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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission File Number: 0-15083

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

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

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.     |X|

        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, 2003, was approximately $1.0 billion.

        The number of shares of the Registrant’s common stock, $1.00 par value, outstanding on March 1, 2004 was 59,534,491.

DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index begins on page 102.

CROSS REFERENCE INDEX

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. It 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 cash management, insurance, investments, mortgage, and trust services, designed to meet substantially all of the financial needs of its customers. TSFG currently conducts business through 76 branch offices in South Carolina, 24 in North Carolina, 34 in northern and central Florida and one in Virginia. At December 31, 2003, TSFG had $10.7 billion in assets, $5.8 billion in loans, $6.0 billion in deposits, $979.9 million in shareholders’ equity, and $1.6 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 northern and central 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 targets markets for expansion that exceed the Southeastern and United States medians for household growth and per capita income growth. TSFG has emphasized internal growth through the acquisition of market share from the large out-of-state bank holding companies. It attempts to acquire market share by providing quality banking services and personal service to individuals and business customers. Since inception, TSFG has consummated 15 acquisitions of financial institutions, four non-bank financial service providers, and two insurance agencies. Approximately 40% of TSFG’s growth has come from acquisitions. On January 20, 2004, TSFG signed a definitive agreement to acquire CNB Florida Bancshares, Inc. (“CNB”), which operates 16 branch offices in Northeast Florida and had approximately $820 million in total assets at December 31, 2003.

        At December 31, 2003 and 2002, TSFG had no non-consolidated special purpose entities.

Subsidiary Banks

        TSFG manages its banking subsidiaries by dividing its franchise into 9 banking markets, each run by a market president. 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.

        Carolina First Bank. Carolina First Bank, headquartered in Greenville, South Carolina, engages in a general banking business through Carolina First Bank/South Carolina, which serves South Carolina and coastal North Carolina, and Carolina First Bank/North Carolina, which serves western North Carolina. Carolina First Bank operated through 100 branches with $8.5 billion in assets, $4.4 billion in loans, and $4.5 billion in deposits at December 31, 2003.

        Carolina First Bank/South Carolina operated through 81 branches with $3.7 billion in loans and $3.8 billion in deposits at December 31, 2003. It currently focuses its operations in the following five principal market areas:

• the Greenville and Anderson metropolitan area (located in the Upstate region of South 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 Metropolitan Statistical Areas in the state. In addition, approximately one-fourth of Carolina First Bank/South Carolina’s branch locations are in other counties, which are not a part of these metropolitan areas.

        Carolina First Bank/North Carolina operated through 19 branch offices in western North Carolina with $654.5 million in loans and $641.3 million in deposits at December 31, 2003. It currently concentrates its operations in the Hendersonville and Ashville 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. The Federal Deposit Insurance Corporation (“FDIC”) insures Carolina First Bank’s deposits, limited to $100,000 per depositor.

        Mercantile Bank. Mercantile Bank, headquartered in Orlando, Florida, engages in a general banking business through 34 branches with $2.3 billion in assets at December 31, 2003. It currently focuses on three 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); and
• the Jacksonville metropolitan area (located in the North 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. The FDIC insures Mercantile Bank’s deposits, limited to $100,000 per depositor.

        Community National Bank. TSFG also owns Community National Bank, headquartered in Pulaski, Virginia, which engages in a general community-oriented commercial and consumer banking business through one branch office and one loan production office in Pulaski, Virginia. This stand-alone banking subsidiary was acquired as part of TSFG’s acquisition of MountainBank Financial Corporation (“MBFC” or “MountainBank”), which closed on October 3, 2003. Community National Bank is outside TSFG’s geographic market focus. Accordingly, on February 3, 2004, TSFG entered into a definitive asset sale agreement to sell substantially all of the assets and liabilities of Community National Bank.

Non-Bank Subsidiaries

        TSFG has a number of non-bank subsidiaries. The following describes certain of these 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, 2003, API had 215 corporate accounts and managed $256.4 million in plan assets.

        Carolina First Community Development Corporation. In 2003, Carolina First Bank formed a new subsidiary, Carolina First Community Development Corporation (“CFCDC”), to underwrite future 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, 2003, CF Investment had invested $1.8 million in three companies. The estimated fair value for these investments, which are recorded in other assets, approximates the cost basis.

        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 state-of-the-art 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. It intends to utilize Gardner Associates, Inc. as a platform to build its insurance-related business in that market area.

        REIT Subsidiaries. In 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 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. SFAM is majority-owned by TSFG, but has a minority interest equity holder.

Business Segments

        Item 8, Note 33 to the Consolidated Financial Statements discusses TSFG’s business segments, which information is incorporated herein by reference.

Economic and Industry-Wide Risk Factors

        TSFG’s revenue and credit performance is impacted by U.S. and specifically Southeastern economic conditions, including but not limited to 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, 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, security transactions, and when TSFG acts as an intermediary on behalf of its customers and other third parties. TSFG has a risk management system based on policies and control processes designed to help ensure compliance with those policies.

        TSFG’s business is also subject to market risk, which arises in the normal course of business and includes liquidity risk and price risk. Liquidity risk is the risk that an individual or entity, will be unable to meet a financial commitment to a customer, creditor, or investor when due. Price risk is the risk to earnings that arises from changes in interest rates, equity and commodity prices, and in their implied volatilities.

        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 based on policies and control processes that are designed to help ensure compliance with those policies. These policies and control processes comply with the Gramm-Leach-Bliley Act and other regulatory guidance.

        The economic outlook appears to be improving for 2004 and is generally viewed as stable. Management views this news favorably, but realizes that economic forecasts are not always reliable. TSFG is positioned to benefit from potential improvement in the economy.

Competition

        Each of TSFG’s markets is highly competitive with the largest banks in their respective state 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.

        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 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, personal service.

Employees

        At December 31, 2003, TSFG and its subsidiaries employed 1,918 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.

Web Site Access to TSFG’s Filings with the Securities and Exchange Commission

        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 made available at no cost on TSFG’s web site, www.thesouthgroup.com, through the Investor Relations link. TSFG’s SEC filings are also available through the SEC’s web site at www.sec.gov.

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.

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 engaging in or 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.

        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”.

        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 therefore. 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.

      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, 2003, 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, 2003, 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 2004 is 0.0152% (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, 2003, 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.

      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.

      Sarbanes-Oxley Act of 2002

        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. TSFG has complied with the reforms and new requirements, which included the following:

• It mandated the creation of the Public Company Accounting Oversight Board to oversee audits of public companies.
• It implemented a variety of requirements designed to ensure greater auditor independence, including the prohibition of certain services, which auditors had traditionally provided to clients.
• It mandated a variety of requirements regarding audit committees, including that they be entirely independent, that their scope and responsibility be expanded, particularly with respect to the oversight of the outside auditor, and that they establish procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters. It mandates that issuers disclose whether at least one member of the committee is a “financial expert.”
• It amended existing SEC rules to require that changes in equity ownership by directors, officers, and 10% stockholders be reported more promptly, generally by the end of the second business day following the trade (subject to limited exceptions).
• It mandated that CEOs and CFOs certify that the financial information in each annual and quarterly report fairly presents in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report, and establish and maintain internal controls designed to ensure discovery of material information.
• It adopted rules relating to disclosure of all material off-balance sheet transactions and obligations. It also implemented a variety of rules regarding the presentation of pro-forma financial information in any press release or other public disclosure that was “non-GAAP.”
• It mandates that issuers disclose whether they have adopted a code of ethics for senior executives and any waivers or changes in the code.
• It requires that CEOs and CFOs disgorge incentive compensation and profits from their sales of company securities after restatement of financial information, and prohibits issuers from extending credit to any director or executive officer (subject to limited exceptions).
• It prohibits directors and executive officers from transacting in company equity securities received in connection with employment during any pension fund blackout of such equity.
• It mandates that the SEC review each issuer’s periodic reports at least once every three years.
• It accelerates the time schedule during which Forms 10-K and 10-Q and 8-K must be filed. It also expanded the items reportable under Form 8-K.
• It issued new requirements regarding the obligations of attorneys to report evidence of a material violation of securities law or breach of fiduciary duty to the issuer’s chief legal counsel or chief executive officer, and ultimately to the Board of Directors.
• It adopts new rules regarding statutes of limitation and penalties with respect to securities law violations.

        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 take effect for the year ended December 31, 2004. Among the reforms and new requirements, which will be included in TSFG’s 2004 annual report, 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.
• Management discusses 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.

        These final rules and amendments to the Sarbanes-Oxley Act will have a meaningful impact on TSFG’s operations, TSFG does not believe that it will be affected by the aforementioned reforms and amendments in ways, which are materially different or more onerous than other public companies of similar size and nature.

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, operations, and mortgage departments. TSFG leases the land for the CF Technology building under a 30 year lease. In addition, TSFG leases non-banking office space in 12 locations in South Carolina and Florida.

        At December 31, 2003, TSFG operated 135 branch offices, including 76 in South Carolina, 24 in North Carolina, 34 in Florida and one in Virginia. Of these locations, TSFG or one of its subsidiaries owns 74 locations, which includes eight locations with land leases, and leases 60 locations. In addition, TSFG leases one mortgage loan office and one stand alone ATM location.

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

Item 3.     Legal Proceedings

        See Item 8, Note 22 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 2003.

PART II

Item 5.     Market for the Registrant’s Common Equity, Related Shareholder 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, 2003, TSFG had 8,896 shareholders of record and 59,064,375 shares outstanding. See Item 7, “Capital Resources and Dividends” and Item 8, Notes 26 and 27 to the Consolidated Financial Statements for a discussion of capital stock and dividends, which information is incorporated herein by reference.

Unregistered Sales of Securities

        None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES

(1)     These shares were canceled in connection with option exercises.

Item 6.        Selected Financial Data

        The following selected financial data should be read in conjunction with TSFG's consolidated financial statements and the accompanying notes presented elsewhere herein.

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

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 flow of The South Financial Group, Inc. and its subsidiaries (collectively, “TSFG”). TSFG may also be referred to herein as “we”, “us”, or “our”, except where the context requires otherwise. This discussion should be read in conjunction with the 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 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, the assessment of problem loans (including loans acquired via acquisition), and the performance of the Rock Hill Bank & Trust “workout loans”;
• level, composition, and repricing characteristics of the securities portfolio;
• 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, related cost savings, expected 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;
• costs and effects of litigation; and
• recently-enacted or proposed legislation.

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

Overview

        TSFG operates primarily in fast-growing banking markets in the Southeast. Founded in 1986, TSFG had approximately $10.7 billion in total assets and 135 branch offices in South Carolina, North Carolina, Florida, and Virginia at December 31, 2003.

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 principally in the Jacksonville, Orlando, and Tampa Bay, Florida markets.

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

        The average projected growth rates for TSFG’s markets exceed the Southeastern and United States medians for household growth and per capita income growth. This market strength enhances TSFG’s opportunities to provide noninterest income products and services, as well as organic growth of loans and deposits. TSFG currently ranks fourth in total deposit share in South Carolina, a $45 billion deposit market. In TSFG’s Florida markets, where the markets are significantly larger, TSFG currently ranks tenth or less in deposit market share. Total market deposits approximate $36 billion for Tampa Bay, $23 billion for Orlando, and $16 billion for Jacksonville.

        For 2003, TSFG achieved record net income of $95.1 million, or $1.89 per diluted share, up 60.7% from $59.2 million for 2002. Double-digit growth in total revenues, loans, and low-cost core deposits drove the increase.

        For 2003, net interest income, TSFG’s primary source of revenue, accounted for 74.1% 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 2003 increased 24.9% over 2002, principally due to higher investment securities and solid loan growth.

        TSFG believes that noninterest income represents one of its best opportunities for revenue growth. TSFG expanded and diversified its noninterest income sources by adding mortgage originators and investment brokers, acquiring in-market insurance agencies, developing a Sales and Service Center, and expanding cash management. In addition, two years ago, TSFG introduced its customer-focused sales process, “Elevate.” With the Elevate sales process, TSFG is developing an effective sales culture, through increased understanding of customers’ needs, referrals, and products per household.

        For 2003, noninterest income totaled $95.5 million, which included $17.1 million from gains on asset sales. Excluding gains on asset sales from both years, 2003 noninterest income increased from 2002 by 46.5%. The five largest sources of noninterest income (service charges on deposits, mortgage banking income, fees for investment services, bank-owned life insurance, and merchant processing income) accounted for 83.3% of 2003 noninterest income, excluding gains on asset sales.

        While growing revenues, TSFG also focuses on controlling expenses and successfully integrating acquisitions. For 2003, noninterest expenses totaled $207.2 million, which included $8.6 million from non-operating expenses (principally merger-related costs and loss on early extinguishment of debt). Excluding the non-operating items, 2003 noninterest expenses increased from 2002 by 30.2%. Personnel expense, the largest component, accounts for approximately half of total noninterest expenses.

        Approximately 40% of TSFG’s growth has come through acquisitions. TSFG may continue to consider acquisitions that meet its acquisition criteria of strategic franchise enhancement, accretion to cash earnings per share within 12 months, and consistency with three-year performance goals. In October 2003, TSFG completed its acquisition of MountainBank Financial Corporation (“MBFC” or “MountainBank”), which had approximately $1 billion in assets and operations principally in eleven western North Carolina counties. In January 2004, TSFG announced a definitive agreement to acquire CNB Florida Bancshares, headquartered in Jacksonville, Florida. CNB Florida’s banking subsidiary, CNB National Bank, operates 16 branch offices in 8 Northeast Florida counties and has approximately $820 million in assets. Following the merger, TSFG’s Northeast Florida deposit market share is expected to increase to #7 from #20. For TSFG’s Northeast/Central Florida markets, its deposit market share is expected to increase to #7 from #11.

        In November 2003, TSFG successfully completed a common stock offering of 6,325,000 shares, in which it received net proceeds of approximately $161 million. With the new capital, TSFG’s tangible equity to tangible asset ratio increased to 6.05% at December 31, 2003 from 5.26% at December 31, 2002. In addition, Carolina First Bank received an “investment grade” rating from Moody’s, enhancing its ability to borrow at reasonable rates. TSFG faces the near-term challenge of increasing earnings in order to offset the potential earnings per share dilution from adding the additional shares from the offering.

        TSFG’s key credit quality measures improved during 2003. At December 31, 2003, nonperforming assets as a percentage of loans and other real estate owned declined to 1.06% including the Rock Hill Workout Loans and 0.72% excluding the Rock Hill Workout Loans. In connection with its October 2002 asset purchase transaction with Rock Hill Bank & Trust, TSFG segregated certain identified problem loans into a separately-managed portfolio. At December 31, 2003, this portfolio totaled $28.6 million (less than 0.5% of the total loan portfolio), down from $72.4 million at December 31, 2002. TSFG believes that it is close to resolving the Rock Hill Workout Loans. TSFG manages its credit risk through an early warning credit risk management system, designed to lower credit costs.

        TSFG’s provision for loan losses declined to $20.6 million for 2003 from $22.3 million for 2002, primarily attributable to the liquidation of nonperforming loans with allocated reserves that exceeded net loan losses incurred. TSFG expects the provision for loan losses to increase in 2004, principally in connection with projected loan growth.

        TSFG’s strong loan growth continued during 2003. Loans held for investment at December 31, 2003 increased 29.3% over the prior year. Adjusting for approximately $772.8 million in loans acquired in the MountainBank merger, 2003 organic loan growth reached 10.1%.

        TSFG gained core deposits and enhanced its deposit mix, reflecting successful sales and promotional campaigns. Average deposits for 2003 increased 33.5% over the 2002 average. Average deposit transaction account balances increased 51.8% during the same period, driven by growth in money market and noninterest-bearing deposits. Adjusting for fourth quarter 2003 average transaction deposits of approximately $365 million acquired in the MountainBank merger, organic average transaction deposit growth was 29.3%.

        During 2003, TSFG increased its securities portfolio to manage interest rate risk and to provide additional income by leveraging its excess capital. At December 31, 2003, securities totaled $4.0 billion, or 37.4% of total assets. TSFG has taken steps to reduce the valuation risk in the portfolio from changes in interest rates and shortened the duration to approximately three and a half years. The short weighted average life and duration provide TSFG with cash flow to proactively manage the portfolio as market conditions change and to provide liquidity to fund loan growth. During 2004, TSFG expects to reduce the level of its securities portfolio as a percentage of total assets, as loan growth replaces some securities balances with new loans.

        The economic outlook appears to be improving for 2004 and is generally viewed as stable. Management views this news favorably, but realizes that economic forecasts are not always reliable. TSFG is positioned to benefit from potential improvement in the economy.

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. The more critical accounting policies include TSFG’s accounting for securities, loans, allowance for loan losses, intangibles, derivatives, and income taxes. In particular, TSFG considers its policies regarding the allowance for loan losses, income taxes, and accounting for acquisitions to be its most critical accounting policies due to the significant degree of the levels of subjectivity and management judgment necessary to account for these matters. Different assumptions in the application of these policies could result in material changes in TSFG’s consolidated financial statements.

      Allowance for loan losses

        The allowance for loan losses (“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 us to adjust our Allowance based on information available to them at the time of their examination.

      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 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 management is not aware of any reason that a material change will occur in the future. The Internal Revenue Service is currently examining TSFG’s 2000 and 1999 federal income tax returns.

      Accounting for Acquisitions

        TSFG has increased its market share, in part, through bank and non-bank acquisitions. To account for 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” (“SFAS 142”), TSFG has used and will continue to use the purchase method of accounting. 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. These tests, which TSFG performed as of June 30, 2003 and 2002, use estimates such as 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 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 fair value.

        As part of its initial adoption of SFAS 142, TSFG recorded a $1.4 million charge related to impairment of goodwill associated with Carolina First Mortgage Company in 2002. The valuations as of June 30, 2003 indicated that no impairment charge was required as of that test date. Historically, TSFG’s acquisition intangibles reported on its consolidated financial statements have been materially correct, and management is not aware of any reason that a material change will occur in the future.

        Also, please see Item 8, Note 1 to the Consolidated Financial Statements for a description of TSFG’s significant accounting policies.

Acquisitions

        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)

        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. In November 2003, TSFG received the proceeds under RHBT’s blanket bond insurance policy and paid 50% of the net amount out to RHBT. TSFG recorded the remaining amount, which totaled $1.3 million, as a purchase price adjustment that reduced goodwill.

        As part of its acquisition strategy, TSFG considers acquisitions in its targeted footprint in markets growing faster than the United States and Southeast medians for household growth and per capita income growth. Table 2 summarizes the geographic focus for TSFG’s acquisitions completed during the past three years.

Table 2
SUMMARY OF BANK ACQUISITIONS - GEOGRAPHIC FOCUS

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

      Pending Acquisition and Sale

        On January 20, 2004, TSFG signed a definitive agreement to acquire CNB, headquartered in Jacksonville, Florida. At December 31, 2003, CNB operated through 16 branch offices in eight counties in Northeast Florida and had total assets of approximately $820 million. At closing, TSFG will issue shares of common stock (at a fixed exchange ratio of 0.84 shares of TSFG common stock for each CNB share) in exchange for all the common stock and stock obligations of CNB. This acquisition gives TSFG a significant presence in fast-growing Northeast Florida increasing our deposit market share ranking in Northeast Florida to #7 from #20. This transaction, which is expected to close in July 2004, will be accounted for using the purchase method of accounting and is subject to regulatory and CNB shareholder approvals.

        On February 3, 2004, TSFG entered into a definitive asset sale agreement to sell substantially all of the assets and liabilities of Community National Bank. Headquartered in Pulaski, Virginia, Community National Bank is outside TSFG’s geographic market focus. TSFG acquired Community National Bank in connection with its October 2003 acquisition of MBFC. At December 31, 2003, Community National Bank was a wholly-owned subsidiary of TSFG with $67.8 million in total assets. Since Community National Bank is immaterial to TSFG’s financial statements, presentation as a discontinued operation was not warranted. For the fourth quarter 2003, Community National Bank’s net income totaled $78,000.

Balance Sheet Review

      Loans

        TSFG focuses its lending activities on small and middle market businesses and individuals in its geographic markets. At December 31, 2003, outstanding loans totaled $5.8 billion, which equaled 95.6% of total deposits and 53.8% 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 market areas. 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 $1.3 billion, or 29.3%, to $5.7 billion at December 31, 2003. In 2003, TSFG acquired $772.8 million in loans held for investment from its acquisition of MountainBank, which accounted for over 59.5% of the increase. Excluding the loans acquired from MountainBank, organic loan growth for 2003 totaled 10.1%. The majority of the organic loan growth was in commercial, indirect consumer, and home equity loans. While originations of residential mortgage loans increased, most of these loans were sold at origination in the secondary market.

        Loans held for sale decreased $37.6 million to $29.6 million at December 31, 2003 from $67.2 million at December 31, 2002, primarily related to selling or transferring the loans held for sale acquired from Gulf West and lower mortgage originations. In 2003, loans held for sale acquired from Gulf West decreased $17.7 million (to zero at December 31, 2003), primarily from the sale of two commercial real estate loans and the transfer to loans held for investment.

        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)

        Table 3 provides a stratification of the portfolio by collateral type and borrower type. Table 4 provides a stratification of the loan portfolio by loan purpose.

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

        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 automobiles. They are closed at the auto dealership but approved in advance by TSFG for immediate purchase. Loans are extended on new and used autos with terms varying from two years up to five years.

        Direct retail consumer loans are loans to individuals to finance personal, family, or household needs. Typical loans are loans to finance auto purchases, home repairs and additions, and home purchases. These loans are made by TSFG employees in its branches.

        Home equity loans are loans to home-owners, 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 to be 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 only significant industry concentration is in commercial real estate loans. All other industry concentrations are less than 10% of total loans. Commercial real estate loans were 36.0% of loans held for investment at December 31, 2003. Due to sustained strong population growth and household income growth, real estate development and construction are major components of the economic activity that occurs in TSFG’s markets. The risk attributable to this concentration is managed by focusing our lending to markets we are familiar with and to borrowers who have proven track records and who we believe possess the financial means to weather adverse market conditions. In its commercial real estate lending, TSFG does not make loans without recourse to the borrower, loans without personal guarantees from the owners, or loans to cash out equity in commercial properties. 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)

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

        Table 6 presents maturities of certain loan classifications based on collateral type at December 31, 2003. 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)

        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

        The increase in relationships over $10 million had two primary components. First, existing credit relationships, which were previously less than $10 million, expanded to this level. Second, TSFG’s corporate lending group, created in 2001 to focus on larger regional companies located in our markets, grew significantly in 2002 and continued growing in 2003.

        TSFG has set a house-lending limit of $25 million, well below the legal lending limit of $271.5 million at December 31, 2003. The 20 largest relationships, which range from $25 million in total commitments to $18.7 million for the 20^th largest relationship, have an aggregate outstanding principal balance of $281.6 million, or 4.9% of total loans held for investment, at December 31, 2003.

        At December 31, 2003, the loan portfolio included commitments totaling $225.9 million in “shared national credits” (multi-bank credit facilities of $20 million or more). Outstandings under these commitments totaled $99.7 million. By policy, we participate 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 immediate 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.

        To facilitate comparisons, Table 8 presents credit quality indicators two ways: one that includes all loans and one that excludes the Rock Hill Workout Loans. On October 31, 2002, loans totaling $191.3 million were acquired from Rock Hill Bank. Prior to the closing and in connection with identified problem loans, Rock Hill Bank had charged off a significant portion of its loan portfolio and established additional reserves. At closing, TSFG segregated certain identified problem loans into a separately-managed portfolio, referred to as the “Rock Hill Workout Loans.” At December 31, 2003, this portfolio totaled $28.6 million, less than 0.5% of TSFG’s total loan portfolio. However, the Rock Hill Workout loans accounted for 32.2% of TSFG’s total nonperforming assets. For 2003, net loan charge-offs for the Rock Hill Workout loans totaled $10.3 million, the majority of which were provided for in the allowance for loan losses as of December 31, 2002. TSFG expects nonperforming assets and the allowance for loan losses to decline as the Rock Hill Workout Loans continue to be liquidated, moved to performing status, or otherwise resolved. TSFG believes that the Rock Hill Workout loans will largely be resolved during the next few quarters with minimal impact to 2004 net income. Where appropriate, TSFG has provided credit quality measures excluding the Rock Hill Workout Loans to identify core credit quality measures and trends.

        Table 8 presents information pertaining to nonperforming assets.

Table 8
NONPERFORMING ASSETS
(dollars in thousands)

        Credit Quality Including Rock Hill Workout Loans. Nonperforming assets declined to 1.06% of loans held for investment and other real estate owned at December 31, 2003, compared with 1.67% at December 31, 2002. Net loan charge-offs increased to 0.62% of average loans held for investment for 2003 from 0.49% for 2002, primarily due to the disposition of fully-reserved Rock Hill Workout Loans and the liquidation of fully-reserved nonperforming loans. As anticipated, the allowance for loan losses declined to 1.28% of period-end loans held for investment at December 31, 2003 from 1.58% at December 31, 2002.

        Credit Quality Excluding Rock Hill Workout Loans. TSFG’s core credit quality measures (which exclude the Rock Hill Workout Loans) strengthened in 2003, continuing an improving trend that began in early 2002. Core nonperforming assets declined to 0.72% of loans held for investment and other real estate owned at December 31, 2003 from 1.03% at December 31, 2002. Net loan charge-offs totaled $20.0 million, or 0.41% of average loans held for investment for 2003, down from 0.50% of average loans held for investment for 2002. The allowance for loan losses as a percent of loans held for investment remained stable at 1.23% at December 31, 2003. However, the allowance coverage improved to 2.22 times nonperforming loans at December 31, 2003 from 1.56 times at December 31, 2002.

        During the fourth quarter 2003, TSFG became aware of developments that could cause an $8.6 million standby letter of credit to be called. This standby letter of credit backs an industrial revenue bond, which is secured by a manufacturing plant. The occupant of the plant filed Chapter 11 bankruptcy in October, but the letter of credit has not been called. TSFG expects the letter of credit to be called in the first quarter of 2004 in which case TSFG expects that, net of anticipated collections and charge-offs, approximately half of the letter of credit amount may be placed in nonaccrual status. TSFG reserved for the expected loss as of December 31, 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 primarily on the direction of the economy. The economic outlook appears to be improving, but economic forecasts are not always reliable. If the economy continues to improve, TSFG expects the core nonperforming asset ratio to continue declining and the core charge-offs as a percentage of average loans to be comparable to the 2003 average (excluding the Rock Hill Workout loans) during 2004. Given the economic uncertainty, 2004 charge-off levels may fluctuate above or below that average from quarter to quarter.

        Certain of the Rock Hill Workout Loans are defined as “designated loans” under the Rock Hill Bank purchase agreement (“Designated Loans”) and are subject to earnout provisions. As defined in the purchase agreement, the total principal amount owed by the borrowers for Designated Loans was $45.2 million, of which $19.5 million had either been charged off or reserved prior to acquisition by TSFG. To the extent that principal collections on these Designated Loans exceed $25.7 million through the termination date of the earnout agreement, TSFG will pay the RHBT shareholders 30% of such excess. The net effect is to pay RHBT shareholders 30% of the net recoveries on these loans from charge-off collections and reserve reductions. Through December 31, 2003, total net charge-offs and allowance levels on the Designated Loans exceeded the amount that would require a payment under the earnout agreement.

         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 individually assessed for impairment under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statements No. 5 and 15” (“SFAS 114”), and assigned specific allocations. To allow for modeling error, a range of probable loss ratios (from 95% to 105% of the adjusted historical loss ratio) is then derived for each segment. The resulting percentages are then applied to the dollar amounts of loans in each segment to arrive at each segment’s range of probable loss levels.

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

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

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