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

FORM 10-Q

X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      For the quarterly period ended March 31, 2004

OR

__    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
         For the transition period from ________ to ________

Commission File No. 0-25988

CNB Florida Bancshares, Inc.

(Exact name of registrant as specified in its charter)

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___

The number of shares of the registrant's common stock outstanding as of April 30, 2004 was 6,286,162 shares, $0.01 par value per share.

CNB FLORIDA BANCSHARES, INC.

FINANCIAL REPORT ON FORM 10-Q

TABLE OF CONTENTS

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PART I
FINANCIAL INFORMATION

     CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See accompanying notes to unaudited consolidated financial statements.

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CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes to unaudited consolidated financial statements.

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CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)

Note 1. Basis of Presentation and Accounting Policies

The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q which do not require all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, such financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. Management’s discussion and analysis should be read in conjunction with the consolidated financial statements. Certain amounts and captions relating to 2003 have been reclassified to conform to current year presentation.

Accounting policies followed in the presentation of interim financial results are presented in Note 2 of CNB Florida Bancshares, Inc.’s (the “Company’s”) audited consolidated financial statements included in Form 10-K for the year ended December 31, 2003, which is available on the Company’s web site at www.cnbnb.com.

Note 2. Pending Merger

On January 21, 2004, the Company announced that it had entered into a definitive agreement to be acquired by The South Financial Group, Inc. in an all-stock transaction. Under terms of the agreement, the Company’s shareholders will receive 0.84 shares of The South Financial Group, Inc. common stock for each CNB Florida Bancshares, Inc. share. In addition, outstanding options to purchase the Company’s stock will be converted into options to acquire The South Financial Group, Inc.’s common stock at the 0.84 exchange ratio. The transaction is expected to close in July 2004 and is subject to regulatory and Company shareholder approval. The Company’s subsidiary, CNB National Bank, will merge into The South Financial Group, Inc.’s Florida banking subsidiary, Mercantile Bank.

Note 3. Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, CNB National Bank. All significant intercompany accounts and transactions have been eliminated.

Note 4. Earnings Per Share

Basic earnings per common share is calculated based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated based on the weighted average number of shares of common stock outstanding and common stock equivalents, consisting of outstanding stock options that have a dilutive effect on earnings per share. Common stock equivalents are determined using the treasury stock method for diluted shares outstanding. The difference between diluted and basic shares outstanding is common stock equivalents from stock options outstanding during the periods ended March 31, 2004 and 2003.

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The following table sets forth the computation of earnings per share for the three month periods ended March 31, 2004 and 2003.

Note 5. Comprehensive Income

Comprehensive income is defined as the change in equity during a period arising from non-owner transactions and events. The following table details the Company’s comprehensive income for the three months ending March 31, 2004 and 2003.

Note 6. Stock-Based Compensation

The Company has long-term incentive plans that provide stock-based awards, including stock options to certain key employees. The Company applies the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock option and award plans and has adopted the disclosure-only option under Statement of Financial Accounting Standards, (“SFAS”) No. 123, Accounting for Stock-Based Compensation. If the Company had adopted the accounting provisions of SFAS 123 and recognized expense for the fair value of employee stock options granted over the vesting life of the options, pro forma stock-based

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compensation expense (net of tax) for the three months ended March 31, 2004 and 2003 would have been $117,000 and $21,000, respectively. The following table outlines pro forma net income and earnings per share that would have been reported if the Company had adopted the fair value provisions of SFAS 123 (dollars in thousands, except per share data):

In determining the pro forma disclosures above, the fair value of options granted was estimated on the grant date using the Black-Scholes option-pricing model. The Black-Scholes model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options, and changes to the subjective assumptions used in the model can result in materially different fair value estimates. Options to purchase 67,000 shares of stock with an estimated average fair value of $9.32 per option were granted during the three months ended March 31, 2004. There were no employee stock options granted during the three months ended March 31, 2003. The weighted-average grant date fair values of options granted during 2004 and all of 2003 were based on the following assumptions:

Compensation expense under the fair value-based method is recognized over the vesting period of the related stock options and is based on the estimated number of shares expected to actually vest. Accordingly, the pro forma results of applying SFAS 123 in 2004 and 2003 may not be indicative of future amounts.

The Company entered into a definitive agreement to be acquired by The South Financial Group, Inc. on January 21, 2004. The transaction is expected to close in July 2004 and is subject to regulatory and Company shareholder approval. Upon approval of the transaction by Company shareholders, all currently unvested stock options will become exercisable. As of March 31, 2004, unrecognized pre-tax pro forma compensation expense on outstanding unvested stock options totaled $1.1 million. Assuming Company shareholders approve the transaction; unrecognized pro forma compensation expense would be included in pro forma net income and earnings per common share as noted above in the period shareholder approval for the transaction is obtained. The shareholder meeting to vote on the transaction is expected to be held in the second quarter of 2004.

Note 7. Recent Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable-Interest Entities – an Interpretation of ARB No. 51 (“FIN 46”). FIN 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity and (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest:

• The direct or indirect ability to make decisions about the entity's activities through voting rights or similar rights

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• The obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities
  
• The right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses.
  

This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a significant impact on the Company’s consolidated financial statements.

In October 2003, the FASB issued FASB Staff Position No. FIN 46-6, Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. This Staff Position defers the effective date for applying the provisions of FIN 46 for interests held by public entities in variable interest entities or potential variable interest entities created before February 1, 2003 and non-registered investment companies. The adoption of this Staff Position is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) (“FIN 46(R)”). FIN 46(R) is an update of FIN 46 and contains different implementation dates based on the types of entities subject to the pronouncement and based on whether a company has adopted FIN 46. The adoption of FIN 46(R) on March 31, 2004 did not have a material impact on the Company’s consolidated financial statements. The Company does not have any interests in variable interest entities that are subject to the provisions of FIN 46 or FIN 46(R).

In April 2004, the FASB issued FASB Staff Position No. 129-1, Disclosure Requirements under FASB Statement No. 129, “Disclosure of Information about Capital Structure,” Relating to Contingently Convertible Securities. (“FSP 129-1”). The purpose of FSP 129-1 is to interpret how the disclosure provisions of FASB Statement No. 129 apply to contingently convertible securities and to their potentially dilutive effects on earnings per share. The guidance in this FSP is effective April 2004 and applies to all existing and newly created securities. The adoption of FSB 129-1 did not have a material impact on the Company’s consolidated financial statements.

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CNB FLORIDA BANCSHARES, INC. AND SUBSIDIARY
Selected Financial Data

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

     The following analysis reviews important factors affecting the financial condition and results of operations of CNB Florida Bancshares, Inc. for the three months ended March 31, 2004 and 2003. This financial information should be read in conjunction with the unaudited consolidated financial statements of CNB Florida Bancshares, Inc. (“the Company”) and its wholly owned subsidiary, CNB National Bank (“the Bank”), included in "Item 1. Financial Statements" above and the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2003. The Company makes its Securities and Exchange Commission filings available on its website at www.cnbnb.com. The analysis contains forward-looking statements with respect to financial and business matters, which are subject to risks and uncertainties that may change over a period of time. These risks and uncertainties include but are not limited to changes in the interest rate environment that may reduce margins, general economic or business conditions in the Company’s markets that lead to a deterioration in credit quality or reduced loan demand, legislative or regulatory changes and competitors of the Company that may have greater financial resources and develop products or services that enable such competitors to compete more successfully than the Company. Other factors that may cause actual results to differ from the forward-looking statements include customer acceptance of new products and services, changes in customer spending and saving habits and the Company’s success in managing costs associated with expansion. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Actual results could be significantly different from the forward-looking statements contained herein. The Company has no foreign operations; accordingly, there are no assets or liabilities attributable to foreign operations.

PENDING ACQUISITION

     On January 21, 2004, the Company announced that it had entered into a definitive agreement to be acquired by The South Financial Group, Inc. in an all-stock transaction. Under terms of the agreement, the Company’s shareholders will receive 0.84 shares of The South Financial Group, Inc. common stock for each CNB Florida Bancshares, Inc. share. In addition, outstanding options to purchase the Company’s stock will be converted into options to acquire The South Financial Group, Inc.’s common stock at the 0.84 exchange ratio. The transaction is expected to close in July 2004 and is subject to regulatory and Company shareholder approval. The Company’s subsidiary, CNB National Bank, will merge into The South Financial Group, Inc.’s Florida banking subsidiary, Mercantile Bank.

RESULTS OF OPERATIONS

     The Company’s earnings for the three month period ended March 31, 2004 were $1.7 million, or $0.27 per diluted share, compared to $1.3 million, or $0.21 per diluted share, in the first quarter of 2003. These results reflect an increase in net interest income and a decline in provision for loan losses. The increase in net interest income resulted from earning asset growth and favorable changes in the Company’s funding mix. The lower provision for loan losses reflects an improvement in the level of net charge-offs and a decline in nonperforming assets. Results for the quarter also include a reduction in noninterest income and a higher level of noninterest expense. Noninterest income and noninterest expense for the 2004 first quarter include securities gains of $106,000 and a loss on bank real estate of $142,000, respectively. Securities gains were $13,000 in the first quarter of 2003. Total assets increased to $833.3 million at March 31, 2004 compared to $819.9 million at December 31, 2003, and $774.2 million at March 31, 2003. Total outstanding loans and deposits rose 15% and 7% to $698.4 million and $742.2 million, respectively, at March 31, 2004 from $606.0 million and $694.8 million, respectively, at March 31, 2003.

Net Interest Income

     Net interest income is the single largest source of revenue for the Bank and consists of interest and net loan fee income generated by earning assets, less interest expense paid on interest bearing liabilities. The Company’s primary objective is to manage its assets and liabilities to provide the largest possible amount of income while balancing interest rate, credit quality, liquidity and capital risks. Net interest income for the first quarter of 2004 was $7.8 million, compared to $6.6 million for the three month period ended March 31,2003 an increase of 18%. Loan and investment securities growth, coupled with a favorable change in funding mix, were the primary contributors to the increase. Interest income increased 6% while interest expense decreased 14% for the 2004 first quarter over

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comparable 2003 amounts. The decreased interest expense reflects a decline in funding costs on the Company’s interest bearing deposit portfolio. Net interest yield was 4.00% in the first quarter 2004 compared to 3.91% in the fourth quarter 2003 and 3.79% in the first quarter 2003.

     Total average earning assets increased $76.2 million, or 11% to $778.9 million in the first quarter 2004, compared to $702.7 million in the first quarter 2003. The increase was primarily due to growth in the average balance of loans and investment securities to $689.7 million and $86.1 million for the three months ended March 31,2004 from $604.0 million and $47.8 million for the same period in 2003, respectively. The increase was partially offset by decreases in federal funds sold and interest bearing deposits. Increases in NOW and money market deposits, were the main contributors to the $48.2 million, or 8% growth in average interest bearing liabilities. The increase was partially offset by a decrease in time deposits of $17.0 million, or 5%.

     The Company believes that its efforts to reduce the impact of margin compression from the current low interest rate environment have been successful. While the Company continues to maintain an asset sensitive position with respect to asset and liability management, it is anticipated that market interest rates will remain at current low levels well into 2004. Maintaining this profile will allow the Company to take advantage of a rising rate environment. Table 1 provides the Company's average volume of interest earning assets and interest bearing liabilities for the three months ended March 31, 2004 and 2003, respectively.

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Table 1: Year to Date Average Balances - Yields and Rates

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Table 1a: Analysis of Year to Date Changes in Interest Income and Expense

Non-Interest Income

     Non-interest income decreased 20% to $1.3 million for the 2004 first quarter from $1.6 million for the comparable 2003 quarter. The decrease was primarily attributed to a $410,000 decline in secondary market mortgage income due to reductions in loan production staff resulting from organizational changes within the mortgage function and a general increase in mortgage rates which resulted in reduced loan production. The decrease was partially offset by a $93,000 increase in securities gains and an increase in deposit service charges of $35,000. Other fee income, which includes credit card fees, credit life insurance income, safe deposit box fees, discount brokerage fees and other miscellaneous fees, decreased $38,000 for the three month period ended March 31, 2004 compared to the corresponding 2003 period.

     Non-interest income, annualized, as a percentage of average assets was 0.63% for the three months ended March 31, 2004, compared to 0.87% for the comparable period in 2003.

Non-Interest Expense

     Non-interest expense increased 7% to $5.8 million in the 2004 first quarter compared to $5.5 million for the 2003 first quarter. The increase is attributable to an increase in personnel, occupancy and equipment, and other expense. As a percentage of average assets, annualized non-interest expense decreased to 2.8% from 2.9% in the first quarter 2004 and 2003, respectively. Salaries and employee benefits increased $124,000 or 4% to $3.0 million for the first three months of 2004, compared to $2.9 million for the same period in 2003. As a percentage of average

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assets annualized, salaries and employee benefits decreased to 1.45% from 1.52%, for the first quarter of 2004 and 2003, respectively. Average full-time equivalent employees increased by one to 260 during the first quarter of 2004 as compared to the same period in 2003.

     Occupancy expense (including premises, furniture, fixtures and equipment) increased $50,000, or 6% during the three months ended March 31, 2004 compared to the same period in 2003. The increase is primarily attributable to operating expenses associated with the Company’s Magnolia Parke and Glen St. Mary Offices, both of which opened in the second half of 2003.

Other operating expenses increased $192,000, or 11%, in the first quarter of 2004 compared to the same period in 2003. Other expense in the first quarter 2004 includes a $142,000 loss on the Company’s closed branch office in Alachua, Florida, which is under contract to be sold in the second quarter of 2004. The following table details the areas of significance in other operating expenses.

Table 2: Other Operating Expenses

Income Taxes

     The Company's income tax expense in interim reporting periods is determined by estimating the combined federal and state effective tax rate for the year and applying such rate to interim pre-tax income. The Company's estimated annual effective tax rate for 2004 is approximately 36.6%.

LIQUIDITY

     Liquidity is defined as the ability of the Company to meet anticipated demands for funds under credit commitments and deposit withdrawals at a reasonable cost on a timely basis. Management measures the Company’s liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis. These funds can be obtained by converting assets to cash or by attracting new deposits. Average liquid assets (cash and amounts due from banks, interest bearing deposits in other banks, federal funds sold and investment securities available for sale) totaled $79.1 million and represented 11% of average total deposits

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during the first three months of 2004, compared to $118.6 million and 17% for 2003. Average loans were 94% and 89% of average deposits for the three-month periods ended March 31, 2004 and 2003, respectively.

     In addition to core deposit growth, sources of funds available to meet liquidity demands include cash received through ordinary business activities such as the collection of interest and fees, federal funds sold, loan and investment maturities and lines for the purchase of federal funds by the Bank from its principal correspondent banks. The Bank is also a member of the Federal Home Loan Bank and has access to short-term and long-term funds. In addition, the Company entered into a line of credit with one of its correspondent banks in April 2001. The agreement was amended in October 2001 to reflect the following structures: (1) a $3 million revolving line of credit maturing on June 30, 2004 with interest floating quarterly at 3-month Libor plus 145 basis points; and (2) a $10 million term loan maturing October 3, 2006 with interest floating quarterly at 3-month Libor plus 170 basis points. Semi-annual principal payments of approximately $714,000 begin in April 2004. The Company also entered into a $10 million pay-fixed interest rate swap with the same bank. The fixed rate under the interest rate swap is 6.45% and the variable rate is based on 3-month Libor plus 170 basis points. The swap matures October 3, 2006 and has been designated as a cash flow hedge of the variable interest payments on the $10 million term loan noted in (2) above. The fair value of the interest rate swap at March 31, 2004 was approximately ($535,000). There was $1.5 million outstanding on the $3 million line of credit on March 31, 2004 (an additional $750,000 was drawn on the line during April 2004). The term loan, line of credit and interest rate swap are all collateralized by 100% of the common stock of the Bank.

In connection with the term loan and line of credit agreement, the Company is required to maintain compliance with certain covenants and restrictions. The following financial covenants are to be maintained on a quarterly basis and are calculated at the Bank-level:

• Interest coverage ratio of greater than or equal to 2.00x through September 30, 2003.
• Debt service coverage ratio of greater than or equal to 0.85x through September 30, 2002; 1.00x from October 1, 2002 through September 30, 2003; 1.25x from October 1, 2003 through September 30, 2004; and 1.50x from October 1, 2004 through maturity.
• Ratio of non-performing assets to total loans plus other real estate owned and repossessed assets of less than or equal to 1.25%.
• Maintenance of tier 1 and total risk based capital ratios that meet the benchmarks for consideration as a “well-capitalized” institution (currently 6% and 10%, respectively). Also, maintenance of a leverage capital ratio of at least 6%.

In addition, the Company is subject to the following restrictions:

• No additional debt is permitted without consent of the lender.
• No increases in dividends paid by the Company to its common shareholders are permitted without consent of the lender.

Failure to maintain any of these covenants would place the Company in default of the line of credit agreement. In such a case, absent any waivers obtained from the lender, all amounts payable could be accelerated and become due immediately. As of March 31, 2004, the Company was in compliance with all covenants.

The level of commitments to fund additional borrowings and standby letters of credit also impacts the Company’s liquidity position. These commitments, when drawn, are generally funded through deposit inflows, loan and investment maturities, interest receipts and, to the extent necessary, short term purchases of federal funds. The Company’s borrowing capacity with the FHLB is also available to fulfill commitments to lend. Since many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if any, is based on management's credit evaluation in the same manner as though an immediate credit extension were to be granted. Commitments to extend credit and standby letters of credit amount to approximately $203,910,000 and $8,383,000, respectively, at March 31, 2004 and expire as outlined in the table below (in thousands):

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OBLIGATIONS AND COMMITMENTS

The following table presents the Company’s contractual obligations at March 31, 2004:

     Long-term debt and line of credit obligations relate to the Company’s borrowing arrangement with another financial institution as more fully described in Liquidity above. Operating lease obligations represent contractual commitments to make payments under leases for certain branch, equipment and related properties. The Company does not have any capital leases obligations. Purchase obligations are defined as contractual obligations to purchase products or services from unaffiliated parties with a specific minimum quantity defined at a fixed, minimum or variable price over time. The Company’s primary purchase obligation relates to certain core processing services provided by an unaffiliated vendor. The services provided to the Company relate to critical front and back office data processing applications. The term of the contract runs through June 30, 2006 and has pricing provisions that provide for certain minimum levels of account and transaction volumes. To date, the level of services obtained under this contract has exceeded such minimums. For the first three months of 2004, the average monthly fee paid for these services was approximately $94,000. For purposes of presenting contractual commitments in the table above, the average monthly amount was projected to be paid over the remaining term of the contract, subject to minimum pricing increases as outlined in the agreement.

INTEREST RATE SENSITIVITY

     Interest rate sensitivity refers to the responsiveness of interest-earning assets and interest-bearing liabilities to changes in market interest rates. The rate sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities, at a given time interval, including both floating rate instruments and instruments that are approaching maturity. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risk to the Company.

     The Company’s gap and liquidity positions are reviewed on a regular basis by management to determine whether or not changes in policies and procedures are necessary to achieve financial goals. This analysis includes assumptions about balance sheet growth and related mix as well as pricing and maturity profile. Included in the review is an internal analysis of the possible impact on net interest income due to market changes in interest rates. Based on this internal analysis, at March 31, 2004, a gradual increase in interest rates of 200 basis points would have increased net interest income over the ensuing twelve-month period by 5.25% as compared to a projection under

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stable rates. A gradual decrease in interest rates of 200 basis points over this same period would have decreased net interest income by 5.34% as compared to a stable rate environment. At March 31, 2004, the Bank’s net economic value ratio was 7.15% and 10.26%, assuming a gradual increase or decrease, respectively, in interest rates of 200 basis points over a 12-month period. The net economic value ratio is the market value of equity divided by the market value of assets and measures the Bank’s capitalization, talking into account balance sheet gains and losses. The net economic value ratio, however, does not place a value on the Company’s core deposit relationships. The computations of interest rate risk do not necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes in interest rates.

     Table 3, "Rate Sensitivity Analysis", presents rate sensitive assets and liabilities, separating the assets and liabilities into fixed and variable interest rate categories. The estimated fair value of each instrument category is also shown in the table. While these fair values are based on management's judgment of the most appropriate factors, there is no assurance that, were the Company to have disposed of such instruments at March 31, 2004, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances.

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Table 3: Rate Sensitivity Analysis
March 31, 2004
(dollars in thousands)