 2005. Assets held for disposal,
included in other assets, totaled $1.4 million at December 31, 2004, and consisted
primarily of loans held for sale. At December 31, 2004, other liabilities included $34,000
related to the wholesale mortgage operation. 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 December
31, 2004, the revenue and pre-tax loss related to the wholesale mortgage operations
acquired from Florida Banks totaled $961,000 and $754,000, respectively. The after-tax
loss of $490,000 is recognized as discontinued operations in the consolidated statement of
income for the year ended December 31, 2004.

NOTE 8. RESTRICTIONS ON
CASH AND DUE FROM BANKS

The
Subsidiary Banks are required to maintain average reserve balances with the Federal
Reserve Bank based upon a percentage of deposits. The average amounts of these reserve
balances for the years ended December 31, 2004 and 2003 were $24.6 million and $24.7
million, respectively.

At
December 31, 2004 and 2003, TSFG had restricted cash totaling $1.8 million and $3.7
million as collateral to secure derivative financial instruments, respectively.

NOTE 9. SECURITIES

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

|                              | 2004 |              |  |          
|----------------------------- | ---- | ------------ |  | ---------
|
|Securities Available for Sale |      |              |  |          
|U.S. Treasury                 |      | $   236,804  |  | $     288
|U.S. Government agencies      |      | 934,442      |  | 1,187    
|Mortgage-backed securities    |      | 2,530,056    |  | 3,911    
|State and municipals          |      | 272,949      |  | 1,475    
|Other investments             |      | 290,116      |  | 5,951    
|                              |      |              |  |          
|                              |      | $4,264,367   |  | $12,812  
|                              |      |              |  |          
|                              |     
|Securities Held to Maturity   |     
|State and municipals          |      | $     75,145 |  | $  1,488 
|Other investments             |      | 100          |  | --       
|                              |      |              |  |          
|                              |      | $     75,245 |  | $  1,488 
|                              |      |              |  |          

|                              | 2003 |              |  |          
|----------------------------- | ---- | ------------ |  | ---------
|
|Securities Available for Sale |      |              |  |          
|U.S. Treasury                 |      | $   247,695  |  | $     712
|U.S. Government agencies      |      | 869,016      |  | 3,472    
|Mortgage-backed securities    |      | 2,389,174    |  | 4,299    
|State and municipals          |      | 127,280      |  | 840      
|Other investments             |      | 294,336      |  | 12,079   
|                              |      |              |  |          
|                              |      | $3,927,501   |  | $21,402  
|                              |      |              |  |          
|                              |     
|Securities Held to Maturity   |     
|State and municipals          |      | $     90,745 |  | $  2,292 
|Other investments             |      | 352          |  | --       
|                              |      |              |  |          
|                              |      | $     91,097 |  | $  2,292 
|                              |      |              |  |          

74



At
December 31, 2004, other investments in securities available for sale included the
following (recorded at the pre-tax estimated fair value indicated): corporate bonds of
$142.0 million, FHLB stock of $72.7 million, Federal National Mortgage Association
preferred stock of $50.1 million, Federal Home Loan Mortgage Corporation preferred stock
of $12.0 million, community bank stocks of $14.9 million, and other equity investments of
$3.6 million. At December 31, 2003, other investments in securities available for sale
included the following (recorded at the pre-tax estimated fair value indicated): corporate
bonds of $148.5 million, FHLB stock of $50.4 million, Federal National Mortgage
Association preferred stock of $54.7 million, Federal Home Loan Mortgage Corporation
preferred stock of $12.1 million, community bank stocks of $23.5 million, and other equity
investments of $10.4 million.

The
amortized cost and estimated fair value of securities available for sale and securities
held to maturity (in thousands) at December 31, 2004, by contractual maturity, are shown
in the following table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties. Estimated fair value of securities was determined using quoted
market prices.

|                                       | December 31, 2004 |             
|-------------------------------------- | ----------------- | ------------
|
|Securities Available for Sale          |                   |             
|Due in one year or less                |                   | $     17,387
|Due after one year through five years  |                   | 672,985     
|Due after five years through ten years |                   | 1,285,794   
|Due after ten years                    |                   | 2,140,367   
|No contractual maturity                |                   | 147,834     
|                                       |                   |             
|                                       |                   | $4,264,367  
|                                       |                   |             
|                                       |                  
|Securities Held to Maturity            |                  
|Due in one year or less                |                   | $     12,406
|Due after one year through five years  |                   | 39,152      
|Due after five years through ten years |                   | 22,940      
|Due after ten years                    |                   | 747         
|                                       |                   |             
|                                       |                   | $     75,245
|                                       |                   |             

Gross
realized gains, gross realized losses, and sale proceeds for available for sale securities
(in thousands) for the years ended December 31 are summarized as follows. These net
gains or losses are shown in noninterest income as gain on sale of available for sale
securities and gain on equity investments.

|                                                                 | 2004 | 2003 | 2002
|---------------------------------------------------------------- | ---- | ---- | ----
|Gross realized gains                                             |      |      | $   
|Gross realized losses                                            |      |      |     
|                                                                 |      |      |     
|Net gain on available for sale securities and equity investments |      |      | $   
|                                                                 |      |      |     
|Sale proceeds                                                    |      |      | $   
|                                                                 |      |      |     

At
December 31, 2004 and 2003, TSFG had none and $480,000 in investment securities classified
as trading, respectively. In each of the three years ending December 31, 2004, TSFGs
change in net unrealized holding gains on trading securities, which are included in
earnings, totaled a loss of $1,000. In 2002, TSFG transferred $208.2 million of U.S.
Treasury securities from available for sale securities to trading securities at fair value
and recognized a $1.6 million unrealized gain at the time of transfer.

Securities
with market values of approximately $3.8 billion and $3.4 billion at December
31, 2004 and 2003, respectively, were pledged to secure public deposits and for other
purposes. The book values totaled approximately $3.8 billion and $3.4 billion
for these same periods.

75



Carolina
First Bank and Mercantile Bank, as members of the Federal Home Loan Bank
(FHLB) of Atlanta, are required to own capital stock in the FHLB of Atlanta
based generally upon their balances of residential mortgage loans, select commercial loans
secured by real estate, and FHLB advances. FHLB capital stock, which is included in other
investments, is pledged to secure FHLB advances. No ready market exists for this stock,
and it has no quoted market value. However, redemption of this stock has historically been
at par value. At December 31, 2004 and 2003, Carolina First Bank owned a total of
$62.6 million and $47.5 million in FHLB stock, respectively. At December 31,
2004 and 2003, Mercantile Bank owned a total of $10.1 million and $2.7 million in FHLB
stock, respectively. At December 31, 2003, Community National Bank owned a total of
$175,000 in FHLB stock.

Gross
unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been
in a continuous unrealized loss position, at December 31, 2004, were as follows (in
thousands):

|                              | Less than 12 Months | 12 Months or Longer | Total |              |  |          
|----------------------------- | ------------------- | ------------------- | ----- | ------------ |  | ---------
|
|Securities available for sale |                     |                     |       |              |  |          
|U.S. Treasury                 |                     | $   176,438         |       | $    1,553   |  | $  46,394
|U.S. Government agencies      |                     | 435,567             |       | 3,335        |  | 111,766  
|Mortgage-backed securities    |                     | 1,340,913           |       | 19,459       |  | 621,984  
|State and municipals          |                     | 130,403             |       | 1,210        |  | 44,037   
|Other investments             |                     | 51,524              |       | 591          |  | 14,317   
|                              |                     |                     |       |              |  |          
|                              |                     | $2,134,845          |       | $  26,148    |  | $838,498 
|                              |                     |                     |       |              |  |          
|                              |                    
|Securities held to maturity   |                    
|State and municipals          |                     | $     13,786        |       | $         37 |  | $  12,116
|Other investments             |                     | --                  |       | --           |  | --       
|                              |                     |                     |       |              |  |          
|                              |                     | $     13,786        |       | $         37 |  | $  12,116
|                              |                     |                     |       |              |  |          

At
December 31, 2004, TSFG had 725 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, and corporate bonds (a $783,000
unrealized loss included in other investments) summarized above were attributable to
increases in interest rates, rather than credit quality. Nearly all of these securities
are rated AAA so the credit risk is minimal. TSFG believes it has the ability to hold
these investments until a market price recovery or maturity, and therefore these
investments are not considered impaired on an other-than-temporary basis.

In
December 2004, TSFG recorded $9.9 million and $511,000 in other-than-temporary impairments
on its perpetual preferred stock investments in Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation, respectively. In accordance with SFAS 115 and SAB
59 as the forecasted market price recovery period lengthened on these investments we
determined there was a lack of objective evidence to support recovery of the cost of these
securities over a reasonable period of time, which resulted in the other-than-temporary
impairment charge.

At
December 31, 2004, cost method investments totaling $5.5 million and $9.0 million were
included in available for sale securities and other assets, respectively. TSFG uses the
cost method of accounting for these privately held, nonmarketable securities after
considering TSFGs percentage ownership and degree of management influence. At
December 31, 2003, cost method investments totaling $4.9 million and $11.7 million were
included in available for sale securities and other assets, respectively.

76



NOTE 10. LOANS

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

|                                                | 2004 | 2003
|----------------------------------------------- | ---- | ----
|Commercial, financial and agricultural          |      |     
|Real estate--construction                       |      |     
|Real estate--residential mortgages (1-4 family) |      |     
|Commercial secured by real estate               |      |     
|Consumer                                        |      |     
|                                                |      |     
|Loans held for investment                       |      |     
|Loans held for sale                             |      |     
|Allowance for loan losses                       |      |     
|                                                |      |     
|Net loans                                       |      |     
|                                                |      |     
|                                                |      |     
|Included in the above:                          |      |     
|Nonaccrual loans                                |      |     
|                                                |      |     
|Loans past due 90 days still accruing interest  |      |     
|                                                |      |     

No interest income was recognized on nonaccrual  loans during 2004 and 2003.  Interest income  recognized on nonaccrual  loans
during 2002 totaled $134,000.

The following tables summarize  information on impaired loans (in thousands),  all of which are commercial loans on nonaccrual
status, at and for the years ended December 31.

|                             | 2004 | 2003   
|---------------------------- | ---- | -------
|Impaired loans (year end)    |      | $28,836
|Related allowance (year end) |      | 11,129 

|                           | 2004 | 2003     | 2002
|-------------------------- | ---- | -------- | ----
|Interest income recognized |      | $     -- |     
|Foregone interest          |      | 1,935    |     

The
average recorded investment in impaired loans for the years ended December 31, 2004, 2003,
and 2002 was $47.8 million, $55.3 million, and $42.3 million, respectively. Impaired loans
totaling $1.9 million and $18.5 million at December 31, 2004 and 2003, respectively, had a
specific allowance of zero. At December 31, 2004, impaired loans included $4.7 million in
restructured loans. There were no restructured loans included in loans at December 31,
2003.

TSFG
directors, directors of subsidiaries of TSFG, executive officers, and associates of such
persons were customers of and had transactions with TSFG in the ordinary course of
business. Included in such transactions are outstanding loans and commitments, all of
which were made under normal credit terms and did not involve more than normal risk of
collection. The aggregate dollar amount of these outstanding loans was $39.5 million,
$20.3 million, and $21.3 million at December 31, 2004, 2003, and 2002, respectively.
During 2004, new loans of $34.0 million were made, and payments totaled $14.8 million.
During 2003, new loans of $18.3 million were made, and payments totaled $19.3 million.

77



NOTE 11. ALLOWANCE FOR
LOAN LOSSES

Changes
in the allowance for loan losses (in thousands) were:

|                                           | 2004 | 2003 | 2002
|------------------------------------------ | ---- | ---- | ----
|Balance at beginning of year               |      |      | $   
|Purchase accounting acquisitions           |      |      |     
|Allowance adjustment for loans sold        |      |      |     
|Provision for loan losses                  |      |      |     
|Loans charged off                          |      |      |     
|Recoveries of loans previously charged off |      |      |     
|                                           |      |      |     
|Balance at end of year                     |      |      | $   
|                                           |      |      |     

NOTE 12. PREMISES AND
EQUIPMENT

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

|                                               | 2004 | 2003     
|---------------------------------------------- | ---- | ---------
|Land and land improvements                     |      | $  33,031
|Buildings                                      |      | 72,201   
|Furniture, fixtures and equipment              |      | 91,231   
|Capitalized software                           |      | 20,725   
|Leasehold improvements                         |      | 31,349   
|Construction in progress                       |      | 4,476    
|                                               |      |          
|                                               |      | 253,013  
|Less accumulated depreciation and amortization |      | 82,365   
|                                               |      |          
|                                               |      | $170,648 
|                                               |      |          

Depreciation
and amortization of premises and equipment totaled $17.0 million, $14.5 million, and $12.2
million in 2004, 2003 and 2002, respectively. At December 31, 2004, there were no land and
buildings pledged as collateral for long-term debt.

NOTE 13. LONG-LIVED
ASSETS HELD FOR SALE

At
December 31, 2004, Carolina First Bank owned land, which was classified in other assets as
an asset held for sale, and recorded at its estimated net realizable value of $136,000. At
December 31, 2003, Carolina First Bank owned building and land, which was classified in
other assets as an asset held for sale, and recorded at its estimated net realizable value
of $821,000. In addition, at December 31, 2003, Mercantile Bank owned a vacant branch,
which was classified in other assets as an asset held for sale, and recorded at its
estimated net realizable value of $999,000.

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 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.

In
2003, TSFG recorded a $268,000 impairment loss from the write-down of a leased property
included in premises and equipment, which is included in noninterest expense. During 2003,
an impairment loss from write-down of assets totaling $181,000 was charged to
merger-related costs, which is included in noninterest expense, for a banking office held
for sale. The fair value for this property was determined by market prices for other
similar properties located in the market.

In
2002, TSFG recorded a $1.4 million impairment loss from the write-down of assets, which is
included in noninterest expenses. The impairment loss included a $1.2 million write-down
of a significantly under occupied banking office building and land. The fair value for
this property was determined by market prices for other similar properties located in this
market. In addition, the write-down of assets included a $128,000 impairment loss on a
parcel of undeveloped land held for sale. The fair value for this parcel was determined by
an independent evaluation. The impairment loss also included $83,000 associated with
subletting office space at less than the contractual lease rate and a $47,000 write-off of
the leasehold improvements at a vacated leased banking office.

78



NOTE 14. GOODWILL

The
following summarizes the changes in the carrying amount of goodwill related to each of
TSFGs business segments (in thousands) for the years ended December 31, 2004 and
2003:

|                                | CarolinaFirstBank | MercantileBank | Other | Total  
|------------------------------- | ----------------- | -------------- | ----- | -------
|Balance, December 31, 2002      |                   |                | $     | 116,279
|Purchase accounting adjustments |                   |                |       | 90,501 
|                                |                   |                |       |        
|Balance, December 31, 2003      |                   |                |       | 206,780
|Purchase accounting adjustments |                   |                |       | (379   
|Dispositions                    |                   |                |       | --     
|                                |                   |                |       |        
|Balance, December 31, 2004      |                   |                | $     | 206,401
|                                |                   |                |       |        

The
goodwill for each reporting unit was tested for impairment as of June 30, 2004 in
accordance with SFAS 142. 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 present value of expected 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.

NOTE 15. OTHER INTANGIBLE
ASSETS

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

|                                 | 2004 | 2003
|-------------------------------- | ---- | ----
|Core deposit intangible          |      |     
|Less accumulated amortization    |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     
|Non-compete agreement intangible |      |     
|Less accumulated amortization    |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     
|Customer list intangible         |      |     
|Less accumulated amortization    |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     

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

|                                                | 2004 | 2003   | 2002
|----------------------------------------------- | ---- | ------ | ----
|Core deposit intangible                         |      | $5,080 |     
|Non-compete agreement intangible                |      | 805    |     
|Customer list intangible                        |      | 158    |     
|                                                |      |        |     
|Total amortization expense of intangible assets |      | $6,043 |     
|                                                |      |        |     

79



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

|                                         | CoreDepositIntangible | Non-CompeteAgreementIntangible | CustomerListIntangible | Total 
|---------------------------------------- | --------------------- | ------------------------------ | ---------------------- | ------
|2005                                     |                       | $  5,696                       |                        | $1,315
|2006                                     |                       | 5,095                          |                        | 1,314 
|2007                                     |                       | 4,607                          |                        | 1,206 
|2008                                     |                       | 3,801                          |                        | 527   
|2009                                     |                       | 3,095                          |                        | 209   
|Aggregate total for all years thereafter |                       | 11,449                         |                        | 2     
|                                         |                       |                                |                        |       
|                                         |                       | $33,743                        |                        | $4,573
|                                         |                       |                                |                        |       

NOTE 16. 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, for the two
years ended December 31, 2004.

|                                                           | 2004 | 2003
|---------------------------------------------------------- | ---- | ----
|Balance at beginning of year                               |      |     
|MSRs amortized                                             |      |     
|MSRs impairment recovery (loss) from the valuation of MSRs |      |     
|                                                           |      |     
|Balance at end of year                                     |      |     
|                                                           |      |     

The aggregate fair value of capitalized MSRs at December 31, 2004 and 2003 was $1.3 million and $1.9 million, respectively.
At December 31, 2004 and 2003, the valuation allowance for capitalized MSRs totaled $1.6 million and $1.8 million, respectively.

The estimated  amortization  expense for MSRs for the years ended December 31 is as follows:  $885,000 for 2005,  $220,000 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.

NOTE 17. DERIVATIVE
FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The fair value of TSFG's  derivative  assets and liabilities and their related notional amounts (in thousands) at December 31,
2004 and 2003 is presented below.

|                                                              | December 31, 2004 | December 31, 2003 |  |                 |  |             
|------------------------------------------------------------- | ----------------- | ----------------- |  | --------------- |  | ------------
|
|
|Cash Flow Hedges                                              |                   |                   |  |                 |  |             
|Interest rate swaps associated with borrowing activities      |                   | $     943         |  | $            -- |  | $     95,500
|                                                              |                  
|Fair Value Hedges                                             |                  
|Interest rate swaps associated with lending activities        |                   | --                |  | --              |  | --          
|Interest rate swaps associated with borrowing activities      |                   | --                |  | 10,127          |  | 185,000     
|Interest rate swaps associated with deposit taking activities |                   | 2,558             |  | 7,805           |  | 1,006,903   
|                                                              |                  
|Other Derivatives                                             |                  
|Futures contracts                                             |                   | 6                 |  | --              |  | 20,000      
|Options, interest rate swaps and other                        |                   | 11,484            |  | 16,884          |  | 178,250     
|                                                              |                   |                   |  |                 |  |             
|                                                              |                   | $14,991           |  | $     34,816    |  | $1,485,653  
|                                                              |                   |                   |  |                 |  |             

Certain
derivative liabilities were collateralized by approximately $1.8 million in cash and by
securities, which are held by third-party safekeepers. The approximate cost and fair value
of these securities at December 31, 2004 were $28.7 million and $28.4 million,
respectively.

80



As part of our mortgage activities, TSFG orginates certain residential loans and commits these loans for sale.
The commitments to orginate residential loans and the sales commitments are freestanding derivative instruments and are generally funded within 90 days. The fair value of
these commitments was not significant at December 31, 2004.

In
2004, noninterest income included $3.2 million of net gains for futures, options, and
other derivatives, which did not qualify for hedge accounting under SFAS 133. During 2004,
unrealized gains on cash flow hedges totaling $36,000 (net of related income taxes of
$13,000) were recognized in other comprehensive income and were partially offset by
$33,000 (net of related income taxes of $12,000) of gains reclassified to the consolidated
income statement as a result of the settlement of a derivative asset previously recognized
as a cash flow hedge. The settlement of the derivative asset previously recognized as a
cash flow hedge decreased the fair value of our derivative asset by $489,000. The gain on
this terminated cash flow hedge was included in accumulated other comprehensive income and
in accordance with SFAS 133 is being amortized over the remaining life of the original
forecasted transaction as it affects earnings. TSFG expects $131,000, net of income tax,
of the existing gains, which are included in accumulated other comprehensive income, to be
reclassified to the consolidated income statement within the next 12 months. In addition,
for 2004, the amount of ineffectiveness from TSFGs cash flow hedges was not
significant.

In
2003, noninterest income included $1.8 million of net gains for futures, options, other
derivatives, and trading activities, which do not qualify for hedge accounting under SFAS
133. During 2003, unrealized gains on cash flow hedges totaling $1.0 million (net of
related income taxes of $484,000) were recognized in other comprehensive income. In 2003,
$167,000 of losses were reclassified from other comprehensive income to the consolidated
income statement as a result of the discontinuance of cash flow hedges.

In
2002, noninterest income included $934,000 of net losses for futures, options, other
derivatives, and trading activities, which do not qualify for hedge accounting under SFAS
133. During 2002, unrealized gains on cash flow hedges totaling $318,000 (net of related
income taxes of $187,000) were recognized in other comprehensive income. In 2002, there
were no gains or losses that were reclassified from other comprehensive income to the
consolidated income statement as a result of the discontinuance of cash flow hedges
because it is probable that the original forecasted transactions will not occur. In
addition, for 2002, the amount of ineffectiveness from TSFGs cash flow hedges was
not significant.

NOTE 18. DEPOSITS

Deposits
at December 31 are summarized as follows (in thousands):

|                                    | 2004 | 2003      
|----------------------------------- | ---- | ----------
|Noninterest-bearing demand deposits |      | $1,237,877
|Interest-bearing checking           |      | 816,933   
|Money market accounts               |      | 2,704,287 
|Savings accounts                    |      | 192,769   
|Time deposits under $100,000        |      | 856,386   
|Time deposits of $100,000 or more   |      | 645,820   
|Brokered deposits                   |      | 1,211,465 
|                                    |      |           
|                                    |      | $7,665,537
|                                    |      |           

Maturities
of time deposits (includes brokered deposits) at December 31, 2004 are as follows (in
thousands):

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

81



NOTE 19. INCOME TAXES

The
aggregate amount of income tax expense (benefit) (in thousands) included in the
consolidated statements of income and in the consolidated statements of changes in
shareholders equity and comprehensive income (in thousands) for the years ended
December 31, 2004, 2003, and 2002 were as follows:

|                                                                     | 2004 | 2003 | 2002
|-------------------------------------------------------------------- | ---- | ---- | ----
|Income before minority interest, discontinued operations,            |      |      |     
|and cumulative effect of change in accounting principle              |      |      | $   
|Dividends on minority interest in consolidated subsidiary            |      |      |     
|Discontinued operations                                              |      |      |     
|Cumulative effect of change in accounting principle                  |      |      |     
|Shareholders' equity:                                                |      |     
|Change in unrealized gains on fair value of cash flow hedges         |      |      |     
|Change in unrealized (losses) gains on available for sale securities |      |      |     
|                                                                     |      |      |     
|                                                                     |      |      | $   
|                                                                     |      |      |     

Income
tax expense (benefit) attributable to income before income taxes, minority interest,
discontinued operations, and cumulative effect of change in accounting principle
(income tax expense) (in thousands) for the years ended December 31, 2004,
2003, and 2002 consisted of the following:

|                         | 2004 | 2003 | 2002
|------------------------ | ---- | ---- | ----
|Current                  |      |      |     
|U.S. Federal             |      |      | $   
|State and local          |      |      |     
|                         |      |      |     
|                         |      |      |     
|Deferred                 |      |     
|U.S. Federal             |      |      |     
|State and local          |      |      |     
|                         |      |      |     
|                         |      |      |     
|                         |      |      |     
|Total income tax expense |      |      | $   
|                         |      |      |     

Income
tax expense differed from the amounts computed by applying TSFGs statutory U.S.
federal income tax rate of 35% for the years ended December 31, 2004, 2003, and 2002 to
pretax income from continuing operations as a result of the following (in thousands):

|                                                             | 2004 | 2003 | 2002 |       
|------------------------------------------------------------ | ---- | ---- | ---- | ------
|Income tax expense at federal statutory rate                 |      |      | $    | 61,693
|State income tax, net of federal benefit                     |      |      |      | 3,501 
|Increase (decrease) resulting from:                          |      |     
|Subsidiary stock, recognition of basis difference            |      |      |      | --    
|Bank-owned life insurance                                    |      |      |      | (3,926
|Nontaxable municipal interest                                |      |      |      | (2,632
|Basis difference on gain on sale of substantially all of the |      |     
|assets and liabilities of Community National Bank            |      |      |      | 2,246 
|Income tax credits                                           |      |      |      | (436  
|Dividends received deduction                                 |      |      |      | (871  
|Change in federal and state valuation allowance for deferred |      |     
|income tax assets                                            |      |      |      | 47    
|Other, net                                                   |      |      |      | (2,965
|                                                             |      |      |      |       
|                                                             |      |      | $    | 56,657
|                                                             |      |      |      |       

82



The
tax effected sources of temporary differences that give rise to significant portions of
deferred income tax assets and deferred income tax liabilities at December 31 are
presented below (in thousands):

|                                                                                                | 2004 | 2003
|----------------------------------------------------------------------------------------------- | ---- | ----
|Deferred Income Tax Assets                                                                      |      |     
|Loan loss allowance deferred for income tax purposes                                            |      |     
|Unrealized losses on securities available for sale                                              |      |     
|Compensation expense deferred for income tax reporting purposes                                 |      |     
|Federal capital loss carryforward                                                               |      |     
|Excess basis of MSRs for income tax purposes over financial reporting purposes                  |      |     
|State net operating loss carryforwards                                                          |      |     
|Excess basis of securities for income tax purposes over financial reporting purposes            |      |     
|Environmental remediation costs                                                                 |      |     
|Federal net operating loss carryforward                                                         |      |     
|Other                                                                                           |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|Less valuation allowance                                                                        |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|Deferred Income Tax Liabilities                                                                 |      |     
|Excess basis of intangible assets for financial reporting purposes over income tax basis        |      |     
|Income tax depreciation in excess of book depreciation                                          |      |     
|Excess basis of prepaid and deferred expenses for financial reporting purposes over income tax  |      |     
|basis                                                                                           |      |     
|Unrealized gains on cash flow hedges and fair value of derivatives deferred for income tax      |      |     
|reporting purposes                                                                              |      |     
|Excess carrying value of assets acquired for financial reporting purposes over income tax basis |      |     
|                                                                                                |      |     
|Employee benefits deduction accelerated for income tax reporting purposes                       |      |     
|Income tax bad debt reserve recapture adjustment                                                |      |     
|Other                                                                                           |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|Net deferred income tax assets                                                                  |      |     
|                                                                                                |      |     
|                                                                                                |      |     
|Changes in net deferred income tax assets were (in thousands):                                  |      |     
|                                                                                                |      |     
|Balance at beginning of year                                                                    |      |     
|Purchase accounting acquisitions                                                                |      |     
|Income tax benefit from change in unrealized gains on available for sale securities             |      |     
|Income tax expense from change in fair values on cash flow hedges                               |      |     
|Deferred income tax (expense) benefit on continuing operations                                  |      |     
|                                                                                                |      |     
|Balance at end of year                                                                          |      |     
|                                                                                                |      |     

At
December 31, 2004, TSFG has net operating loss carryforwards for state income tax purposes
of $36.0 million available to offset future taxable state income, if any, which expires in
years 2007 through 2024. In addition, a subsidiary in which TSFG owned less than 80% has a
net operating loss carryforward for federal income tax purposes of $503,000 available to
offset future taxable federal income, if any, which expires in years 2023 through 2024.
TSFG purchased the remaining interest in this subsidiary during 2004. TSFG also has
capital loss carryforwards for financial reporting purposes of $23.0 million, which are
available to reduce future taxable federal capital gains, if any, through 2009.

The
valuation allowance for deferred income tax assets as of January 1, 2004 and 2003 was $6.2
million and $3.7 million, respectively. The net change in the valuation allowance relative
to state net operating loss carryforwards and net deferred state income tax assets for the
years ended December 31, 2004 and 2003 was an increase of $198,000 and $212,000,
respectively. The 2004 increase in the valuation allowance relative to state net operating
loss carryforwards included $83,000 acquired from acquisitions. The net change in
valuation allowance relative to federal capital loss carryforwards for the years ended
December 31, 2004 and 2003 was a decrease of $136,000 and an increase of $2.2 million,
respectively. The net change in valuation allowance relative to its federal net operating
loss carryforward for the years ended December 31, 2004 and 2003 was an increase of
$68,000 and $108,000, respectively.

83



In
assessing the realizability of deferred income tax assets, management considers whether it
is more likely than not that some portion or all of the deferred income tax assets will
not be realized. The ultimate realization of deferred income tax assets is dependent upon
TSFGs ability to generate taxable income during the periods in which those temporary
differences become deductible and prior to their expiration governed by the income tax
code. Management considers the scheduled reversal of deferred income tax liabilities,
projected future taxable income, and income tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections for future
taxable income over the periods, during which the deferred income tax assets are expected
to be deductible, management believes it more likely than not TSFG will realize the
benefits of these deductible differences, net of the existing valuation allowances at
December 31, 2004. The amount of the deferred income tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.

Tax
returns for 2001 forward are subject to examination by the Internal Revenue Service.

NOTE 20. SHORT-TERM
BORROWED FUNDS

Short-term
borrowings and their related weighted average interest rates at December 31 were (in
thousands):

|                                                  | 2004 | 2003       |  |  
|------------------------------------------------- | ---- | ---------- |  | -
|
|Federal funds purchased and repurchase agreements |      | $1,583,495 |  | 2
|Treasury, tax and loan note                       |      | 14,111     |  | 1
|Commercial paper                                  |      | 29,405     |  | 2
|Line of credit to unaffiliated bank and other     |      | --         |  |  
|                                                  |      |            |  |  
|                                                  |      | $1,627,011 |  | 2
|                                                  |      |            |  |  

Repurchase
agreements represent overnight and short-term borrowings by Carolina First Bank and
Mercantile Bank collateralized by securities of the United States government or its
agencies, which are held by third-party safekeepers. The approximate cost and fair value
of these securities at December 31, 2004 were $739.1 million and $732.5 million,
respectively. The approximate cost and fair value of these securities at December 31, 2003
were $573.0 million and $571.8 million, respectively.

The
maximum short-term borrowings outstanding at any month end were (in thousands):

|                                                  | 2004 | 2003      
|------------------------------------------------- | ---- | ----------
|Federal funds purchased and repurchase agreements |      | $1,715,306
|FHLB advances                                     |      | 205,000   
|Treasury, tax and loan note                       |      | 110,377   
|Commercial paper                                  |      | 39,743    
|Line of credit to unaffiliated bank and other     |      | 7,349     
|Aggregate short-term borrowings                   |      | 1,769,005 

Average  short-term  borrowings  during  2004,  2003,  and  2002,  were  $1.4  billion,   $935.6 million,   and  $1.4 billion,
respectively.  The  average  interest  rates on  short-term  borrowings  during  2004,  2003,  and 2002 were 1.40%,  1.22%,  and 1.53%,
respectively.

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

|                                                  | 2004 | 2003    | 2002
|------------------------------------------------- | ---- | ------- | ----
|Federal funds purchased and repurchase agreements |      | $17,568 |     
|FHLB advances                                     |      | 96      |     
|Treasury, tax and loan note                       |      | 80      |     
|Commercial paper                                  |      | 1,095   |     
|Line of credit to unaffiliated bank and other     |      | 69      |     
|                                                  |      |         |     
|                                                  |      | $18,908 |     
|                                                  |      |         |     

84



NOTE 21. UNUSED LINES OF
CREDIT

At
December 31, 2004, the Subsidiary Banks had unused short-term lines of credit to purchase
federal funds from unrelated banks totaling $536.6 million (which are withdrawable at
the lenders option). These lines of credit are generally available on a one-to-ten
day basis for funding short-term liquidity needs by the Subsidiary Banks. At December 31,
2004, the Subsidiary Banks had $1.5 billion of unused borrowing capacity from the
FHLB. This capacity may be used when the Subsidiary Banks have available collateral to
pledge.

At
December 31, 2004, the parent company had three unused short-term lines of credit totaling
$35.0 million. These lines of credit are withdrawable at the lenders option. One
line of credit for $15.0 million matures May 14, 2005 and has a fixed interest rate of
one-month LIBOR plus 125 basis points commencing on the loan date. The second line of
credit for $10.0 million matures June 30, 2005 and has a variable interest rate of
one-month LIBOR plus 200 basis points. The third line of credit for $10.0 million matures
November 15, 2005 and has a variable interest rate of one-month LIBOR plus 170 basis
points.

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 December 31, 2004, the
Subsidiary Banks had qualifying collateral to secure advances up to $951.8 million, none
of which was outstanding.

NOTE 22. LONG-TERM DEBT

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

|                                                                                                                                                                                                                                                                                                                                                                          |  | 2004       |  | 2003     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ---------
|FHLB advances; fixed interest rates ranging from 1.29% to 6.27% due from
   2005 to 2018; collateralized by a blanket lien on qualifying loans secured
   by first mortgages on one-to-four family residences valued at $282.2 million
   and mortgage-backed securities valued at $926.0 million; initial maturity
   of one year or greater; interest payable quarterly |  | $1,047,040 |  | $ 980,680
|Repurchase agreements; fixed and variable rates ranging from 1.10% to 4.23%
   due from 2005 to 2014; collateralized by securities of the United States government
   or its agencies, which are held by third-party safekeepers and corporate bonds
   valued at $1.8 billion; interest payable quarterly                                                                |  | 1,665,134  |  | 1,494,800
|Subordinated Notes; due June 26, 2033; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 3.10% (not to
   exceed 11.75% through June 26, 2008); balance can be prepaid in whole or in part after
   June 26, 2008 at accrued and unpaid interest plus outstanding principal (1)                                |  | 3,093      |  | --       
|Subordinated Notes; due December 26, 2032; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 3.25% (not to   exceed
11.75% through December 26, 2007); balance can be prepaid in whole or in part 
   after December 26, 2007 at accrued and unpaid interest plus outstanding principal (1)                    |  | 3,093      |  | --       
|Subordinated Notes; due November 7, 2032; unsecured; interest payable semi-annually
   and at maturity at a rate per annum equal to ninety-day LIBOR plus 3.45% (not to 
   exceed 12.5% through November 7, 2007); balance can be prepaid in whole or in part
   after November 7, 2007 at accrued and unpaid interest plus outstanding principal (1)                    |  | 22,681     |  | 22,681   
|Subordinated Notes; due October 7, 2032; unsecured; interest payable
   quarterly and at maturity at a rate per annum equal to three-month LIBOR plus 3.65%
   (not to exceed 12.5% through July 7, 2007); balance can be prepaid in whole or in part
    on or after July 7, 2007 at accrued and unpaid interest plus outstanding principal (1)                          |  | 25,774     |  | 25,774   
|Subordinated Notes; due July 30, 2032; unsecured; interest payable semi-annually
   and at maturity at a rate per annum equal to six-month LIBOR plus 3.625% (not to
   exceed 12.0% through July 30, 2007); balance can be prepaid in whole or in part after
   July 30, 2007 at accrued and unpaid interest plus outstanding principal (1)                              |  | 18,042     |  | 18,042   

85



|                                                                                                                                                                                                                                                                                                                                                      |  | 2004       |  | 2003      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ----------
|Subordinated Notes; due June 30, 2032; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 3.65% (not 
   to exceed 12.0% through June 30, 2007); balance can be prepaid in whole or in part
   after June 30, 2007 at accrued and unpaid interest plus outstanding principal (1)            |  | 20,619     |  | 20,619    
|Subordinated Notes; due June 30, 2032; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 3.65% (not to
   exceed 12.0% through June 30, 2007); balance can be prepaid in whole or in part
   after June 30, 2007 at accrued and unpaid interest plus outstanding principal (1)             |  | 4,124      |  | --        
|Subordinated Notes; due April 22, 2032; unsecured; interest payable semi-annually
   and at maturity at a rate per annum equal to six-month LIBOR plus 3.70% (not to
   exceed 11.0% through April 22, 2007); balance can be prepaid in whole or in part
   after April 22, 2007 at accrued and unpaid interest plus outstanding principal (1)        |  | 4,124      |  | --        
|Subordinated Notes; due December 18, 2031; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 3.60% (not to
   exceed 12.5% through December 18, 2006); balance can be prepaid in whole or in part
   after December 18, 2006 at accrued and unpaid interest plus outstanding principal (1) |  | 6,186      |  | --        
|Subordinated Notes; due July 8, 2031; unsecured; interest payable semi-annually
   and at maturity at a rate per annum equal to six-month LIBOR plus 3.75% (not to
   exceed 11.0% through December 8, 2006); balance can be prepaid in whole or in part
   after December 8, 2006 at accrued and unpaid interest plus outstanding principal (1)      |  | 31,959     |  | 31,959    
|Subordinated Notes; due December 17, 2013; unsecured; interest payable quarterly
   and at maturity at a rate per annum equal to three-month LIBOR plus 2.83%;
   balance can be prepaid on December 17, 2008 at par plus accrued and unpaid interest                                                                                                 |  | 10,000     |  | 10,000    
|6.33% Subordinated Notes; due December 20, 2006; unsecured; interest payable
   semi-annually of each year and at maturity; balance can be prepaid on
   December 20, 2001 at par plus accrued and unpaid interest                                                                                                                                    |  | 6,000      |  | 6,000     
|Mandatorily redeemable preferred stock of subsidiary; redeemable May 31, 2012;
   unsecured; dividends payable quarterly and at maturity at a rate per annum equal to
   three-month LIBOR plus 3.50% (2)                                                                                                                                             |  | 38,500     |  | 38,500    
|Mandatorily redeemable preferred stock of subsidiary; redeemable January 31, 2031;
   unsecured; dividends payable quarterly and at maturity at a rate per annum equal to
   11.125% (2)                                                                                                                                                              |  | 26,300     |  | 26,300    
|Mandatorily redeemable preferred stock of subsidiary; redeemable January 31, 2011;
   preferred stock can be redeemed in whole or part on or after December 8, 2005; 
   unsecured; dividends payable quarterly and at maturity at a rate per annum equal to
   three-month LIBOR plus 3.00% (2)                                                      |  | 25,000     |  | 25,000    
|Employee stock ownership plan note payable to RBC/Centura Bank; due July 23, 2007;
   collateralized by 51,459 shares of TSFG stock valued at approximately
   $1.7 million; interest at Centura Bank's prime rate less 1.25% with monthly
   principal payments of $25,000                                                                           |  | 800        |  | 1,100     
|Note payable; interest at 12.50% due December 31, 2012; collateralized by a United
   States Treasury note valued at $2.3 million; with current annual payments of
   approximately $125,000                                                                                                                                                          |  | 900        |  | 927       
|                                                                                                                                                                                                                                                                                                                                                      |  |            |  |           
|                                                                                                                                                                                                                                                                                                                                                      |  | 2,959,369  |  | 2,702,382 
|Purchase accounting premiums, net of amortization                                                                                                                                                                                                                                                                                                     |  | 2,774      |  | 497       
|                                                                                                                                                                                                                                                                                                                                                      |  |            |  |           
|                                                                                                                                                                                                                                                                                                                                                      |  | $2,962,143 |  | $2,702,879
|                                                                                                                                                                                                                                                                                                                                                      |  |            |  |           

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

86



Required
annual principal payments for the five years subsequent to December 31, 2004 are as
follows (in thousands):

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

Debt
issuance costs, net of accumulated amortization, totaled $6.7 million and $6.8 million at
December 31, 2004 and 2003, respectively, and are included in other assets on the
consolidated balance sheet. Amortization of debt issuance costs totaled $596,000,
$135,000, and $97,000 in 2004, 2003, and 2002 and is reported in other noninterest
expenses on the consolidated statements of income.

During
the years ended December 31, 2004, 2003 and 2002, TSFG recognized losses on the early
extinguishment of debt totaling $1.4 million, $2.7 million, and $354,000, respectively.
Such losses are included in noninterest expenses. The loss for 2004 related to 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 rates on these repurchase agreements ranged from 1.54% to 2.99%. The
loss for 2003 related to prepayment penalties for FHLB advances totaling $40.0 million
with a fixed interest rate of 6.27%. The loss for 2002 consisted of the write-off of
unamortized issue costs due to the full redemption of $26.3 million of 9% subordinated
debt due September 1, 2005 at par value.

NOTE 23. MINORITY
INTEREST IN CONSOLIDATED SUBSIDIARY

In
accordance with its adoption of SFAS No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and Equity,
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. In addition, effective July 1, 2003, TSFG reported
dividends earned by institutional holders on preferred shares of its real estate
investment trust subsidiary as interest expense. For periods prior to July 1, 2003, these
dividends earned are reported as minority interest in consolidated subsidiary, net of tax.

Carolina
First Mortgage Loan Trust (the REIT), a majority-owned subsidiary of SCOREIT,
Inc. (a subsidiary of Carolina First Bank), holds real estate-related assets, including
mortgage loans. SCOREIT, Inc.s ownership in the REIT is evidenced by common and
preferred equity. On June 11, 2002, Carolina First Bank sold 131 shares of the
REITs Series 2000A Cumulative Fixed Rate Preferred Shares (the
Series A Trust Preferred Stock) and 385 shares of the REITs
Series 2002C Cumulative Floating Rate Preferred Shares (the Series C Trust
Preferred Stock) to institutional buyers. On June 8, 2001, Carolina First Bank
sold 250 shares of the REITs Series 2000B Cumulative Floating Rate Preferred
Shares (the Series B Trust Preferred Stock) to an institutional buyer. On
February 22, 2001, Carolina First Bank sold 132 shares of the Series A Trust
Preferred Stock to an institutional buyer. The Series A Trust Preferred Stock, Series
B Trust Preferred Stock, and Series C Trust Preferred Stock have a stated value of
$100,000 per share. Proceeds to Carolina First Bank from these sales totaled
$49.2 million, net of issuance costs totaling $2.4 million in 2002, and
$37.0 million, net of $1.2 million in issuance costs in 2001. The mandatorily
redeemable preferred stock of subsidiary qualifies as capital under Federal Reserve Board
guidelines.

Dividends
on the Series A Trust Preferred Stock, Series B Trust Preferred Stock, and
Series C Trust Preferred Stock are cumulative, and will accrue whether or not the Carolina
First Mortgage Loan Trust has earnings, whether or not there are funds legally available
for the payment of such dividends, and whether or not such dividends are declared. The
dividends for the Series A Trust Preferred Stock are computed at a rate per annum
equal to 11.125% of the stated value and are payable quarterly. The dividends for the
Series B Trust Preferred Stock are computed at a rate per annum equal to three month
LIBOR plus 300 basis points of the stated value and are payable quarterly. The dividends
for the Series C Trust Preferred Stock are computed at a rate per annum equal to
three month LIBOR plus 350 basis points of the stated value and are payable quarterly.

87



The
shares of Series A Trust Preferred Stock are mandatorily redeemable on
January 31, 2031 and are not subject to optional redemption provisions other than in
connection with a tax event or capital event (as defined in the terms of the Series A
Trust Preferred Stock). After the occurrence of a tax event or capital event, TSFG may
redeem all or a portion of the Series A Trust Preferred Stock at a redemption price
equal to the greater of (i) the liquidation value of $100,000 per share or
(ii) the sum of the present values of the liquidation value and remaining dividends
up to January 31, 2031, discounted to the actual redemption date at a discount rate
(as defined in the terms of the Series A Trust Preferred Stock).

The
shares of Series B Trust Preferred Stock are mandatorily redeemable on
January 31, 2011, or upon earlier redemption as described below. TSFG has the right
to redeem the Series B Trust Preferred Stock in whole or in part, on or after
December 8, 2005, on any quarterly dividend payment date, at a redemption price equal
to the liquidation value ($100,000 per share). After the occurrence of a tax event or
capital event (as defined in the terms of the Series B Trust Preferred Stock), TSFG may
redeem all or a portion of the Series B Trust Preferred Stock at a redemption price
equal to 101% of the liquidation value if the redemption is prior to December 8, 2005
or 100% of the liquidation value thereafter.

The
shares of Series C Trust Preferred Stock are mandatorily redeemable on May 31, 2012, and
are not subject to optional redemption provisions other than in connection with a tax
event or capital event (as defined in the terms of the Series C Trust Preferred Stock).
After the occurrence of a tax event or capital event (as defined in the terms of the
Series C Trust Preferred Stock), TSFG may redeem all or a portion of the Series C Trust
Preferred Stock at a redemption price equal to 101% of the liquidation value if the
redemption is prior to May 31, 2007 or 100% of the liquidation value thereafter.

The
dividends earned by institutional holders of the Series A Trust Preferred Stock, the
Series B Trust Preferred Stock, and the Series C Trust Preferred Stock for the six
months ended June 30, 2003 (prior to reclassification to long-term debt under SFAS 150)
and year ended December 31, 2002 amounted to $2.0 million (net of amortization of
issuance costs of $144,000 and income taxes of $1.1 million) and $3.3 million (net of
amortization of issuance costs of $141,000 and income taxes of $1.9 million),
respectively.

NOTE 24. CONTINGENT
LIABILITIES AND COMMITMENTS

# 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
external 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 $660,000 at December 31, 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 and
impact earnings. The related estimated net realizable value of the other real estate
owned, included in other assets, totaled $300,000 at December 31, 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.

# Recourse Reserve

As
part of its acquisition of Florida Banks, TSFG acquired a recourse reserve associated with
loans previously sold from Florida Banks wholesale mortgage operation. This recourse
requires the repurchase of loans at par plus accrued interest from the buyer, upon the
occurrence of certain events. At December 31, 2004, the estimated recourse reserve
liability, included in other liabilities, totaled $2.5 million. TSFG will continue to
evaluate the reserve level and may make adjustments as more information becomes known.
There can be no guarantee that any liability or cost arising out of this matter will not
exceed any established reserves.

88



# Lease Commitments

Minimum
rental payments under noncancelable operating leases at December 31, 2004 are as follows
(in thousands):

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

Leases
on premises and equipment have options for extensions under substantially the same terms
as in the original lease period with certain rate escalations. Lease payments charged to
expense totaled $11.3 million, $10.4 million, and $9.0 million in 2004, 2003, and 2002,
respectively. The leases typically provide that the lessee pay property taxes, insurance,
and maintenance cost.

# Lending Commitments and
Guarantees

In
the normal course of business, to meet the financing needs of its customers, TSFG is a
party to financial instruments with off-balance-sheet risk. These financial instruments
include commitments to extend credit, standby letters of credit, repurchase agreements,
and documentary letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the consolidated
balance sheets.

TSFGs
exposure to credit loss in the event of non-performance by the other party to the
financial instrument is represented by the contractual amount of those instruments. TSFG
uses the same credit policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.

Commitments
to extend credit are agreements to lend as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. TSFG evaluates each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by TSFG upon extension of credit, is based on managements credit
evaluation.

Unfunded
loan commitments and letters of credit at December 31, 2004 were approximately
$2.3 billion and included the following (in thousands):

|                                               |  |         
|---------------------------------------------- |  | --------
|Loan commitments:                              |  |         
|Commercial, financial, agricultural, and other |  | $982,956
|Commercial secured by real estate              |  | 773,718 
|Home equity loans                              |  | 388,650 
|Standby letters of credit                      |  | 135,178 
|Documentary letters of credit                  |  | 2,412   
|Unused business credit card lines              |  | 17,550  

The
total portfolios of loans serviced or subserviced for non-affiliated parties at December
31, 2004 and 2003 were $155.2 million and $229.3 million, respectively.

TSFG
directors, directors of subsidiaries of TSFG, executive officers, and associates of such
persons were customers of and had transactions with TSFG in the ordinary course of
business. Included in such transactions are loan commitments, all of which were made under
normal credit terms and did not involve more than normal risk of collection. At December
31, 2004, the aggregate dollar amount of these unfunded loan commitments to the
aforementioned directors, officers and their associates totaled $14.3 million and are
included in the unfunded loan commitments presented above.

89



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 and such amount was not significant at December 31, 2004. The
maximum potential amount of undiscounted future payments related to standby letters of
credit at December 31, 2004 was $135.2 million.

NOTE 25. CAPITAL STOCK

On
November 10, 2004, TSFG filed a universal shelf registration statement
registering up to $750.0 million of securities to provide additional flexibility in
managing capital levels, both in terms of debt and equity. No securities have been offered
or sold under this shelf registration to date. The filing of this shelf registration on
November 10, 2004 terminated TSFGs previous shelf registration statement filed June
27, 2003.

On
June 27, 2003, TSFG filed a universal shelf registration statement registering
up to $200.0 million of securities to provide additional flexibility in managing capital
levels, both in terms of debt and equity. 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.
The 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. This shelf registration
statement has been terminated as discussed above.

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

NOTE 26. REGULATORY
CAPITAL REQUIREMENTS

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

Quantitative
measures established by regulation to ensure capital adequacy require TSFG and the
Subsidiary Banks to maintain minimum amounts and ratios (set forth in the following table)
of total and tier 1 capital (as defined in the regulation) to risk-weighted assets (as
defined) and to average assets (as defined). Management believes, as of December 31, 2004,
that TSFG and the Subsidiary Banks met all capital adequacy requirements.

As
of December 31, 2004, the most recent notification from federal banking agencies
categorized TSFG and the Subsidiary Banks as well capitalized under the
regulatory framework. To be categorized as well capitalized, the Subsidiary
Banks must maintain minimum total risk-based capital, tier 1 capital, and tier 1
leverage ratios as set forth in the table. Since December 31, 2004, there have been no
events or conditions that management believes have changed the Subsidiary Banks
categories.

90



TSFGs
and the Subsidiary Banks capital levels at December 31 exceeded the well
capitalized levels, as shown below (dollars in thousands):

|                               | Actual | For Capital AdequacyPurposes | To Be Well CapitalizedUnder PromptCorrective ActionProvisions |           |   |  
|------------------------------ | ------ | ---------------------------- | ------------------------------------------------------------- | --------- | - | -
|
|TSFG                           |        |                              |                                                               |           |   |  
|Tier 1 capital                 |        |                              | $                                                             | 967,494   |   | $
|Total risk-based capital       |        |                              |                                                               | 1,137,433 |   |  
|Tier 1 capital ratio           |        |                              |                                                               | 9.53      | % |  
|Total risk-based capital ratio |        |                              |                                                               | 11.21     |   |  
|Leverage ratio                 |        |                              |                                                               | 7.39      |   |  
|                               |        |                             
|Carolina First Bank            |        |                             
|Tier 1 capital                 |        |                              | $                                                             | 572,654   |   | $
|Total risk-based capital       |        |                              |                                                               | 729,817   |   |  
|Tier 1 capital ratio           |        |                              |                                                               | 8.89      | % |  
|Total risk-based capital ratio |        |                              |                                                               | 11.32     |   |  
|Leverage ratio                 |        |                              |                                                               | 6.39      |   |  
|                               |        |                             
|Mercantile Bank                |        |                             
|Tier 1 capital                 |        |                              | $                                                             | 323,304   |   | $
|Total risk-based capital       |        |                              |                                                               | 449,978   |   |  
|Tier 1 capital ratio           |        |                              |                                                               | 8.47      | % |  
|Total risk-based capital ratio |        |                              |                                                               | 11.79     |   |  
|Leverage ratio                 |        |                              |                                                               | 7.23      |   |  
|                               |        |                             
|Community National Bank        |        |                             
|Tier 1 capital                 |        |                              |                                                               | n/a       |   | $
|Total risk-based capital       |        |                              |                                                               | n/a       |   |  
|Tier 1 capital ratio           |        |                              |                                                               | n/a       |   |  
|Total risk-based capital ratio |        |                              |                                                               | n/a       |   |  
|Leverage ratio                 |        |                              |                                                               | n/a       |   |  

NOTE 27. RESTRICTION OF
DIVIDENDS FROM SUBSIDIARIES

The ability of TSFG to pay
cash dividends over the long term is dependent upon receiving cash in the form of
dividends from its subsidiaries. South Carolinas banking regulations restrict the
amount of dividends that Carolina First Bank can pay. All dividends paid from Carolina
First Bank are payable only from the net income of the current year, unless prior
regulatory approval is granted. The Florida statutes permit Mercantile Bank to pay
dividends from the net income of the current period combined with retained earnings of the
preceding two years without prior approval of Mercantile Banks regulatory agency
with certain limitations. Capital adequacy considerations could further limit the
availability of dividends from the Subsidiary Banks.

The terms for the
Series A Trust Preferred Stock, Series B Trust Preferred Stock, and Series C
Trust Preferred Stock include certain asset coverage and cash flow tests, which, if
triggered, may prohibit the REIT from paying dividends to Carolina First Bank, which in
turn may limit its ability to pay dividends to TSFG.

91



NOTE 28. AVERAGE SHARE
INFORMATION

The following is a summary of the basic and diluted average common shares outstanding for the years ended December 31:

|                                                 | 2004 | 2003       | 2002
|------------------------------------------------ | ---- | ---------- | ----
|Basic                                            |      |            |     
|Average common shares outstanding (denominator)  |      | 64,592,317 |     
|                                                 |      |            |     
|                                                 |     
|Diluted                                          |     
|Average common shares outstanding                |      | 64,592,317 |     
|Dilutive potential common shares                 |      | 1,642,854  |     
|                                                 |      |            |     
|                                                 |     
|Average diluted shares outstanding (denominator) |      | 66,235,171 |     
|                                                 |      |            |     

The
following options were outstanding for the years ended December 31 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:

|2004    | 2003 | 2002             |  |        
|------- | ---- | ---------------- |  | -------
|
|25,180  |      | $29.93 to $30.35 |  | 393,639
|33,489  |      | $31.26           |  | 504,950
|515,710 |      | $31.96           |  | 105,788

NOTE 29. STOCK
COMPENSATION PLANS

TSFG
has a long-term incentive plan (2004 LTIP), a restricted stock plan, and stock
option plan. These plans provide for grants or options to purchase TSFGs $1 par
value common stock.

# 2004 Long-Term Incentive
Plan

TSFGs
2004 LTIP provides for incentive compensation in the form of stock options, restricted
stock, performance units (which may be stock based), stock appreciation rights and
director compensation. These grants may be made to directors, officers, employees,
prospective employees, and consultants of TSFG. At December 31, 2004, authorized shares
under the 2004 LTIP totaled 2 million shares. During 2004, TSFG awarded 8,659 shares with
a weighted-average fair value of $28.71 for director compensation. Directors fees
associated with these grants totaled $249,000 in 2004. During 2003, TSFG awarded 13,590
shares with a weighted-average fair value of $25.28 for director compensation.
Directors fees associated with these grants totaled $344,000 in 2003. At December
31, 2004, TSFG had 1,977,751 shares available to be granted.

During
2004, TSFG recognized restricted stock compensation expense totaling $1.3 million related
to approximately 81,000 shares of restricted stock issued in January 2005.

# Restricted Stock Plan

TSFG
has a Restricted Stock Plan for awards to certain key employees. At December 31, 2004,
authorized shares under the Restricted Stock Plan totaled 875,000 shares. Shares granted
under the Restricted Stock Plan are subject to restrictions as to continuous employment
for a specified time period following the date of grant. During this period, the holder is
entitled to full voting rights and dividends. At December 31, 2004, there were 178,500
shares of unvested restricted stock with a weighted-average fair value of $27.54 computed
as of the grant dates. In addition, as of December 31, 2004, TSFG has issued 523,628
shares under the Restricted Stock Plan, which have already vested and 172,872 shares
available to be granted.

92



The
following is a summary of TSFGs restricted stock grants, the weighted-average fair
values at grant date, and compensation expense recognized on restricted stock awards for
the three years ended December 31, 2004.

|                                                                        | 2004 | 2003 | 2002
|----------------------------------------------------------------------- | ---- | ---- | ----
|Shares granted                                                          |      |      |     
|Shares canceled                                                         |      |      |     
|                                                                        |      |      |     
|                                                                        |      |      |     
|                                                                        |      |      |     
|Weighted-average fair value of restricted stock granted during the year |      |      | $   
|Compensation expense recognized (in thousands)                          |      |      | $   

# Stock Option Plan

TSFG
has a Stock Option Plan, a Directors Stock Option Plan, a Fortune 50 Stock Option
Plan, and options acquired from acquisitions (collectively referred to as stock-based
option plans). At December 31, 2004, authorized shares under the Stock Option Plan totaled
4.7 million shares. The exercise price of each option either equals or exceeds the fair
market value of TSFGs Common Stock on the date of grant. Options issued to employees
under the Stock Option Plan are typically exercisable on a cumulative basis for 20% of the
shares on each of the first five anniversaries of the grant. Under the Directors
Stock Option Plan, TSFG may grant options to its non-employee directors. At December 31,
2004, authorized shares under the Directors Stock Option Plan totaled 650,000
shares. The exercise price of each directors option equals the fair market value of
TSFGs Common Stock on the date of grant. Options issued to directors under the
Directors Stock Option Plan vest immediately on the grant date.

The
following is a summary of the activity under the stock-based option plans for the three
years ended December 31, 2004.

|                                      | 2004 | 2003 | 2002 |            |   |  
|------------------------------------- | ---- | ---- | ---- | ---------- | - | -
|
|Outstanding, January 1                |      |      |      | 4,240,795  |   | $
|Granted:                              |      |     
|Price = Fair Value                    |      |      |      | 813,270    |   |  
|Price > Fair Value                    |      |      |      | 11,760     |   |  
|Price <Fair Value (from acquisitions) |      |      |      | 998,176    |   |  
|Cancelled                             |      |      |      | (154,300   | ) |  
|Exercised                             |      |      |      | (1,168,728 | ) |  
|Outstanding, December 31              |      |      |      | 4,740,973  |   | $
|Exercisable, December 31              |      |      |      | 2,944,270  |   | $

93



The
following table summarizes information about stock options outstanding under the
stock-based option plans at December 31, 2004:

|              | Options Outstanding | Options Exercisable |  |    |   
|------------- | ------------------- | ------------------- |  | -- | --
|
|$1.49/$10.45  |                     | 514,242             |  | 2  | .9
|$10.71/$13.16 |                     | 583,875             |  | 4  | .7
|$13.88/$18.00 |                     | 615,990             |  | 5  | .0
|$18.06/$21.06 |                     | 559,114             |  | 7  | .0
|$21.42/$21.91 |                     | 511,151             |  | 6  | .9
|$22.34/$25.37 |                     | 536,563             |  | 5  | .0
|$26.25/$27.51 |                     | 537,770             |  | 7  | .5
|$27.70/$31.26 |                     | 367,208             |  | 7  | .8
|$31.96        |                     | 515,060             |  | 10 | .0
|              |                     |                     |  |    |   
|              |                     | 4,740,973           |  | 6  | .2
|              |                     |                     |  |    |   

NOTE 30. EMPLOYEE BENEFITS

TSFG
maintains the Carolina First Salary Reduction Plan and Trust (401(k) Plan) for
all eligible employees. Upon ongoing approval of the Board of Directors, TSFG matches
employee contributions equal to six percent of compensation subject to certain adjustments
and limitations. Contributions of $3.9 million, $3.3 million, and $2.3 million were
charged to operations in 2004, 2003, and 2002, respectively.

TSFG
maintains The South Financial Group, Inc. Employee Stock Ownership Plan (ESOP)
for all eligible employees. The ESOP has a loan, guaranteed by TSFG, used to acquire
shares of stock of TSFG. Such stock is pledged as collateral for the loan. At December 31,
2004, the ESOP owned 176,471 shares of TSFG stock, of which 51,459 were pledged to secure
the loan. The remainder was allocated to individual accounts of participants. In
accordance with the requirements of the American Institute of Certified Public Accountants
Statements of Position 76-3 and 93-6, TSFG presents the outstanding loan amount as
long-term debt and as a reduction of shareholders equity in the accompanying
consolidated balance sheets (Note 22). TSFG contributions to the ESOP are the primary
source of funds used to service the debt. Annual contributions consist of amounts
necessary to service the debt and other amounts at the discretion of, and determined by,
the Board of Directors, and may not exceed the maximum amount deductible under the
applicable sections of the Internal Revenue Code. For the years ended December 31, 2004,
2003, and 2002, contributions of $432,000, $746,000, and $607,000, respectively, were
charged to operations. There were no discretionary contributions made during 2004.

TSFG
maintains Supplementary Executive Retirement Plans (SERPs) for certain officers.
These plans provide salary continuation benefits after the participant reaches normal
retirement age (usually age 65) or early retirement (age 55 and 7 years of service) and
continue for 10 to 18 years. The SERPs also provide limited benefits in the event of early
termination or disability while employed by TSFG and full benefits to the officers
beneficiaries in the event of the officers death. The officers vest in the benefits
over a number of years as defined by the SERPs, usually 10 years. In the event of a change
of control of TSFG as defined in the SERPs, the officers become 100% vested in the total
benefit. TSFG has purchased life insurance policies on these officers in order to fund the
payments required by the SERPs. For the years ended December 31, 2004, 2003 and 2002,
contributions of $3.5 million, $2.5 million, and $1.5 million, respectively, were charged
to operations related to these SERPs.

TSFG
maintains an Executive Deferred Compensation Plan for certain officers. This plan allows
the participant to defer up to 80% of base annual salary and 100% of annual bonus
compensation on a pre-tax basis. TSFG provides a match of 10% of the employee
contribution. The deferral elections are irrevocable and cannot be changed during the plan
year. TSFGs match becomes fully vested after five years. Payments from the plan will
automatically begin upon the employees retirement, termination of employment, or
death during employment. However, participants may choose to receive payments prior to
these events, such as an in-service distribution, an elective early withdrawal, or upon a
change in control. Deferred compensation expense, which is associated with TSFGs
matching contributions, totaled $130,000, $72,000, and $84,000 in 2004, 2003, and 2002,
respectively.

94



Beginning
on January 1, 2003, under TSFGs Executive Deferred Compensation Plan for certain
officers, TSFG common stock was added as an investment option for deferred compensation.
The common stock purchased by TSFG for this deferred compensation plan is maintained in a
rabbi trust (the Trust), on behalf of the participants. The assets of the
Trust are subject to the claims of general creditors of TSFG. Dividends payable on the
common shares held by the Trust will be reinvested in additional shares of common stock of
TSFG on behalf of the participants. The deferred compensation obligation in the Trust is
classified as a component of shareholders equity, and the common stock held by the
Trust is classified as a reduction of shareholders equity. The obligations of TSFG
under this investment option of the deferred compensation plan, and the shares held by the
Trust, have no net effect on outstanding shares. Subsequent changes in the fair value of
the common stock are not reflected in earnings or shareholders equity.

NOTE 31. MERGER-RELATED
AND DIRECT ACQUISITION COSTS

In
connection with its 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) for the three years ended December 31, 2004:

|                                          | 2004 | 2003     | 2002
|----------------------------------------- | ---- | -------- | ----
|Merger-related costs                      |      |          |     
|Compensation-related expenses             |      | $  2,533 |     
|System conversion costs                   |      | 1,505    |     
|Travel                                    |      | 910      |     
|Impairment loss from write-down of assets |      | --       |     
|Advertising                               |      | 214      |     
|Other                                     |      | 2,704    |     
|                                          |      |          |     
|                                          |      | $  7,866 |     
|                                          |      |          |     
|                                          |     
|                                          |      | 2004     |     
|Direct acquisition costs                  |     
|Investment banking and professional fees  |      | $  5,432 |     
|Contract and lease terminations           |      | 8,547    |     
|Severance                                 |      | 1,094    |     
|                                          |      |          |     
|                                          |      | $15,073  |     
|                                          |      |          |     

Severance
charges are 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
December 31, 2004, the accruals for merger-related costs and direct acquisition costs
totaled $250,000 and $285,000, respectively. These accruals are included in other
liabilities.

NOTE 32. RELATED PARTY
TRANSACTIONS

During
the years ended December 31, 2004, 2003 and 2002, lease payments aggregating approximately
$26,000, $26,000, and $25,000, respectively, were made to affiliates of directors or
companies in which certain directors have an interest. These lease payments were made in
the ordinary course of business and were on terms comparable to those that would have been
obtained between unrelated parties.

At
December 31, 2004 and 2003, TSFG had loans to TSFG directors, directors of its
subsidiaries, executive officers, and associates of such persons totaling $39.5 million
and $20.3 million, respectively. All of these loans were made under normal credit terms
and did not involve more than normal risk of collection. At December 31, 2004, the
aggregate dollar amount of these unfunded loan commitments to the aforementioned
directors, officers and their associates totaled $14.3 million. See Notes 10 and 24
for further details.

95



NOTE 33. FAIR VALUE OF
FINANCIAL INSTRUMENTS

SFAS
No. 107, Disclosures about Fair Value of Financial Instruments (SFAS
107), requires disclosure of fair value information, whether or not recognized in
the statement of financial position, when it is practical to estimate the fair value. SFAS
107 defines a financial instrument as cash, evidence of an ownership interest in an entity
or contractual obligations, which require the exchange of cash, or other financial
instruments. Certain items are specifically excluded from the disclosure requirements,
including TSFGs common stock, premises and equipment, accrued interest receivable
and payable, and other assets and liabilities.

Fair
value approximates book value for the following financial instruments due to the
short-term nature of the instrument: cash and due from banks, interest-bearing bank
balances, federal funds sold, federal funds purchased and repurchase agreements, and other
short-term borrowings.

Investment
securities are valued using quoted market prices. Fair value for variable rate loans that
reprice frequently is based on the carrying value. Fair value for mortgage loans, consumer
loans and all other loans (primarily commercial and industrial loans) with fixed rates of
interest is based on the discounted present value of the estimated future cash flows.
Discount rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality. The carrying amount for loan
commitments and letters of credit, which are off-balance-sheet financial instruments,
approximates the fair value since the obligations are short-term and typically based on
current market rates.

Fair
value for demand deposit accounts and interest-bearing accounts with no fixed maturity
date is equal to the carrying value. Certificate of deposit accounts are estimated by
discounting cash flows from expected maturities using current interest rates on similar
instruments. For brokered deposits the call date is used instead of maturity date. Fair
value for long-term debt is based on discounted cash flows using TSFGs current
incremental borrowing rate.

TSFG
has used managements best estimate of fair value based on the above assumptions.
Thus, the fair values presented may not be the amounts, which could be realized, in an
immediate sale or settlement of the instrument. In addition, any income taxes or other
expenses, which would be incurred in an actual sale or settlement, are not taken into
consideration in the fair values presented. The estimated fair values of TSFGs
financial instruments (in thousands) at December 31 were as follows:

|                                                  | 2004 | 2003        |  |            
|------------------------------------------------- | ---- | ----------- |  | -----------
|
|Financial Assets                                  |      |             |  |            
|Cash and due from banks                           |      | $   199,847 |  | $   199,847
|Interest-bearing bank balances                    |      | 4,669       |  | 4,669      
|Federal funds sold                                |      | --          |  | --         
|Trading securities                                |      | --          |  | --         
|Securities available for sale                     |      | 4,234,843   |  | 4,234,843  
|Securities held to maturity                       |      | 75,245      |  | 76,552     
|Net loans                                         |      | 8,032,141   |  | 8,150,559  
|Derivative assets                                 |      | 14,991      |  | 14,991     
|                                                  |     
|Financial Liabilities                             |     
|Deposits                                          |      | $7,665,537  |  | $7,683,671 
|Federal funds purchased and repurchase agreements |      | 1,583,495   |  | 1,583,495  
|Other short-term borrowings                       |      | 43,516      |  | 43,516     
|Long-term debt                                    |      | 2,962,143   |  | 2,993,712  
|Derivative liabilities                            |      | 34,816      |  | 34,816     

96



NOTE 34. 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.

The accounting  policies of the segments are the same as those  described in the summary of significant  accounting  policies.
TSFG  accounts for  intersegment  revenues and expenses as if these  transactions  were to third  parties,  that is, at current  market
prices. TSFG evaluates performance based on budget to actual comparisons and segment profits.

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.

|                                              | CarolinaFirstBank | MarcantileBank | Other | EliminatingEntries | Total
|--------------------------------------------- | ----------------- | -------------- | ----- | ------------------ | -----
|Year Ended December 31, 2004                  |                   |                |       |                    |      
|Net interest income                           |                   |                | $     | 262,139            |      
|Provision for loan losses                     |                   |                |       | 27,591             |      
|Noninterest income                            |                   |                |       | 74,861             |      
|Noninterest expenses                          |                   |                |       | 163,018            |      
|Merger-related costs (a)                      |                   |                |       | 779                |      
|Amortization of intangibles (a)               |                   |                |       | 3,170              |      
|Income tax expense                            |                   |                |       | 45,704             |      
|Discontinued operations                       |                   |                |       | --                 |      
|Net income                                    |                   |                |       | 100,687            |      
|                                              |                   |               
|December 31, 2004                             |                   |               
|Total assets                                  |                   |                | $     | 9,234,839          |      
|Loans                                         |                   |                |       | 5,021,721          |      
|Deposits                                      |                   |                |       | 4,684,608          |      
|                                              |                   |               
|Year Ended December 31, 2003                  |                   |               
|Net interest income                           |                   |                | $     | 213,841            |      
|Provision for loan losses                     |                   |                |       | 13,588             |      
|Noninterest income                            |                   |                |       | 72,779             |      
|Noninterest expenses                          |                   |                |       | 144,296            |      
|Merger-related costs (a)                      |                   |                |       | 2,781              |      
|Amortization of intangibles (a)               |                   |                |       | 1,753              |      
|Income tax expense                            |                   |                |       | 39,905             |      
|Minority interest in consolidated subsidiary, |                   |               
|net of tax                                    |                   |                |       | (2,010             | )    
|Net income                                    |                   |                |       | 86,821             |      

97



|                                              | CarolinaFirstBank | MercantileBank | Other | EliminatingEntries | Total |  
|--------------------------------------------- | ----------------- | -------------- | ----- | ------------------ | ----- | -
|December 31, 2003                             |                   |                |       |                    |       |  
|Total assets                                  |                   |                | $     | 8,513,715          |       | $
|Loans                                         |                   |                |       | 4,372,476          |       |  
|Deposits                                      |                   |                |       | 4,543,012          |       |  
|                                              |                   |               
|Year Ended December 31, 2002                  |                   |               
|Net interest income                           |                   |                | $     | 188,599            |       | $
|Provision for loan losses                     |                   |                |       | 15,509             |       |  
|Noninterest income                            |                   |                |       | 43,245             |       |  
|Noninterest expenses                          |                   |                |       | 120,743            |       |  
|Merger-related costs (a)                      |                   |                |       | 921                |       |  
|Amortization of intangibles (a)               |                   |                |       | 1,093              |       |  
|Income tax expense                            |                   |                |       | 30,825             |       |  
|Minority interest in consolidated subsidiary, |                   |               
|net of tax                                    |                   |                |       | (3,247             | )     |  
|Cumulative effect of change in accounting     |                   |               
|principle, net of tax                         |                   |                |       | --                 |       |  
|Net income                                    |                   |                |       | 61,520             |       |  

(a)    
          Included in noninterest expenses.

NOTE 35. PARENT COMPANY
FINANCIAL INFORMATION

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

Condensed Balance Sheets

|                                       | December 31, |              | 
|-------------------------------------- | ------------ | ------------ | 
|
|Assets                                 |              |              | 
|Cash and due from banks                |              | $     51,790 | 
|Investment in subsidiaries:            |             
|Bank subsidiaries                      |              | 1,469,657    | 
|Nonbank subsidiaries                   |              | 17,165       | 
|                                       |              |              | 
|Total investment in subsidiaries       |              | 1,486,822    | 
|Receivable from subsidiaries           |              | 2,710        | 
|Other investments                      |              | 15,311       | 
|Other assets                           |              | 41,355       | 
|                                       |              |              | 
|                                       |              | $1,597,988   | 
|                                       |              |              | 
|                                       |             
|Liabilities and shareholders' equity   |             
|Accrued expenses and other liabilities |              | $     19,577 | 
|Payables to subsidiaries               |              | 1,908        | 
|Borrowed funds                         |              | 30,205       | 
|Subordinated debt                      |              | 145,695      | 
|Shareholders' equity                   |              | 1,400,603    | 
|                                       |              |              | 
|                                       |              | $1,597,988   | 
|                                       |              |              | 

98



Condensed Statements of Income

|                                                   | Years Ended December 31, |  |  
|-------------------------------------------------- | ------------------------ |  | -
|
|Income                                             |                          |  |  
|Dividend income from subsidiaries                  |                          |  | $
|Equity in undistributed net income of subsidiaries |                          |  |  
|Gain on equity investments                         |                          |  |  
|Interest income from subsidiaries                  |                          |  |  
|Sundry                                             |                          |  |  
|                                                   |                          |  |  
|                                                   |                          |  |  
|                                                   |                          |  |  
|Expenses                                           |                          | 
|Interest on borrowed funds                         |                          |  |  
|Loss on early extinguishment of debt               |                          |  |  
|Sundry                                             |                          |  |  
|                                                   |                          |  |  
|                                                   |                          |  |  
|                                                   |                          |  |  
|Income before taxes                                |                          |  |  
|Income tax benefit                                 |                          |  |  
|                                                   |                          |  |  
|Net income                                         |                          |  | $
|                                                   |                          |  |  

Condensed Statements of Cash Flows

|                                                                       | Years Ended December 31, |  |  
|---------------------------------------------------------------------- | ------------------------ |  | -
|
|Operating activities                                                   |                          |  |  
|Net income                                                             |                          |  | $
|Adjustments to reconcile net income to net cash provided by operations |                          | 
|Equity in undistributed net income of subsidiaries                     |                          |  |  
|Gain on disposition of equity investments                              |                          |  |  
|Loss on early extinguishment of debt                                   |                          |  |  
|Other assets, net                                                      |                          |  |  
|Other liabilities, net                                                 |                          |  |  
|                                                                       |                          |  |  
|Net cash provided by operating activities                              |                          |  |  
|                                                                       |                          |  |  
|                                                                       |                          | 
|Investing activities                                                   |                          | 
|Investment in subsidiaries                                             |                          |  |  
|Loans to subsidiaries, net                                             |                          |  |  
|Proceeds from disposition of equity investments                        |                          |  |  
|Purchase of equity investments                                         |                          |  |  
|                                                                       |                          |  |  
|Net cash used for investing activities                                 |                          |  |  
|                                                                       |                          |  |  
|                                                                       |                          | 
|Financing activities                                                   |                          | 
|Borrowings, net                                                        |                          |  |  
|Issuance of subordinated debt, net                                     |                          |  |  
|Issuance of common stock, net                                          |                          |  |  
|Cash dividends paid                                                    |                          |  |  
|Repurchase of common stock                                             |                          |  |  
|Other                                                                  |                          |  |  
|                                                                       |                          |  |  
|Net cash (used for) 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 year                               |                          |  | $
|                                                                       |                          |  |  

99



NOTE 36. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following provides quarterly financial data for 2004 and 2003 (dollars in thousands, except per share data).

2004 Quarterly Financial Data

|                                                         | Three Months Ended |  |   |        
|-------------------------------------------------------- | ------------------ |  | - | -------
|
|Interest income                                          |                    |  | $ | 160,039
|Interest expense                                         |                    |  |   | 55,474 
|                                                         |                    |  |   |        
|Net interest income                                      |                    |  |   | 104,565
|Provision for loan losses                                |                    |  |   | 10,829 
|Noninterest income                                       |                    |  |   | 15,401 
|Noninterest expenses                                     |                    |  |   | 68,649 
|                                                         |                    |  |   |        
|Income before income taxes and discontinued operations . |                    |  |   | 40,488 
|Income taxes                                             |                    |  |   | 14,341 
|                                                         |                    |  |   |        
|Income from continuing operations                        |                    |  |   | 26,147 
|Discontinued operations, net of tax                      |                    |  |   | (325   
|                                                         |                    |  |   |        
|Net income                                               |                    |  | $ | 25,822 
|                                                         |                    |  |   |        
|Per common share, basic:                                 |                    | 
|Income from continuing operations                        |                    |  | $ | 0.37   
|Discontinued operations                                  |                    |  |   | (0.01  
|                                                         |                    |  |   |        
|Net income                                               |                    |  | $ | 0.36   
|                                                         |                    |  |   |        
|Per common share, diluted:                               |                    | 
|Income from continuing operations                        |                    |  | $ | 0.36   
|Discontinued operations                                  |                    |  |   | (0.01  
|                                                         |                    |  |   |        
|Net income                                               |                    |  | $ | 0.35   
|                                                         |                    |  |   |        

2003 Quarterly Financial Data

|                                                         | Three Months Ended |  |   |        
|-------------------------------------------------------- | ------------------ |  | - | -------
|
|Interest income                                          |                    |  | $ | 117,162
|Interest expense                                         |                    |  |   | 38,634 
|                                                         |                    |  |   |        
|Net interest income                                      |                    |  |   | 78,528 
|Provision for loan losses                                |                    |  |   | 4,290  
|Noninterest income                                       |                    |  |   | 23,899 
|Noninterest expenses, excluding merger-related costs     |                    |  |   | 57,644 
|                                                         |                    |  |   |        
|Income before income taxes and minority interest         |                    |  |   | 40,493 
|Income taxes                                             |                    |  |   | 12,072 
|                                                         |                    |  |   |        
|Income before minority interest                          |                    |  |   | 28,421 
|Minority interest in consolidated subsidiary, net of tax |                    |  |   | --     
|                                                         |                    |  |   |        
|Net income                                               |                    |  | $ | 28,421 
|                                                         |                    |  |   |        
|Net income per common share, basic                       |                    |  | $ | 0.51   
|                                                         |                    |  |   |        
|Net income per common share, diluted                     |                    |  | $ | 0.50   
|                                                         |                    |  |   |        

100



# Item 9.    Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure

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

# Item 9A.    Controls and
Procedures

(a)       
          TSFGs management, with the participation of its principal executive
          officer and principal financial officer, has evaluated the effectiveness, as of
          December 31, 2004, of TSFGs disclosure controls and
          procedures, as such term is defined in Rule 13a-15(e) under the Securities
          Exchange Act of 1934, as amended (the Exchange Act). Based upon
          their evaluation, the principal executive officer and principal financial
          officer concluded that TSFGs disclosure controls and procedures, as of
          December 31, 2004, were effective to provide reasonable assurance that
          information required to be disclosed by TSFG in the reports filed or submitted
          by it under the Exchange Act is recorded, processed, summarized and reported
          within the time periods specified in the SECs rules and forms, and to
          provide reasonable assurance that information required to be disclosed by TSFG
          in such reports is accumulated and communicated to TSFGs management,
          including its principal executive officer and principal financial officer, as
          appropriate to allow timely decisions regarding required disclosure.

(b) Managements
Report on Internal Control Over Financial Reporting. Included under the heading
Management Report on Internal Control Over Financial Reporting at Item 8
of this Annual Report on Form 10-K.

(c) Audit
report of KPMG, LLP, an independent public accounting firm on TSFG's assessment of the effectiveness of its internal controls over financial reporting. Included under the heading
Report of Independent Registered Public Accounting Firm at Item 8 of this
Annual Report on Form 10-K.

(d) Changes
in internal control over financial reporting. TSFG continually assesses the adequacy of
its internal control over financial reporting and enhances its controls in response to
internal control assessments and internal and external audit and regulatory
recommendations. No control enhancements during the quarter ended December 31, 2004
or through the date of this Annual Report on Form 10-K have materially affected, or
are reasonably likely to materially affect, TSFGs internal control over financial
reporting.

# Item 9B.    Other
Information

On December 14, 2004, the Compensation Committee of the Board of Directors
approved performance goals for bonus awards for 2005 under the Management Incentive Compensation Plan (the "Plan")
for all TSFG executive officers, including Mack I. Whittle, Jr., William S. Hummers III, James W. Terry, Jr., Andrew B. Cheney
and John C. DuBose.  Bonus payments will be a percentage of the individual's base salary amount that varies depending on the extent to which
target performance goals for the year are met or exceeded.  Target performance goals are subject to adjustment to appropriately reflect dilution
associated with corporate transaction that may occur during 2005.  Target performance goals were established for earnings per share, return on assets and return on equity.  Individual
target performance goals also were established based on each executive's 2005 strategic plan and objectives for his areas of organization responsibility.

# PART III

# Item 10.    Directors and
Executive Officers of the Registrant

See
Executive Compensation Plan Data in the Registrants Proxy Statement relating to the
2005 Annual Meeting of Shareholders filed with the Securities and Exchange Commission,
which information is incorporated herein by reference.

See
Election of Directors, Executive Officers, Business Experience of Directors and Executive
Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in the
Registrants Proxy Statement relating to the 2005 Annual Meeting of Shareholders
filed with the Securities and Exchange Commission, which information is incorporated
herein by reference.

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

101



# Item 11.    Executive
Compensation

See Compensation
of Directors and Executive Officers in TSFGs Proxy Statement relating to the 2005
Annual Meeting of Shareholders filed with the Securities and Exchange Commission, which
information is incorporated herein by reference.

Item 12.    Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder                    Matters

See
Security Ownership of Certain Beneficial Owners and Management in TSFGs Proxy
Statement relating to the 2005 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission, which information is incorporated herein by reference.

# Item 13.    Certain
Relationships and Related Transactions

See
Certain Relationships and Related Transactions in TSFGs Proxy Statement relating to
the 2005 Annual Meeting of Shareholders filed with the Securities and Exchange Commission,
which information is incorporated herein by reference.

# Item 14.    Principal
Accountant Fees and Services

See Audit
Fees, Other Audit Committee Matters, and Ratification of Independent Registered Public
Accounting Firm for 2005 in TSFGs Proxy Statement relating to the 2005 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission, which
information is incorporated herein by reference.

# PART IV

# Item 15.    Exhibits and
Financial Statement Schedules

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

The
following managements statement on responsibility for financial reporting, report of
independent auditors and consolidated financial statements of TSFG and its subsidiaries
are included in Item 8 hereof:
        Managements Statement on Responsibility for Financial Reporting
        Reports of KPMG LLP, an Independent
Registered Public Accounting Firm
        Consolidated Balance SheetsDecember 31, 2004 and 2003
        Consolidated Statements of IncomeYears ended December 31, 2004, 2003 and 2002
        Consolidated Statements of Changes in Shareholders Equity and Comprehensive IncomeYears
ended December 31,           2004, 2003 and 2002
        Consolidated Statements of Cash FlowsYears ended December 31, 2004, 2003 and 2002
        Notes to Consolidated Financial Statements
        (a)(2)   Financial Statement Schedules

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

102



(a)(3)    Listing of Exhibits

|Exhibit No. | Description of Exhibit                                                                                                      |  | Location                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- | --------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           
|2.1         | Agreement and Plan of Reorganization entered into as of January 20, 2004 by and among TSFG and CNB Florida Bancshares, Inc. |  | Incorporated by reference to Exhibit 2.1 of TSFG's Current Report on Form 8-K, Commission File No. 333-32590, dated January 22, 2004                                                                                                                                                                                                                                                                                                                                                            
|           
|2.4         | Asset Sale Agreement entered into as of September 3, 2002 by and among TSFG, Carolina First Bank and Rock Hill Bank & Trust |  | Incorporated by reference to Exhibit 2.1 of TSFG's Registration Statement on Form S-4, Commission File No. 333-100100.                                                                                                                                                                                                                                                                                                                                                                          
|           
|3.1         | Articles of Incorporation, as amended by Articles of Amendments dated June 1, 1997 and April 19, 2000.                      |  | Incorporated by reference to Exhibit 3.1 of TSFG's Registration Statement on Form S-4, Commission File No. 57389; Exhibit 3.2 of TSFG's Registration Statement on Form S-4, Commission File No. 333-32459, and Exhibit 10.3 of TSFG's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, Commission File No. 15083.                                                                                                                                                            
|           
|3.2         | Amended and Restated Bylaws of TSFG as amended and restated as of December 18, 1996.                                        |  | Incorporated by reference to Exhibit 3.1 of TSFG's Current Report on Form 8-K dated December 18, 1996, Commission File No. 0-15083.                                                                                                                                                                                                                                                                                                                                                             
|           
|4.1         | Specimen TSFG Common Stock certificate                                                                                      |  | Incorporated by Reference to Exhibit 4.1 of TSFG's Registration Statement on Form S-1, Commission File No. 33-7470.                                                                                                                                                                                                                                                                                                                                                                             
|           
|4.2         | Articles of Incorporation, as amended                                                                                       |  | Included as Exhibit 3.1, 3.1.1 and 3.1.2                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           
|4.3         | Bylaws                                                                                                                      |  | Included as Exhibit 3.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           
|4.4         | Amended and Restated Common Stock Dividend Reinvestment Plan                                                                |  | Incorporated by reference to the Prospectus in TSFG's Registration Statement on Form S-3, Commission File No. 333-112404                                                                                                                                                                                                                                                                                                                                                                        
|10.1        | TSFG Amended and Restated Restricted Stock Agreement Plan, as amended by Amendment #1 and #2.                               |  | Incorporated by reference to Exhibit 99.1 from TSFG's Registration Statement on Form S-8, Commission File No. 33-82668/82670; Exhibit 10.1 from TSFG's Annual Report on Form 10-K for the year ended December 31, 2001; and Exhibit 10.1.2 from TSFG's Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 0-15083.                                                                                                                                            
|           
|10.1.1*     | Amendment #3 to TSFG Amended and Restated Restricted Stock Agreement Plan                                                   |  | Incorporated by reference to Exhibit 10.1.1 of TSFG's Annual Report on Form 10-K for the year ended December 31, 2002, Commission File No. 0-15083                                                                                                                                                                                                                                                                                                                                              
|           
|10.2*       | TSFG Employee Stock Ownership Plan                                                                                          |  | Incorporated by reference to Exhibit 10.2 of TSFG's Annual Report on Form 10-K for the year ended December 31, 1999, Commission File No. 0-15083                                                                                                                                                                                                                                                                                                                                                
|           
|10.3*       | TSFG Amended and Restated Stock Option Plan, as amended by Amendment #1, #2, #3 and #4                                      |  | Incorporated by reference to Exhibit 10.2 of TSFG's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998, Commission File No. 0-15083; Exhibit 10.3.2 of TSFG's Registration Statement on Form S-4, Commission File No. 333-32590; Exhibit 10.3.3 of TSFG's Annual Report on Form 10-K for the year ended December 31, 2001 Commission File No. 0-15083; and Exhibit 10.3.4 of TSFG's Annual Report on Form 10-K for the year ended December 31, 2001, Commission File No. 0-15083

103



|      
|------
|10.4* 
|      
|10.5* 
|      
|10.6* 
|      
|10.7* 
|      
|10.8* 
|      
|10.9* 
|      
|10.10*
|      
|10.11*
|      
|10.12*
|      
|10.13*
|      
|10.14*
|      
|10.15*
|      
|10.16*
|      
|10.17*
|      
|10.18*

104



|      
|------
|10.19 
|      
|10.20*
|      
|10.21*
|      
|10.22*
|      
|10.23*
|      
|10.24*
|      
|11.1  
|      
|21.1  
|      
|22.1  
|      
|23.1  
|      
|23.2  
|      
|31.1  
|31.2  
|32.1  
|32.2  

*     This is a management contract or compensatory plan.

Copies of exhibits are available  upon written  request to William P.  Crawford,  Jr.,  Executive  Vice  President and General
Counsel of The South Financial Group, Inc.

|Type | Date Filed | Reporting Purpose
|---- | ---------- | -----------------

(c)     See Item 15(a)(3).

105



SIGNATURES

THE SOUTH FINANCIAL GROUP, INC.

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

|Name                                             | Title                                                                                        | Date         
|------------------------------------------------ | -------------------------------------------------------------------------------------------- | -------------
|                                                
|/s/ Mack I. Whittle, Jr.Mack I. Whittle, Jr.     | President and Chief Executive Officer                                                        | March 9, 2005
|                                                
|/s/ William S. Hummers IIIWilliam S. Hummers III | Vice Chairman and Executive Vice President(Principal Accounting and Chief Financial Officer) | March 9, 2005

Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,  this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated:

|Name                                               | Title                 | Date         
|-------------------------------------------------- | --------------------- | -------------
|                                                  
|/s/ William R. Timmons, Jr.William R. Timmons, Jr. | Chairman of the Board | March 9, 2005
|                                                  
|/s/ Mack I. Whittle, Jr.Mack I. Whittle, Jr.       | Director              | March 9, 2005
|                                                  
|/s/ William S. Hummers IIIWilliam S. Hummers III   | Director              | March 9, 2005
|                                                  
|/s/ William P. BrantWilliam P. Brant               | Director              | March 9, 2005
|                                                  
|/s/ Gordon W. CampbellGordon W. Campbell           | Director              | March 9, 2005
|                                                  
|/s/ J. W. DavisJ. W. Davis                         | Director              | March 9, 2005
|                                                  
|/s/ C. Claymon Grimes, Jr.C. Claymon Grimes, Jr.   | Director              | March 9, 2005
|                                                  
|/s/ M. Dexter HagyM. Dexter Hagy                   | Director              | March 9, 2005
|                                                  
|/s/ Jon W. PritchettJon W. Pritchett               | Director              | March 9, 2005
|                                                  
|/s/ H. Earle Russell, Jr.H. Earle Russell, Jr.     | Director              | March 9, 2005

106



|/s/ Charles B. SchoolerCharles B. Schooler       | Director | March 9, 2005
|------------------------------------------------ | -------- | -------------
|                                                
|/s/ Edward J. SebastianEdward J. Sebastian       | Director | March 9, 2005
|                                                
|/s/ John C. B. Smith, Jr.John C. B. Smith, Jr.   | Director | March 9, 2005
|                                                
|/s/ William R. Timmons IIIWilliam R. Timmons III | Director | March 9, 2005
|                                                
|/s/ Samuel H. VickersSamuel H. Vickers           | Director | March 9, 2005
|                                                
|/s/ David C. Wakefield IIIDavid C. Wakefield     | Director | March 9, 2005

107



INDEX TO EXHIBITS

|Exhibit No. |  | Description                                                                                                                                                                                                                                   
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23       |  | Form of Grant for TSFG 2004-2006 Long-Term Incentive Plan - Restricted Stock Unit Award Agreement.                                                                                                                                            
|           
|10.24       |  | Management Incentive Compensation Plan Targets                                                                                                                                                                                                
|           
|21.1        |  | Subsidiaries of the Registrant                                                                                                                                                                                                                
|           
|23.1        |  | Consent of KPMG LLP                                                                                                                                                                                                                           
|           
|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.                                                                                    

108