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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report: October 19, 2005
The South Financial Group, Inc.
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(Exact name of registrant as specified in its charter)
South Carolina 0-15083 57-0824914
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
102 South Main Street, Greenville, South Carolina 29601
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 255-7900
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Securities
Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
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Item 4.02. Non-Reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review
(a) On October 19, 2005, management and the Audit Committee of the Board of
Directors of The South Financial Group, Inc. ("TSFG") determined that TSFG's
financial statements for the quarters ended March 31, 2005 and June 30 2005, and
for the years ended December 31, 2002, 2003 and 2004 and the related quarterly
periods should no longer be relied upon, as a result of accounting treatment
related to its interest rate swaps associated with brokered certificates of
deposits ("CDs").
Since 2001, TSFG has entered into various interest rate swaps to hedge
the interest rate risk inherent in certain of its brokered CDs. Since inception
of the hedging program, TSFG has applied the "short-cut method" of fair value
hedge accounting under Financial Accounting Standards ("FAS") 133 to account for
the swaps. TSFG has determined that these swaps did not qualify for the
short-cut method because the related broker fee was determined (in retrospect)
to have caused the swap not to have a zero value at inception (which is required
under FAS 133 to qualify for the short-cut method). Although the financial
statement impact of applying the "long-haul" method of effectiveness testing
using FAS 133 and the results under the "short-cut" method show no material
difference in the effectiveness of the swaps, hedge accounting under FAS 133 is
not allowed for the affected periods because the hedge documentation required
for the "long-haul" method was not in place at the inception of the hedge.
As a result, TSFG expects that the financial statements for the years
ended December 31, 2002, 2003 and 2004 and for the six months ended June 30,
2005 will reflect a cumulative adjustment of approximately $4.9 million (net of
income taxes) to account for the interest rate swaps as if fair value hedge
accounting for the brokered CDs was never applied. In addition, TSFG expects
that the third quarter 2005 will include a charge of approximately $9.8 million
(net of income taxes), to reflect the same treatment.
Fair value hedge accounting allows a company to record the change in
fair value of the hedged item (in this case, brokered CDs) as an adjustment to
income as an offset to the mark-to-market adjustment on the related interest
rate swap. Eliminating the application of fair value hedge accounting reverses
the fair value adjustments that have been made to the brokered CDs. TSFG has
redesignated these interest rate swaps as fair value hedges utilizing the "long
haul" method of effectiveness testing, and as a result, should receive hedge
accounting treatment for these swaps for future periods.
TSFG intends to refile and restate its Annual Report on Form 10-K for
the year ended December 31, 2004 and its Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2005 and June 30, 2005 to reflect the proper accounting
treatment.
Management and the Audit Committee have discussed the matters disclosed
in this Form 8-K with KPMG LLP, who served as TSFG's external auditors for all
affected periods, in reaching the conclusion to restate the financial statements
for the above-mentioned periods to reflect the correction of the error.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE SOUTH FINANCIAL GROUP, INC.
October 19, 2005 By: /s/ William S. Hummers III
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William S. Hummers III
Executive Vice President and CFO