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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 0-15083

The South Financial Group, Inc.

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

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

     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 o

     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 o

     The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 30, 2002, was approximately $867.3 million.

     The number of shares of the Registrant’s common stock, $1.00 par value, outstanding on March 5, 2003 was 47,372,827.

DOCUMENTS INCORPORATED BY REFERENCE

The Exhibit Index begins on page 101.

CROSS REFERENCE INDEX

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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 asset 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 locations in South Carolina, 5 locations in North Carolina, and 34 locations in northern and central Florida. At December 31, 2002, TSFG had approximately $7.9 billion in assets, $4.5 billion in loans, $4.6 billion in deposits, $646.8 million in shareholders’ equity, and $978.2 million 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 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 13 acquisitions of financial institutions, 3 non-bank financial service providers, and one insurance agency.

     At December 31, 2002 and 2001, TSFG had no non-consolidated special purpose entities.

Subsidiary Banks

     Carolina First Bank. Carolina First Bank, headquartered in Greenville, South Carolina, engages in a general banking business through 76 branches in 46 communities in South Carolina and 5 branches in 3 communities in North Carolina. It currently focuses its operations in five principal market areas in South Carolina:

	•		the Greenville and Anderson metropolitan area (located in the Upstate region);
	•		the Rock Hill metropolitan area (located in the Piedmont region);
	•		the Columbia metropolitan area (located in the Midlands region);
	•		the Myrtle Beach and Georgetown metropolitan areas (located in the northern Coastal region); and
	•		the Charleston and Hilton Head metropolitan areas (located in the central Coastal region).

     These principal market areas represent the largest Metropolitan Statistical Areas in the state. In addition, approximately one-fourth of Carolina First Bank’s branch locations are in other counties in South Carolina, which are not a part of these five Metropolitan Statistical Areas. Carolina First Bank also has 5 branch offices in North Carolina, which are located in the coastal communities of Wilmington, Hampstead, and Jacksonville.

     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.

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     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.

     In September 2001, Carolina First Bank formed SCOREIT, Inc., a real estate investment trust holding company. SCOREIT, Inc. owns a majority interest in two real estate investment trusts, Carolina First Mortgage Loan Trust and Carolina First Mortgage Loan Trust II, which hold mortgage-related assets.

     Mercantile Bank. Mercantile Bank, headquartered in Orlando, Florida, engages in a general banking business through 34 branches in 23 communities in Florida. Its operations are focused in three principal market areas:

	•		the Orlando metropolitan area (located in the Central Florida region);
	•		the Tampa Bay metropolitan area (located in the Central West Florida 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.

     In July 2001, Mercantile Bank formed Citrus REIT Corporation, a majority-owned real estate investment trust that holds mortgage-related assets. In September 2001, Mercantile Bank formed FLOREIT, Inc., a real estate investment trust holding company, and transferred its ownership of Citrus REIT Corporation to FLOREIT, Inc.

Non-Bank Subsidiaries

     TSFG has a number of non-bank subsidiaries. The following describes certain of these subsidiaries.

     Blue Ridge Finance Company, Inc. In December 1995, TSFG acquired Blue Ridge Finance Company, Inc. (“Blue Ridge”), a consumer finance company headquartered in Greenville, South Carolina. Blue Ridge operates from one location and, at December 31, 2002, had less than $1 million in total loans. Blue Ridge has an indirect automobile lending portfolio and ceased making new loans as of 1999.

     CF Investment Company. CF Investment Company (“CF Investment”), headquartered in Greenville, South Carolina and licensed through the Small Business Administration, is a Small Business Investment Company. CF Investment is a wholly-owned subsidiary of Blue Ridge. 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, 2002, CF Investment Company had invested approximately $1.7 million in two companies.

     Carolina First Mortgage Company. Carolina First Mortgage Company (“CF Mortgage”), headquartered in Columbia, South Carolina, is a mortgage company that is currently inactive. Beginning in December 2001, TSFG contracted with non-affiliated companies to service mortgage loans for TSFG. Previously, CF Mortgage serviced these loans. Mortgage loan originations are principally produced by originators at Carolina First Bank and Mercantile Bank. TSFG sells the majority of conforming mortgage loans into the secondary market.

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     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 and Trust Subsidiaries. In 2001 and 2002, TSFG formed several corporations and other trusts for capital raising purposes, some of which are real estate investment trusts (“REITs”). These entities have issued preferred 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. It will be a registered investment advisor and target large endowments, pension funds and similar entities for fund management. It has not commenced operations at this point. 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.

Competition

     Each of TSFG’s markets is highly competitive with all of the largest banks in the 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 including 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, 2002, TSFG and its subsidiaries employed 1,700 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.

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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, 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 believes that the effects of inflation are generally manageable through asset/liability management.

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.

     The BHCA prohibited TSFG from acquiring control of any bank operating outside the State of South Carolina until September 29, 1995, unless the statutes of the state where the bank to be acquired was located specifically authorized such action. Additionally, as of 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

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(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 is 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 with these authorities periodic reports with respect to its financial condition and operations, management, and intercompany relationships between TSFG and its subsidiaries.

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     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 and operates 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 Carolina First Bank, Mercantile Bank, CF Mortgage, and Blue Ridge are subject to state usury laws and certain federal laws concerning interest rates. Carolina First Bank’s, Mercantile Bank’s, CF Mortgage’s, and Blue Ridge’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 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 minority interests in the equity accounts of consolidated subsidiaries, 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, 2002, TSFG’s capital levels exceeded both the risk-based capital guidelines and the applicable minimum leverage capital ratio.

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     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, 2002, 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 2003 is 0.0168% (annualized) for both BIF-insured deposits and SAIF-insured deposits. This rate is set quarterly and may change during the year. In connection with various acquisitions, including the deposits associated with Carolina First Bank, F.S.B., approximately 40% of Carolina First Bank’s 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, 2002, 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

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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. Among the reforms and new requirements are 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.

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

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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 twelve-story building, which adjoins Carolina First Bank’s Greenville main office branch. The majority of TSFG’s administrative functions presently reside in this building excluding technology services. 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.

     At December 31, 2002, TSFG operated 117 banking offices, of which 76 are in South Carolina, 5 are in North Carolina, and 36 are in Florida. Of these locations, TSFG or one of its subsidiaries owns 75 locations, which includes 8 locations with land leases, and leases 42 locations. In addition, TSFG leases one mortgage loan office and 12 stand alone ATM locations.

     At December 31, 2002, TSFG owned 3 vacant land sites in South Carolina. In addition, TSFG leases non-banking office space in 7 locations in South Carolina and Florida.

     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 2002.

PART II

Item 5.     Market for the Registrant’s Common Stock and Related Shareholder Matters

Market for Common Stock and Related Matters

     TSFG’s common stock trades on The Nasdaq Stock Market under the symbol TSFG. At December 31, 2002, TSFG had 7,560 shareholders of record and 47,347,375 shares outstanding. See Item 7, “Table 19–Quarterly Financial Data” for TSFG’s stock prices and cash dividends declared during 2002 and 2001, which information is incorporated herein by reference. See Item 7, “Capital Resources and Dividends” and Item 8, Notes 24 and 26 to the Consolidated Financial Statements for a discussion of capital stock and dividends, which information is incorporated herein by reference.

Unregistered Sales of Securities

     On September 20, 2002, TSFG acquired Gardner Associates, an independent insurance agency based in Columbia, South Carolina. TSFG issued 156,426 shares of TSFG common stock to acquire Gardner Associates and 21,806 shares under an earnout provision as of December 31, 2002. In addition, the principals of Gardner Associates have the right to receive a maximum of 70,779 shares of TSFG common stock, which has been issued and deposited in an escrow account, under earnout provisions based on Gardner Associates’ five-year financial performance. There were two principals of Gardner Associates. The issuance of securities to these two persons was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

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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. TSFG restated prior year amounts, except market price and cash dividends declared per common share, to reflect the 2000 merger with Anchor Financial Corporation and 1999 merger with Citrus Bank, both of which were accounted for using the pooling-of-interests method of accounting.

SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATA

(a)		Excluding merger-related costs (recoveries).
(b)		At December 31, 2002, Rock Hill Bank & Trust Workout Loans totaled $72.4 million with nonperforming assets of $29.2 million and an allowance for loan losses of $16.3 million. Excluding these balances, nonperforming assets as a % of loans and other real estate owned totaled 1.03%, and the allowance for loan losses as a % of loans held for investment was 1.24%.
(c)		Net interest income, noninterest income, and noninterest expenses were reclassified in 2001 and 2000 for the deferral of loan fees and related expenses.

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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 and results of operations 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.

     TSFG has two wholly-owned subsidiary banks, Carolina First Bank and Mercantile Bank, which are collectively referred to as the “Subsidiary Banks.” Percentage calculations contained herein have been calculated based upon actual, not rounded, results.

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 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, and the assessment of problem loans;
	•		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;
	•		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;
	•		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.

Critical Accounting Policies

     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, and income taxes. In particular, TSFG considers its policies regarding the allowance for loan losses and income taxes to be its most critical accounting policies due to the significant degree of management judgment. Different assumptions in the application of these policies could result in material changes in TSFG’s consolidated financial statements. For additional discussion concerning TSFG’s allowance for loan losses and related matters, see “Balance Sheet Review–Allowance for Loan Losses.” Also, please see Item 8, Note 1 to the Consolidated Financial Statements for a description of TSFG’s significant accounting policies.

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Acquisitions

     The following table summarizes TSFG’s acquisitions completed during the past three years. All the acquisitions, except for Gardner Associates, Inc., an insurance agency, were bank acquisitions. All of the 2002 transactions were accounted for using the purchase method of accounting, and accordingly, the assets and liabilities were recorded at their estimated fair values, which are subject to adjustment, as of the acquisition date. For the 2002 transactions, TSFG’s consolidated financial statements include the results of the acquired company’s operations since the acquisition date. The merger with Anchor Financial Corporation (“Anchor Financial”) in June 2000 was accounted for using the pooling-of-interests method of accounting. Accordingly, TSFG restated its historical consolidated financial statements and other financial data to include the accounts and results of operations of Anchor Financial as if the merger had been effective as of the earliest period presented.

Table 1
SUMMARY OF COMPLETED ACQUISITIONS
(dollars in thousands)

(1)		Book value at the acquisition date.
(2)		TSFG agreed to pay a cash earnout based on collection and recoveries with respect to certain loans.
(3)		Of this amount, up to 70,779 of these shares are subject to forfeiture back to TSFG if certain five-year financial performance targets are not met.

     On December 31, 2002, TSFG acquired Central Bank of Tampa (“CBT”), a closely-held community bank headquartered in Tampa, Florida. CBT operated through 5 branches in Tampa. This merger advances TSFG’s strategy to expand in markets with relatively high population and per capita income growth prospects.

     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 banking subsidiary of RHBT Financial Corporation (“RHBT”). Rock Hill Bank operated 3 branches in York County, South Carolina. Under the asset sale agreement, Rock Hill Bank received 430,017 shares of TSFG common stock, plus 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.

     On September 20, 2002, TSFG acquired Gardner Associates, Inc. (“Gardner Associates”), an independent insurance agency based in Columbia, South Carolina. TSFG intends to use Gardner Associates to build its insurance operations in the Midlands area of South Carolina. TSFG issued 156,426 shares of TSFG common stock to acquire Gardner Associates and 21,806 shares under an earnout provision as of December 31, 2002. In addition, the principals of Gardner Associates have the right to receive a maximum of 70,779 shares of TSFG common stock, which has been issued and deposited in an escrow account, under earnout provisions based on Gardner Associates’ five-year financial performance.

     On August 31, 2002, TSFG acquired Gulf West Banks, Inc. (“Gulf West”), a bank holding company headquartered in St.

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Petersburg, Florida. Gulf West operated through Mercantile Bank, a Florida-chartered, non-member bank with 15 locations in the Tampa Bay area of Florida. This merger represents TSFG’s first banking locations in the Tampa Bay area and advances TSFG’s strategy to expand in markets with relatively high population and per capita income growth prospects. Upon acquiring Gulf West, TSFG combined all of its Florida operations under the Mercantile Bank name.

     On June 6, 2000, TSFG acquired Anchor Financial, a South Carolina Corporation headquartered in Myrtle Beach, South Carolina. Anchor Financial operated 33 branches in South Carolina and North Carolina. Since this transaction was accounted for as a pooling-of-interest, TSFG’s consolidated financial statements for all periods include the results of Anchor Financial’s operations.

Overview

     Net income for 2002 totaled $59.2 million, up 41.2% compared with $41.9 million for 2001. Earnings per diluted share for 2002 were $1.38, a 40.8% increase from $0.98 per diluted share for 2001. Higher net interest income, fee income initiatives, efficiency improvements, and a more favorable effective tax rate contributed to the increases in net income and earnings per diluted share. Net interest income increased from a higher net interest margin and 20.2% growth in average earning assets. Net income for 2000 was $7.0 million, or $0.16 per diluted share. Key factors responsible for TSFG’s results of operations are discussed throughout Management’s Discussion and Analysis below.

     Noninterest income for the years ended December 31, 2002, 2001, and 2000 included pre-tax gains on asset sales of $6.1 million, $4.8 million, and $6.0 million, respectively. Gains on asset sales include gains or losses on available for sale securities, disposition of assets and liabilities, and equity investments. Mortgage banking income, a component of noninterest income, includes gains and losses on the sale of mortgage loans and mortgage servicing and charges for the write-down in the value of capitalized mortgage servicing rights. See “Earnings Review—Noninterest Income” for details.

     Noninterest expenses for the year ended December 31, 2002 included the following pre-tax other items: $6.7 million in merger-related costs, $1.8 million of personnel expense related to the settlement of certain employment agreements, $1.4 million impairment loss from write-down of assets, and a $354,000 loss on early extinguishment of debt. For the year ended December 31, 2001, noninterest expenses included the following pre-tax other items: $3.1 million loss on early extinguishment of debt, $665,000 charitable contribution of premises, $501,000 recovery of merger-related costs, and $243,000 impairment loss from write-down of assets. For the year ended December 31, 2000, noninterest expenses included the following pre-tax other items: $29.2 million for merger-related costs, $4.0 million for system conversion costs, $3.7 million impairment loss from write-down of assets, $1.3 million in other charges related to Anchor Financial, $1.2 million in personnel expense from benefit plan changes and contract payments, and $416,000 for write-offs of miscellaneous receivables.

     On January 1, 2002, TSFG adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and ceased amortization of goodwill. Amortization of intangibles that are not amortized in 2002 totaled $4.5 million and $4.8 million for the years ended December 31, 2001 and 2000, respectively. In 2002, TSFG recorded a $1.4 million charge related to impairment of goodwill associated with Carolina First Mortgage Company, which is shown as a cumulative effect of change in accounting principle.

     Net income for the year ended December 31, 2001 included a $434,000 pre-tax gain from the cumulative effect of adopting a new accounting principle for derivatives. For the year ended December 31, 2000, the provision for loan losses included $3.0 million to apply TSFG’s reserve analysis methodology to determine the Allowance requirements for Anchor Financial’s loan portfolio.

     Average common shares outstanding on a diluted basis were 42.7 million in 2002, down 0.3% from 42.8 million in 2001. In connection with share repurchase programs, TSFG repurchased and cancelled 2,141,907 shares and 1,546,407 shares in 2002 and 2001, respectively. Average common shares outstanding on a diluted basis totaled 43.6 million in 2000.

     At December 31, 2002, TSFG had $7.9 billion in assets, $4.5 billion in loans, $4.6 billion in deposits, and $646.8 million in shareholders’ equity. For the year ended December 31, 2002, TSFG’s average assets totaled $6.5 billion, an increase of $1.0 billion, or 19.0%, compared with the 2001 average of $5.5 billion.

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Balance Sheet Review

  Loans

     Loans are the largest category of earning assets and generally produce the highest yields. TSFG concentrates on lending to small and middle market businesses and retail consumers. At December 31, 2002, outstanding loans totaled $4.5 billion, which equaled 98.0% of total deposits and 56.7% of total assets. The loan portfolio consisted principally of 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. The portfolio contains no “highly leveraged transactions,” as defined by regulatory authorities.

     Loans held for investment increased $703.8 million, or 18.9%, to $4.4 billion at December 31, 2002. In 2002, TSFG acquired $582.8 million in loans held for investment from its mergers with CBT, Rock Hill Bank, and Gulf West, which accounted for over 80% of the increase. The majority of the internal loan growth was in commercial loans at both Carolina First Bank and Mercantile Bank, although commercial loan growth slowed during the second half of 2002. Indirect auto loans (loans purchased from car dealers) and home equity loans also increased, partially offset by a decline in direct consumer loans. Loans held for sale increased from commercial real estate loans acquired from Gulf West, which totaled $17.7 million at December 31, 2002, and from higher mortgage loan originations.

     Table 2 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 2
LOAN PORTFOLIO COMPOSITION
(dollars in thousands)

(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.

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     TSFG reviews its loan portfolio based upon the purpose of the loan, which differs from the presentation in Table 2, which is based on collateral type (the underlying assets securing the loan). Table 3 presents TSFG’s loan portfolio based on the primary purpose of the loan, rather than the collateral.

Table 3
LOAN PORTFOLIO COMPOSITION BASED ON LOAN PURPOSE
(dollars in thousands)

(1)

In Table 2, 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 and owner-occupied real estate loans are primarily loans to small and medium-size local businesses to finance short-term operating needs, equipment, and facilities. This portfolio segment declined slightly to 43.2% of loans at December 31, 2002 from 45.1% of loans at December 31, 2001, reflecting a relatively weak market for such loans during the year. Commercial real estate loans are loans to finance the acquisition, development, and sale or lease of real properties to unrelated third parties. This portfolio segment increased slightly to 32.0% of loans at December 31, 2002 from 29.1% of loans at December 31, 2001, reflecting continued strong demand for such loans in TSFG’s major markets. Consumer and mortgage loans are loans to finance personal, family, and household needs of individuals. This segment declined slightly as a percentage of loans, as strong growth in sales finance loans and home equity loans was partially offset by decreases in direct consumer loans and mortgage loans. While originations of residential mortgage loans increased, most of these loans were sold at origination in the secondary market.

     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 32.0% of loans at December 31, 2002. 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. TSFG manages the risk attributable to this concentration by lending in markets in which we operate and to borrowers who have proven track records and possess the financial means to weather reverses in this industry. 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.

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     Table 4 presents maturities of certain loan classifications based on collateral type at December 31, 2002. The table also provides the breakdown between those loans with a predetermined interest rate and those loans with a floating interest rate.

Table 4
SELECTED LOAN MATURITY AND INTEREST SENSITIVITY
(dollars in thousands)

     Table 5 summarizes TSFG’s loan relationships, including unused loan commitments, which are greater than $10 million.

Table 5
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 domiciled in our markets, grew significantly in 2002 and is expected to continue growing in 2003.

     At December 31, 2002, the loan portfolio included commitments totaling $108.4 million in thirteen Shared National Credits (multi-bank credit facilities of $20 million or more). Outstandings under these commitments totaled $55.8 million. By policy, we participate in Shared National Credits only if the borrower is headquartered in our market, the borrower is in an industry familiar to us, we meet directly with the borrower to conduct our analysis, and the borrower agrees to establish an ongoing, banking relationship with us. Two of these credits, in which our commitment totals $2.4 million, are on our internal watch list, but neither of them or any of the others were classified in the Shared National Credits examinations conducted by the regulatory agencies in 2002.

   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 loan monitoring policies is managed. 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 the Directors’ Credit Committees of each banking subsidiary, which meet monthly to review credit quality trends, new large credits, insider loans, large problem credits, credit policy changes, and reports on independent credit audits of branch offices.

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     On October 31, 2002, loans totaling $191.3 million were acquired from Rock Hill Bank. Prior to the closing and in connection with improper lending activities, Rock Hill Bank had charged off a material portion of its loan portfolio and established additional reserves for identified problem loans. At closing, TSFG segregated certain identified problem loans into a separately-managed portfolio, referred to as the “Rock Hill Workout Loans.” This portfolio totaled $72.4 million at December 31, 2002 and included $29.0 million in nonperforming loans. TSFG expects nonperforming assets and the allowance for loan losses to decline as the Rock Hill Workout Loans are liquidated or otherwise resolved. Accordingly, where appropriate, TSFG has provided credit quality measures excluding the Rock Hill Workout Loans to identify core credit quality measures.

     Table 6 presents information pertaining to nonperforming assets for the years indicated. Nonaccrual loans include commercial nonaccrual loans and consumer nonaccrual loans.

Table 6
NONPERFORMING ASSETS
(dollars in thousands)