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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 000-13663
SCBT FINANCIAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0799315
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
520 GERVAIS STREET
COLUMBIA, SOUTH CAROLINA 29201
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 771-2265
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK - $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $173,284,000 based on the closing sale price of $24.66 per
share on June 30, 2003. For purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of common stock outstanding as of March 2, 2004 was
7,720,033.
Documents Incorporated by Reference
Portions of the Registrant's 2003 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Registrant's Proxy Statement for its
2004 Annual Meeting of Shareholders are incorporated by reference into Part III.
Page
Form 10-K Cross-Reference Index
PART I
Item 1. Business ............................................................1
Item 2. Properties...........................................................6
Item 3. Legal Proceedings ...................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................7
PART II
Item 5. Market for the Registrant's Common Equity Related Stockholder
Matters and Issuer Purchases of Equity Securities (1) ...............8
Item 6. Selected Financial Data (1)..........................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................8
Item 7a. Quantitative and Qualitative Disclosure about Market Risk...........24
Item 8. Financial Statements and Supplementary Data ........................25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures...............................................53
Item 9A. Controls and Procedures.............................................56
PART III
Item 10. Directors and Executive Officers of the Registrant (2)..............56
Item 11. Executive Compensation (2)..........................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters (2).................................57
Item 13. Certain Relationships and Related Transactions (2)..................57
Item 14. Principal Accountant Fees and Services (2)..........................57
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....57
(1) All or portions of this item are incorporated by reference to the
Registrant's 2003 Annual Report to Shareholders.
(2) All or portions of this item are incorporated by reference to the
Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders.
FORWARD LOOKING STATEMENTS
Statements included in this report, including in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which are not
historical in nature are intended to be, and are hereby identified as, forward
looking statements for purposes of the safe harbor provided by Section 21E of
the Securities Exchange Act of 1934, as amended. SCBT Financial Corporation
cautions readers that forward looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
forecasted results. Such risk factors include, among others, the following
possibilities: (1) Credit risk associated with an obligor's failure to meet the
terms of any contract with the bank or otherwise fail to perform as agreed; (2)
Interest rate risk involving the effect of a change in interest rates on both
the bank's earnings and the market value of portfolio equity; (3) Liquidity risk
affecting the bank's ability to meet its obligations when they come due; (4)
Price risk focusing on changes in market factors that may affect the value of
traded instruments in mark-to-market portfolios; (5) Transaction risk arising
from problems with service or product delivery; (6) Compliance risk involving
risk to earnings or capital resulting from violations of or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards; (7)
Strategic risk resulting from adverse business decisions or improper
implementation of business decisions; and (8) Reputation risk that adversely
affects earnings or capital arising from negative public opinion.
PART I
ITEM 1. BUSINESS
GENERAL
SCBT Financial Corporation (the "Company"), formerly First National
Corporation, is a bank holding company incorporated under the laws of South
Carolina in 1985. The Company owns 100% of three subsidiaries, namely South
Carolina Bank and Trust, N.A. (formerly First National Bank), a national bank
which opened for business in 1934; South Carolina Bank and Trust of the
Piedmont, N.A. (formerly National Bank of York County), a national bank which
opened for business in 1996; and CreditSouth Financial Services Corporation
("CreditSouth"), a consumer finance company which opened for business in 1998
and has ceased operations. The names of the Company's banking subsidiaries were
changed in May 2002 in order to bring the group under a common marketing
identity. Similarly, the name of the Company was changed in February 2004,
pursuant to shareholder approval at the 2003 annual meeting. In March 2004,
following the corporate name change, the Company switched its common stock
listing from the American Stock Exchange to The NASDAQ Stock Market and began
trading under the symbol "SCBT".
On December 1, 2002, South Carolina Bank and Trust, N.A. (the "Bank"),
acquired the majority of the consumer loan portfolio and related assets of
CreditSouth and assumed the continuing lending activities of that business.
Thereafter, CreditSouth ceased active lending programs and focused on servicing
a retained portfolio of loans that were delinquent at the time of the
acquisition.
In July 2003, South Carolina Bank and Trust of the Pee Dee, N.A., formerly a
wholly-owned subsidiary of the Company, was merged with the Bank in order to
achieve certain operating efficiencies.
In February 2004, the Bank purchased the Denmark, South Carolina branch of
Security Federal Bank, including premises and equipment, certain loans and
deposits. At the time of the transaction, the Bank vacated its existing leased
Denmark office, moving its operations to the newly acquired banking facility. In
March 2004, the Bank sold its Cameron, South Carolina branch, including
premises, equipment and certain deposits, to Farmers and Merchants Bank of South
Carolina and recognized a pre-tax gain of approximately $760,000.
In January 2003, the Company moved its principal executive offices to 520
Gervais Street, Columbia, South Carolina 29201. The Company's mailing address at
its new headquarters is P.O. Box 1030, Columbia, South Carolina 29202, and its
telephone number is (803) 771-2265.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for businesses, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, correspondent banking services, and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers, and no significant portion of its
loans is concentrated within a single industry or group of related industries.
There are no material seasonal factors that would have a material adverse effect
on the Company. The Company does not have any foreign loans.
1
The Company maintains an Internet site at http://www.SCBandT.com. The
information contained in the Company's web site is not incorporated into this
report. The Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to these reports are available
free of charge through the Company's Internet site as soon as reasonably
practicable after they are filed with, or furnished to, the Securities and
Exchange Commission.
TERRITORY SERVED AND COMPETITION
South Carolina Bank and Trust, N.A. conducts its business from 33 offices in
18 South Carolina towns. South Carolina Bank and Trust of the Piedmont, N.A.
conducts its business from four locations in three South Carolina towns. In
certain of their markets, the two banks (the "Banks") encounter strong
competition from several major banks that dominate the commercial banking
industry in their service areas and in South Carolina generally. Several
competitors have substantially greater resources and higher lending limits than
the Banks and they offer certain services for their customers that the Banks do
not offer. In addition to commercial banks, savings institutions and credit
unions, the Banks compete for deposits and loans with other financial
intermediaries and investment alternatives, including mortgage companies, credit
card issuers, leasing companies, finance companies, money market mutual funds,
brokerage firms, governmental and corporation bonds and other securities.
Various of these nonbank competitors are not subject to the same regulatory
restrictions as the Company and many have substantially greater resources than
the Company.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial resources
of the consolidated enterprise and thereby maintains financial, operational and
administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends.
EMPLOYEES
The Company does not have any salaried employees. As of December 31, 2003,
the Company's subsidiaries had 514 full-time equivalent employees. The Company
considers its relationship with its employees to be excellent. The employee
benefit programs the Company provides include group life, health and dental
insurance, paid vacation, sick leave, educational opportunities, a cash
incentive plan, a stock award program, a stock purchase plan, stock option plans
for officers and key employees, a defined benefit pension plan, and a 401(k)
plan.
SUPERVISION AND REGULATION
GENERAL
The Company is a "bank holding company" registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and is
subject to the supervision of, and to regular inspection by, the Federal Reserve
Board. Each of the Banks is organized as a national banking association and
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency (the "OCC"). In addition, the Company and each of
the Banks is subject to regulation (and in certain cases examination) by the
Federal Deposit Insurance Corporation (the "FDIC"), other federal regulatory
agencies and the South Carolina State Board of Financial Institutions (the
"State Board"). The following discussion summarizes certain aspects of banking
and other laws and regulations that affect the Company and its subsidiaries.
Under the Bank Holding Company Act (the "BHC Act"), the Company'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
any other activity which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The BHC Act requires prior Federal Reserve Board approval for, among
other things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. The BHC Act also prohibits a bank
holding company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto. Further, under South
Carolina law, it is unlawful without the prior approval of the State Board for
any South Carolina bank holding company (i) to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank or any
other bank holding company, (ii) to acquire all or substantially all of the
assets of a bank or any other bank holding company, or (iii) to merge or
consolidate with any other bank holding company.
2
The Graham-Leach-Bliley Act amended a number of federal banking laws
affecting the Company and the Banks. In particular, the Graham-Leach-Bliley Act
permits a bank holding company to elect to become a "financial holding company,"
provided certain conditions are met. A financial holding company, and the
companies it controls, are permitted to engage in activities considered
"financial in nature" as defined by the Graham-Leach-Bliley Act and Federal
Reserve Board interpretations (including, without limitation, insurance and
securities activities), and therefore may engage in a broader range of
activities than permitted by bank holding companies and their subsidiaries. The
Company continues to evaluate whether to seek to become a financial holding
company under the Graham-Leach-Bliley Act.
INTERSTATE BANKING
In July 1994, South Carolina enacted legislation which effectively provided
that, after June 30, 1996, out-of-state bank holding companies may acquire other
banks or bank holding companies in South Carolina, subject to certain
conditions. Further, pursuant to the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a
bank holding company became able to acquire banks in states other than its home
state, beginning in September 1995, without regard to the permissibility of such
acquisition under state law, subject to certain exceptions. The Interstate
Banking and Branching Act also authorized banks to merge across state lines,
thereby creating interstate branches, unless a state, prior to the July 1, 1997
effective date, determined to "opt out" of coverage under this provision. In
addition, the Interstate Banking and Branching Efficiency Act authorized a bank
to open new branches in a state in which it does not already have banking
operations if such state enacted a law permitting such "de novo" branching.
Effective July 1, 1996, South Carolina law was amended to permit interstate
branching but not de novo branching by an out-of-state bank. The Company
believes that the foregoing legislation has increased takeover activity of South
Carolina financial institutions by out-of-state financial institutions.
OBLIGATIONS OF HOLDING COMPANY TO ITS SUBSIDIARY BANKS
Under the policy of the Federal Reserve Board, a bank holding company is
required 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 otherwise might not desire or be able to do. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" within 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 which 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.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the FDIC 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'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.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and if any
such assessment is not paid by any shareholder after three months notice, to
sell the stock of such shareholder to make good the deficiency.
3
CAPITAL ADEQUACY
The various federal bank regulators, including the Federal Reserve Board and
the OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments ("Tier 1 Capital"). Tier 2 capital consists
primarily of the allowance for possible loan losses (subject to certain
limitations) and certain subordinated and other qualifying debt ("Tier 2
Capital"). A minimum ratio of total capital to risk-weighted assets of 8.00% is
required and Tier 1 Capital must be at least 50% of total capital. The Federal
Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to
adjusted average total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital
to average total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and is used in conjunction with the risk-based
ratio in determining the overall capital adequacy of banking organizations.
The Federal Reserve Board and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve Board has not advised the Company of any
specific minimum leverage ratio applicable to it. As of December 31, 2003, the
Company, South Carolina Bank and Trust, N.A., and South Carolina Bank and Trust
of the Piedmont, N.A. had leverage ratios of 9.13%, 8.77%, and 8.41%,
respectively, and total risk adjusted capital of 13.06%, 12.57%, and 12.59%,
respectively.
FDICIA, among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA also imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan (see
"Obligations of Holding Company to its Subsidiary Banks," above). In addition,
FDICIA requires the various regulatory agencies to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of a least 8% and a leverage
ratio of a least 4%, or 3% in some cases. Under these guidelines, each of the
Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentration of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position), and (iii) risks from non-traditional activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with the amended guidelines, if the
Company and the Banks were to engage in significant trading activity (as defined
in the amendment) they must incorporate a measure for market risk in their
respective regulatory capital calculations effective for reporting periods after
January 1, 1998.
4
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its subsidiaries,
and the Company's funds for cash distributions to its shareholders are derived
primarily from dividends received from the Banks. Each of the Banks is subject
to various general regulatory policies and requirements relating to the payment
of dividends. Any restriction on the ability of the Banks to pay dividends will
indirectly restrict the ability of the Company to pay dividends.
The approval of the OCC is required if the total of all dividends declared
by a national bank in any calendar year will exceed the total of its retained
net profits for that year combined with its retained net profits for the two
preceding years, less any required transfers to surplus. In addition, national
banks can only pay dividends to the extent that retained net profits (including
the portion transferred to surplus) exceed statutory bad debts in excess of the
bank's allowance for loan losses. Further, if in the opinion of the OCC a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), the OCC may require, after notice and a
hearing, that such bank cease and desist from such practice. The OCC has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve Board, the OCC and the FDIC have issued policy statements which provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
In addition to the foregoing, the ability of the Company and the Banks to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors of the Company's subsidiaries.
CERTAIN TRANSACTIONS BY THE COMPANY AND ITS AFFILIATES
Various legal limitations place restrictions on the ability of the Banks to
lend or otherwise supply funds to the Company and its affiliates. The Federal
Reserve Act limits a bank's "covered transactions," which include extensions of
credit, with any affiliate to 10% of such bank's capital and surplus. All
covered transactions with all affiliates cannot in the aggregate exceed 20% of a
bank's capital and surplus. All covered and exempt transactions between a bank
and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Also, the Federal
Reserve Act requires that all of a bank's extensions of credit to an affiliate
be appropriately secured by acceptable collateral, generally United States
government or agency securities. In addition, the Federal Reserve Act limits
covered and other transactions among affiliates to terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to a bank holding company, a bank or a subsidiary of either as
prevailing at the time for transactions with unaffiliated companies.
INSURANCE OF DEPOSITS
As FDIC-insured institutions, the Banks are subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid by
FDIC-insured institutions is as specified in a schedule required to be issued by
the FDIC that specifies, at semi-annual intervals, target reserve ratios
designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department of
the Treasury. The actual assessment to be paid by each FDIC-insured institution
is based on the institution's assessment risk classification, which 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, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns
(see "--Capital Adequacy" above). As a result of the current provisions of
federal law, the assessment rates on deposits could increase over present
levels. Based on the current financial condition and capital levels of the
Banks, the Company does not expect that the current FDIC risk-based assessment
schedule will have a material adverse effect on the Banks' earnings in 2004.
INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF
2001
On October 26, 2001, the President signed the USA Patriot Act of 2001 into
law. This act contains the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers and certain other financial institutions. The
5
IMLAFA requires U. S. financial institutions to adopt new policies and
procedures to combat money laundering and grants the Secretary of the Treasury
broad authority to establish regulations and to impose requirements and
restrictions on financial institution's operations. The Company has adopted
policies and procedures to comply with the provisions of the Act.
OTHER LAWS AND REGULATIONS
Interest and certain other charges collected or contracted for by the Banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Banks' 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 Community Reinvestment
Act requiring financial institutions to meet their obligations to provide for
the total credit needs of the communities they serve (which includes the
investment of assets in loans to low- and moderate-income borrowers), the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks also are 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 Board 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 banking services.
From time to time, bills are pending before the United States Congress and
in the South Carolina state legislature which in certain cases contain
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking, and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company and its
subsidiaries may be affected thereby.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitute the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve Board. The Federal Reserve Board regulates the supply of
money through various means, including open-market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve Board, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company cannot be
predicted.
ITEM 2. PROPERTIES
In January 2003 the Company relocated its executive headquarters to a new
four-story facility at 520 Gervais Street, Columbia, South Carolina. The lead
branch in the Midlands region of South Carolina Bank and Trust, N.A. also moved
into the 57,000 square foot building. The main offices of South Carolina Bank
and Trust, N.A. are located at 950 John C. Calhoun Drive, S.E., Orangeburg,
South Carolina in a four-story facility that affords 48,000 square feet of space
for operating and administrative purposes. Both of these facilities are owned by
South Carolina Bank and Trust, N.A, which also owns 25 other properties and
leases 12 properties, substantially all of which are used as branch locations or
for housing other operational units.
South Carolina Bank and Trust of the Piedmont, N.A. owns a 12,000 square
foot office building that serves as its main office located at 1127 Ebenezer
Road, Rock Hill, South Carolina. The bank owns one additional property and
leases two others, which are used as branches.
Although the properties leased and owned are generally considered adequate,
there is a continuing program of modernization, expansion, and, as needs
materialize, occasional replacement of facilities.
6
ITEM 3. LEGAL PROCEEDINGS
In the opinion of directors and management, neither the Company nor any of
its subsidiaries is a party to, nor is any of their property the subject of, any
material pending legal proceedings, other than ordinary routine proceedings
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the fourth quarter of
2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
C. John Hipp, III (Age 52). Mr. Hipp has served as President and Chief
Executive Officer of the Company and Chief Executive Officer of South Carolina
Bank and Trust, N.A. (formerly known as First National Bank) since April 1994.
He also served as President of South Carolina Bank and Trust, N.A. from April
1994 to May 2000. From 1990 to 1994, Mr. Hipp served as President of Rock Hill
National Bank and Rock Hill National Corporation.
Robert R. Horger (Age 53). Mr. Horger was named Chairman of the Company and
South Carolina Bank and Trust, N.A. in January 1998 and served as Vice Chairman
of the Company and South Carolina Bank and Trust, N.A. from April 1994 to
January 1998. Mr. Horger became a director of the Company in April 1991. Mr.
Horger is an attorney with Horger, Barnwell and Reid in Orangeburg, South
Carolina.
Dwight W. Frierson (Age 47). Mr. Frierson has served as Vice Chairman of
First National Corporation and South Carolina Bank and Trust, N.A. since January
2000 and has been a director of the Company since April 1996. Mr. Frierson is
Vice President and General Manager of Coca-Cola Bottling Company of Orangeburg.
Robert R. Hill, Jr. (Age 37). Mr. Hill has served as President and Chief
Operating Officer of South Carolina Bank and Trust, N.A. since May 2000. He
served as Senior Executive Vice President and Chief Operating Officer of South
Carolina Bank and Trust, N.A. from November 1998 to May 2000. He served as
President and Chief Executive Officer of South Carolina Bank and Trust of the
Piedmont, N.A. (formerly known as National Bank of York County) from July 1996
to November 1998. Mr. Hill was an organizer of South Carolina Bank and Trust of
the Piedmont, N.A. from October 1995 to July 1996 and team leader for
NationsBank northern region of South Carolina from March 1995 to October 1995.
Richard C. Mathis (Age 53). Mr. Mathis has served as Executive Vice
President and Chief Financial Officer of the Company since May 2000. He was
owner of Carolina MasterCom LLC, an automotive services company, from January
1999 to May 2000. Mr. Mathis served as Executive Vice President and Chief
Financial Officer of M&M Financial Corporation/First National South from January
1998 to January 1999, through that bank's acquisition. Mr. Mathis was Senior
Vice President in the Fixed Income Division of Sterne, Agee & Leach, Inc. in
Atlanta, Georgia, from 1996 through 1997.
John C. Pollok (Age 38). Mr. Pollok was named Senior Executive Vice
President of the Company in February 2003. He has served as Executive Vice
President and Chief Administrative Officer of South Carolina Bank and Trust,
N.A. since May 2000. He served as Executive Vice President of South Carolina
Bank and Trust, N.A. mortgage division from July 1998 until May 2000. Mr. Pollok
served as Senior Vice President of South Carolina Bank and Trust of the
Piedmont, N.A. from January 1996 to July 1998.
Joe E. Burns (Age 49). Mr. Burns has served as Executive Vice President and
Chief Credit Officer of the Company since November 2000. He served as Senior
Vice President and Private Lending Manager for Bank of America from July 1995 to
November 2000.
James A. Shuford, III (52). Mr. Shuford has served as Executive Vice
President of South Carolina Bank and Trust, N.A. since August 1999. He served as
President and Chief Executive Officer of FirstBancorporation, Inc. and
FirstBank, N. A. in Beaufort, South Carolina from October 1993 to August 1999,
when they were acquired by the Company.
Thomas S. Camp (Age 52). Mr. Camp has served as President and Chief
Executive Officer of South Carolina Bank and Trust of the Piedmont, N.A. since
November 1998. He served as Principal and Manager of First Union National Bank
of South Carolina for the Private Client Group from August 1997 to November
1998. Mr. Camp was Vice President of Sales and Marketing at Seibels Bruce
Insurance Co. in Columbia from November 1996 to August 1997. He served as Senior
Vice President of First Union National Bank in South Carolina from February 1989
until November 1996.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Certain information required by this item is incorporated herein by
reference to the information under the caption "Stock Performance and
Statistics" on page 18 of the 2003 Annual Report to Shareholders. As of March 2,
2004, the Company had issued and outstanding 7,720,033 shares of Common Stock
which were held of record by approximately 4,900 persons. The Company's Common
Stock is traded on The NASDAQ Stock Market under the symbol "SCBT".
Dividends are paid by the Company from its assets which, are provided by
dividends paid to the Company by its subsidiaries. Certain restrictions exist
regarding the ability of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends, loans or advances. The approval of the
OCC is required to pay dividends in excess of the Banks' respective net profits
for the current year plus retained net profits (net profits less dividends paid)
for the preceding two years, less any required transfers to surplus. As of
December 31, 2003, approximately $25,347,000 of the Banks' retained earnings
were available for distribution to the Company as dividends without prior
regulatory approval. For the year ended December 31, 2003, the Banks paid
dividends of approximately $5,069,000 to the Company. The Company anticipates
that it will continue to pay comparable cash dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the information set forth under the captions "Financial Highlights" and
"Selected Consolidated Financial Data" on the inside front cover and page 19,
respectively, of the Company's 2003 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of SCBT
Financial Corporation and its operating subsidiaries, South Carolina Bank and
Trust, N.A., and South Carolina Bank and Trust of the Piedmont, N.A. The five
year period 1999 through 2003 is discussed with particular emphasis on the years
2001 through 2003. This commentary should be reviewed in conjunction with the
financial statements and related footnotes and the other statistical information
related to SCBT Financial Corporation contained elsewhere herein.
In 1996, the Company sponsored the organization of South Carolina Bank and
Trust of the Piedmont, N.A. (formerly National Bank of York County) in Rock
Hill, South Carolina, and sold shares of the Company's common stock to
capitalize the new bank and pay organizational and pre-opening expenses. South
Carolina Bank and Trust of the Piedmont, N.A. began operations on July 11, 1996,
as a wholly-owned subsidiary of the Company.
In 1998, the Company sponsored the organization of South Carolina Bank and
Trust of the Pee Dee, N.A. (formerly Florence County National Bank) in Florence,
South Carolina, and sold shares of the Company's common stock to capitalize the
new bank and pay organizational and pre-opening expenses. South Carolina Bank
and Trust of the Pee Dee, N.A. began operations on April 1, 1998, as a
wholly-owned subsidiary of the Company. This bank was merged with South Carolina
Bank and Trust, N.A. in July 2003 in order to achieve certain operating
efficiencies.
Also in 1998, the Company sponsored the organization of CreditSouth
Financial Services Corporation, a consumer finance company which began
operations in Orangeburg, South Carolina, on November 1, 1998. As noted in Part
1, Item 1, on December 1, 2002, South Carolina Bank and Trust, N.A. acquired the
majority of CreditSouth's consumer loan portfolio and related assets, and
CreditSouth ceased operations.
8
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes to Consolidated Financial Statements for information relating to
recent accounting pronouncements.
SUMMARY OF OPERATIONS
Earnings of SCBT Financial Corporation were $14,786,000, $13,834,000, and
$12,257,000 in 2003, 2002 and 2001, respectively. Net income increased 6.9
percent in 2003 when compared to 2002 and increased 12.9 percent in 2002
compared with 2001. Basic earnings per share increased to $1.93 in 2003 compared
to $1.80 in 2002 and $1.59 in 2001. Diluted earnings per share increased to
$1.91 in 2003 from $1.79 in 2002 and $1.59 in 2001. All per share data has been
adjusted to give effect to a ten percent stock dividend paid to shareholders on
December 6, 2002.
The book value per share of SCBT Financial Corporation stock increased to
$14.61 in 2003 compared with $13.49 in 2002 and $12.15 in 2001. The return on
average assets was 1.23 percent in 2003, compared with 1.28 percent in 2002 and
1.21 percent in 2001. The return on average shareholders' equity was 13.72
percent in 2003, 14.09 percent in 2002, and 13.64 percent in 2001. Cash
dividends declared per common share were $0.66 in 2003, compared with $0.59 in
2002 and $0.57 in 2001.
Total earning assets and total deposits increased in 2003 compared to 2002.
At December 31, 2003, total earning assets were $1,114,252,000, an increase of
4.4 percent over $1,067,549,000 at year-end 2002, which was 11.2 percent greater
than the 2001 balance of $959,846,000. In 2003, average earning assets were
$1,123,037,000, an increase of 9.9 percent over $1,022,339,000 in 2002, which
was 7.0 percent greater than the 2001 average of $955,155,000. The increases in
average earning assets in 2003 and 2002 were mainly the result of in-house and
secondary market loan growth.
At December 31, 2003, total deposits were $946,278,000, an increase of 5.4
percent from $898,163,000 at the end of 2002. The 2002 balance was 10.7 greater
than $811,523,000 at year-end 2001. Total deposits averaged $946,746,000 during
2003, an increase of 10.7 percent over $855,223,000 in 2002. The 2002 deposits
average was a 6.3 percent increase over $803,130,000 in 2001.
For the year ended December 31, 2003, total interest income was $64,854,000,
a decrease of $2,470,000, or 3.7 percent, from $67,324,000 in 2002. The decrease
was mainly interest rate related, as the rate earned on average earning assets
declined 82 basis points from 6.59 percent in 2002 to 5.77 percent in 2003. In
2002, total interest income decreased $7,148,000 or 9.6 percent, compared with
$74,472,000 in 2001. This increase was also mainly due to lower interest rates,
as the rate earned on average earning assets declined 121 basis points from 7.80
percent in 2001 to 6.59 percent the following year.
Total interest expense was $14,622,000 for the year 2003, a $4,130,000, or
22.0 percent, decrease from $18,752,000 in 2002. This resulted from a 63 basis
point decrease in the rate paid on total interest-bearing liabilities, partially
offset by a $69,475,000, 8.3 percent, increase in average total interest-bearing
liabilities. Total interest expense in 2002 decreased $11,220,000, or 37.4
percent, from $29,972,000 in 2001. This resulted mainly from a 153 basis point
decline in the average rate paid on interest-bearing liabilities.
In March 2003, the Company's board of directors authorized the extension of
a repurchase program to acquire up to 250,000 shares of the Company's
outstanding common stock. During the years ended December 31, 2003, 2002 and
2001, the Company repurchased 2,100, 12,402 and 138,253 shares, respectively, at
a cost of $53,000, $265,000 and $2,518,000, respectively.
COMPETITION
SCBT Financial Corporation competes with a number of financial institutions
and other firms that engage in activities similar to banking. For example, the
Company competes for deposits with savings and loan associations, credit unions,
brokerage firms and other commercial banks. In its lending activities, the
Company competes with the industries mentioned above as well as consumer finance
companies, leasing companies and other lenders. In today's challenging financial
climate, all lenders are searching for quality borrowers. Competition is strong
for attracting borrowers and originating acceptable grade loans.
A number of financial institution mergers were completed in recent years,
continuing the trend toward consolidation, especially among larger regional and
national financial institutions. Although these mergers reduced the number of
banks and branches, they intensified competition for quality funds and loans.
9
NET INTEREST INCOME
Net interest income is the difference between interest income and interest
expense. In the analysis of net interest income, two significant factors are net
interest spread and net interest margin. Net interest spread is the difference
between the yield on average earning assets and the rate on average
interest-bearing liabilities. Net interest margin is the difference between the
yield on average earning assets and the rate on all average liabilities,
interest and noninterest-bearing, utilized to support earning assets. Net
interest margin is distinguished by the inclusion of the impact of interest free
funds.
Net interest income was $50,232,000 in 2003, an increase of $1,660,000, or
3.4 percent over 2002. This increase was virtually all volume related, as total
average earning assets grew by $100,698,000, or 9.9 percent. A significant
offset to the strong earning assets growth was the continuing decline in
interest rates in general as the net interest spread decreased by 19 basis
points, from 4.36 percent in 2002 to 4.17 percent in 2003. Net interest income
in 2002 was $48,572,000, an increase of $4,072,000, or 9.2 percent, from the
previous year. This resulted from an increase in total average earning assets of
$67,184,000, or 7.0 percent, and from a 32 basis point increase in the net
interest spread, reflecting a greater decline in rates paid on interest-bearing
liabilities as compared with the decrease in rates earned on earning assets.
As a result of the continued historically low interest rate environment in
2003, the net interest margin (non-taxable equivalent) decreased 28 basis points
to 4.47 percent compared with 2002. Contributing to this decline was a ten basis
point decrease in the impact of interest free funds. The net interest margin was
4.75 percent in 2002, an increase of 9 basis points over 2001. This was largely
attributable to the aforementioned decline in interest-bearing liability rates
outpacing the decrease in rates on earning assets.
TABLE 1
VOLUME AND RATE
VARIANCE ANALYSIS
2003 COMPARED TO 2002 2002 COMPARED TO 2001
CHANGES DUE TO CHANGES DUE TO
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
(DOLLARS IN THOUSANDS) VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
Interest income on:
Loans (2) $ 9,763 $ (9,432) $ 331 $ 5,371 $ (10,615) $ (5,244)
Investments:
Taxable (1,538) (1,127) (2,665) 709 (2,086) (1,377)
Tax exempt (3) (123) 5 (118) (91) (14) (105)
Funds sold (7) (17) (24) (326) (141) (467)
Interest -bearing deposits with banks 38 (32) 6 106 (61) 45
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 8,132 (10,602) (2,470) 5,769 (12,917) (7,148)
===================================================================================================================================
Interest expense on:
Deposits:
Interest-bearing transaction accounts
381 (1,535) (1,154) 257 233 490
Savings accounts 96 (1,087) (991) 152 (2,006) (1,854)
Certificates of deposit 453 (2,139) (1,686) (42) (8,631) (8,673)
Funds purchased 118 (447) (329) 176 (1,740) (1,564)
Notes payable 112 (82) 30 429 (48) 381
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,159 (5,289) (4,130) 972 (12,192) (11,220)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,973 $ (5,313) $ 1,660 $ 4,797 $ (725) $ 4,072
===================================================================================================================================
(1) The rate/volume variance for each category has been allocated on an equal
basis between rate and volumes.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a taxable-equivalent basis in the
above analysis.
10
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2003
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 942,717 $ 58,283 6.18%
Investment securities:
Taxable
137,637 5,047 3.67
Tax exempt 30,750 1,383 4.50
Funds sold 6,703 86 1.30
Interest-bearing deposits with banks 5,230 55 1.05
------------ ------------
Total earning assets 1,123,037 64,854 5.77
------------ ------------
Cash and other assets 86,258
Less allowance for loan losses (11,214)
------------
Total assets $ 1,198,081
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 205,077 $ 763 0.37%
Savings 175,347 988 0.56
Certificates of deposit 393,365 9,804 2.49
Funds purchased 86,185 545 0.63
Notes payable 51,720 2,522 4.88
------------ ------------
Total interest-bearing liabilities 911,694 14,622 1.60
------------ ------------
Demand deposits 172,957
Other liabilities 5,639
Shareholders' equity 107,791
------------
Total liabilities and shareholders' equity $ 1,198,081
============
Net interest spread 4.17
Impact of interest free funds 0.30
------------
Net interest margin 4.47%
============
Net interest income $ 50,232
============
11
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2002
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 806,801 $ 57,956 7.18%
Investment securities:
Taxable
171,926 7,711 4.49
Tax exempt 33,504 1,501 4.48
Funds sold 7,162 107 1.55
Interest-earning deposits with banks 2,946 49 1.66
------------ ------------
Total earning assets 1,022,339 67,324 6.59
------------ ------------
Cash and other assets 73,018
Less allowance for loan losses (10,171)
------------
Total assets $ 1,085,186
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 171,052 $ 1,916 1.12%
Savings 167,268 1,978 1.18
Certificates of deposit 378,443 11,488 3.04
Funds purchased 75,956 878 1.15
Notes payable 49,500 2,492 5.03
------------ ------------
Total interest-bearing liabilities 842,219 18,752 2.23
------------ ------------
Demand deposits 138,460
Other liabilities 6,336
Shareholders' equity 98,171
------------
Total liabilities and shareholders' equity $ 1,085,186
============
Net interest spread 4.36
Impact of interest free funds 0.40
------------
Net interest margin 4.75%
============
Net interest income $ 48,572
============
12
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2001
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 743,602 $ 63,196 8.50%
Investment securities:
Taxable
159,482 9,088 5.70
Tax exempt 35,522 1,606 4.52
Funds sold 16,442 578 3.52
Interest-earning deposits with banks 107 4 3.74
------------ ------------
Total earning assets 955,155 74,472 7.80
------------ ------------
Cash and other assets 65,827
Less allowance for loan losses (9,265)
------------
Total assets $ 1,011,717
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 144,963 $ 1,427 0.98%
Savings 160,890 3,833 2.38
Certificates of deposit 379,193 20,163 5.32
Funds purchased 70,852 2,438 3.44
Notes payable 41,134 2,111 5.13
------------ ------------
Total interest-bearing liabilities 797,032 29,972 3.76
------------ ------------
Demand deposits 118,084
Other liabilities 6,550
Shareholders' equity 90,051
------------
Total liabilities and shareholders' equity $ 1,011,717
============
Net interest spread 4.04
Impact of interest free funds 0.62
------------
Net interest margin 4.66%
============
Net interest income $ 44,500
============
13
INVESTMENT SECURITIES
The second largest category of earning assets is investment securities,
which are used to fund loan growth and deposit liquidations, provide liquidity,
employ excess funds, and pledge as collateral for certain public funds deposits
and purchased funds. At December 31, 2003, investment securities were
$152,009,000 or 13.6 percent of earning assets, compared with $164,951,000, or
15.5 percent of earning assets at the end of 2002. As securities are purchased,
they are designated as held-to-maturity or available-for-sale based upon
management's intent, which incorporates liquidity needs, interest rate
expectations, asset/liability management strategies, and capital requirements.
Interest earned on the held-to-maturity portfolio, consisting mainly of tax
exempt state and municipal securities, was $1,383,000 in 2003, a decrease of
$118,000, or 7.9 percent, from the $1,501,000 earned in 2002. The decrease was
due to an average portfolio balance that was $2,754,000, or 8.2 percent, less
than the balance in 2002. This decrease was slightly offset by a two basis point
increase in yield from year to year. In 2002, this portfolio segment earned
$105,000, or 6.5 percent less than 2001 interest of $1,606,000. This decrease
was due primarily to an average portfolio balance that was $2,018,000, or 5.7
percent less than the balance in 2001. Contributing to a lesser extent was the
four basis point decline in the average yield from 2001 to 2002. The average
maturity of the held-to-maturity portfolio was 2.4 years, 3.2 years and 3.9
years at December 31, 2003, 2002 and 2001, respectively.
Securities available-for-sale consist mainly of U.S. Government Agency and
mortgage-backed securities. In 2003, interest earned on this portfolio was
$5,047,000, including $67,000 attributable to short-term money market fund
investments, compared with $7,711,000, including $404,000 earned on money market
investments in 2002. The overall decrease of $2,664,000, or 34.6 percent, was
the result of both rate and average balance declines from year to year. Average
earning rates on available-for-sale securities were 3.67 percent during 2003, or
82 basis points less than 2002. Average outstanding balances were $137,637,000,
a $34,289,000, or 19.9 percent decrease from the prior year, as funds were
redeployed to meet higher yielding loan demand throughout the period. In 2002,
earnings from this segment of the investment securities portfolio were
$1,377,000, or 15.2 percent less than the $9,088,000 earned in 2001. This was
the result of lower rates which were 131 basis points less in 2002 than 2001.
The earnings decrease was partially offset by an available-for-sale portfolio
that averaged $12,444,000, or 7.8 percent more in 2002 that 2001.
At December 31, 2003, the fair value of the investment securities portfolio
was $153,474,000, or 1.0 percent higher than the carrying value, including the
effect of a $1,465,000 higher market value of held-to-maturity securities,
compared to their amortized cost. The differences between fair and carrying
values at December 31, 2002 and 2001 were also favorable at $1,833,000, or 1.1
percent and $648,000, or 0.3 percent, respectively. At December 31, 2003,
investment securities with an amortized cost of $121,531,000 and fair value of
$122,522,000 were classified as available-for-sale. The positive adjustment of
$991,000 to the carrying value of these securities has been reflected, net of
tax, in the consolidated balance sheets as accumulated other comprehensive
income.
The Company realized no gains or losses on the disposition of investment
securities in either 2003 or 2002 and a gain of $570,000 on the sale of equity
securities in 2001.
TABLE 3
BOOK VALUE OF INVESTMENT SECURITIES
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
HELD-TO-MATURITY
U. S. Treasury and other Government agencies -- -- -- -- 3,031
Mortgage-backed -- 51 247 -- 1,304
State and municipal 29,487 33,160 34,767 38,550 42,933
- -------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity 29,487 33,211 35,014 38,550 47,268
- -------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U. S. Treasury and other Government agencies
25,453 45,859 44,265 93,479 93,033
Mortgage-backed 78,560 74,694 101,728 46,726 51,502
Other investments 18,509 11,187 8,926 4,443 3,769
- -------------------------------------------------------------------------------------------------------------
Total Available-for-Sale 122,522 131,740 154,919 144,648 148,304
- -------------------------------------------------------------------------------------------------------------
Total $152,009 $164,951 $189,933 $183,198 $195,572
=============================================================================================================
14
TABLE 4
MATURITY DISTRIBUTION AND YIELDS OF INVESTMENT SECURITIES
DUE IN DUE AFTER DUE AFTER DUE AFTER
DECEMBER 31, 2003 1 YR. OR LESS 1 THRU 5 YRS. 5 THRU 10 YRS. 10 YRS.
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
HELD-TO-MATURITY
State and municipal 4,714 6.57% 20,238 6.53% 4,535 6.91% -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity 4,714 6.57% 20,238 6.53% 4,535 6.91% -- --
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and
Government agencies 9,978 3.80% 15,475 3.62% -- -- -- --
Mortgage-backed 2,883 2.30% 71,741 4.20% 3,936 3.48% -- --
Other investments (1) -- -- 4,000 5.74% 8,509 3.38% 6,000 3.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale 12,861 3.47% 91,216 4.17% 12,445 3.41% 6,000 3.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 17,575 4.30% $111,454 4.60% $ 16,980 4.35% $6,000 3.64%
================================================================================================================================
Percent of Total 12% 73% 11% 4%
Cumulative % of Total 12% 85% 96% 100%
DECEMBER 31, 2003 TOTAL PAR FAIR
(DOLLARS IN THOUSANDS) AMOUNT YIELD VALUE VALUE
State and municipal 29,487 6.59% 29,355 30,952
- ----------------------------------------------------------------------------------
Total Held-to-Maturity 29,487 6.59% 29,355 30,952
- ----------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and
Government agencies 25,453 3.69% 25,450 25,453
Mortgage-backed 78,560 4.09% 76,860 78,560
Other investments (1) 18,509 3.97% 18,500 18,509
- ----------------------------------------------------------------------------------
Total Available-for-Sale 122,522 3.99% 120,810 122,522
- ----------------------------------------------------------------------------------
Total $152,009 4.50% $150,165 $153,474
==================================================================================
(1) Federal Reserve Bank and other corporate stocks have no set maturity and are
classified in "Due after 10 years."
LOAN PORTFOLIO
Loans, net of unearned discount, the largest category of earning assets,
were $951,106,000 at December 31, 2003, an increase of $48,543,000, or 5.4
percent, compared to $902,563,000 at the end of 2002. Average loans outstanding
during 2003 were $942,717,000, an increase of 16.9 percent over the 2002 average
of $806,801,000. Included in these balances were mortgage loans held for sale,
which averaged $43,296,000 during 2003, up 204.8 percent from $14,207,000 in
2002, reflecting the strong mortgage loan refinance market in the past year.
Real estate mortgage loans continue to comprise the largest segment of the
loan portfolio. All commercial and residential loans secured by real estate,
except real estate construction loans, are included in this category. At the end
of 2003, real estate mortgage loans were $689,797,000, including $12,346,000 of
mortgage loans held for sale, and comprised 72.5 percent of the total loan
portfolio. This was an increase of $88,477,000, or 14.7 percent, over year-end
2002. Commercial, financial, agricultural and other loans were $133,055,000,
representing 14.7 percent of all loans at December 31, 2003. This loan category
decreased $16,330,000, or 10.9 percent, compared to the balance at the end of
2002. Consumer installment loans, comprising 10.7 percent of the portfolio at
the end of 2003, were $101,743,000, a decrease of $9,777,000, or 8.8 percent
from the previous year.
Loan interest and fee income was $58,283,000 in 2003, a slight increase over
2002 earnings of $57,956,000. Substantial increases in average loan balances in
2003 compared with 2002 were largely offset by the continued decline in lending
rates, reflecting the historically low general interest rate environment. The
average loan portfolio yield in 2003 was 6.18 percent, or 100 basis points below
the 2002 yield of 7.18 percent. Interest and fee income for 2002 was $5,240,000,
or 8.3 percent, less than the $63,196,000 earned in 2001. This decrease was the
result of a 132 basis point decline in the average yield in 2002 from 8.50
percent in 2001, offset in part by an average loan balance increase of
$63,199,000, or 8.5 percent, year to year. Table 6 shows the maturity and
interest rate sensitivity of the loan portfolio at December 31, 2003. Loans that
mature in one year or less were $176,526,000, comprising 18.6 percent of total
loans. Of the loans due after one year, $418,324,000, or 54.0 percent, had fixed
interest rates, compared with variable rate loans of $356,256,000, or 46.0
percent.
The placement of loans on a nonaccrual status is dependent upon the type of
loan, the past due status and the collection activities in progress. Loans which
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become 120 days past due. Unsecured commercial loans
are charged off on or before the date they become 90 days past due and,
therefore, do not reach nonaccrual status. Commercial and real estate loans
which are partially secured are written down to the collateral value and placed
on nonaccrual status on or before becoming 90 days past due. Closed end consumer
loans are charged off or written down to the contractual value on or before
becoming 120 days past due. Open end consumer loans are charged off or written
down to the contractual value on or before becoming 180 days past due. All
interest accrued in the current year but unpaid at the date a loan is placed on
nonaccrual status is deducted from interest income, while interest accrued from
previous years is charged
15
against the reserve for loan losses. At December 31, 2003, nonaccrual loans were
$4,669,000, compared with $3,010,000 at year-end 2002. At December 31, 2003,
loans that were 90 days or more past due and still accruing were $2,082,000
compared to $1,729,000 at the end of 2002.
Interest income that was foregone was an immaterial amount for each of the
three years ended December 31, 2003. The Company does not have any loans that
have been restructured or any foreign loans.
Concentrations of credit are considered to exist when the amounts loaned to a
multiple number of borrowers engaged in similar business activities which would
cause them to be similarly impacted by economic or other conditions exceed 10
percent of total loans. As of December 31, 2003, there were no such credit
concentrations.
The level of risk elements in the loan portfolio for the past five years is
shown in Table 7.
TABLE 5
DISTRIBUTION OF NET LOANS
BY TYPE
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Commercial, financial,
agricultural and other $133,055 $149,385 $118,819 $103,468 $ 87,098
Real estate - construction 26,511 40,338 37,709 32,256 27,555
Real estate - mortgage 689,797 601,320 495,894 473,131 396,158
Consumer 101,743 111,520 116,442 120,194 99,730
- -------------------------------------------------------------------------------------------------------------
Total $951,106 $902,563 $768,864 $729,049 $610,541
=============================================================================================================
Percent of Total
Commercial, financial,
agricultural and other 14.0% 16.5% 15.5% 14.1% 14.2%
Real estate - construction 2.8 4.5 4.9 4.4 4.5
Real estate - mortgage 72.5 66.6 64.5 64.6 64.5
Consumer 10.7 12.4 15.1 16.9 16.8
- -------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================================================================================
TABLE 6
MATURITY DISTRIBUTION OF LOANS
DECEMBER 31, 2003 MATURITY
1 YEAR 1 - 5 OVER 5
(DOLLARS IN THOUSANDS) TOTAL OR LESS YEARS YEARS
Commercial, financial
agricultural and other $133,055 $ 49,182 $ 76,960 $ 6,913
Real estate - construction 26,511 9,725 7,008 9,778
Real estate - mortgage 689,797 106,983 395,080 187,734
Consumer 101,743 10,636 86,017 5,090
- -------------------------------------------------------------------------------------------------------------------
Total $951,106 $176,526 $565,065 $209,515
===================================================================================================================
Loans due after one year with:
Predetermined interest rates $418,324
Floating or adjustable interest rates $356,256
16
ASSET QUALITY
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment securities, loan, or
short-term investment portfolio, is reviewed by management for credit risk. To
facilitate this review, SCBT Financial Corporation has established credit and
investment policies which include credit limits, documentation, periodic
examination and follow-up. In addition, these portfolios are examined for
exposure to concentration in any one industry, government agency, or geographic
location. At December 31, 2003 and 2002, the Company did not have more than ten
percent of the loan portfolio in any one industry and had no foreign loans.
Each category of earning assets has a degree of credit risk. To measure
credit risk, various techniques are utilized. Credit risk in the investment
portfolio can be measured through bond ratings published by independent
agencies. In the investment securities portfolio, 99.5 percent of the
investments consist of U.S. Treasury securities, U.S. Agency securities and
tax-free securities having a rating of "A" or better by at least one of the
major bond rating agencies. The credit risk of the loan portfolio can be
measured by historical experience. The Company maintains its loan portfolio in
accordance with its established credit policies. Net loan charge-offs as a
percentage of net average loans improved to .19 percent in 2003, compared with
..25 percent in 2002. The ratio was also .19 percent in 2001. See "Loans" for a
discussion of the Company's charge-off and nonaccrual policies.
TABLE 7
NONACCRUAL AND PAST DUE LOANS
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Loans past due 90 days or more $ 2,082 $ 1,729 $ 1,561 $ 1,838 $ 729
Loans on a nonaccruing basis 4,669 3,010 3,317 1,481 1,537
- -----------------------------------------------------------------------------------------------
Total $ 6,751 $ 4,739 $ 4,878 $ 3,319 $ 2,266
===============================================================================================
TABLE 8
SUMMARY OF LOAN
LOSS EXPERIENCE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Allowance for loan losses - January 1 $ 11,065 $ 9,818 $ 8,922 $ 7,886 $ 6,934
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs (2,410) (2,236) (1,808) (1,004) (826)
Total recoveries 700 256 400 202 165
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs (1,710) (1,980) (1,408) (802) (661)
Provision for loan losses 2,345 3,227 2,304 1,838 1,613
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses - December 31 $ 11,700 $ 11,065 $ 9,818 $ 8,922 $ 7,886
================================================================================================================
Average loans - net of unearned income $899,421 $792,594 $732,587 $680,217 $541,434
Ratio of net charge-offs to average
loans - net of unearned income .19% .25% .19% .12% .12%
17
LOAN LOSS PROVISION
The Company maintains an allowance for loan losses at a level which
management believes is sufficient to provide for potential losses in the loan
portfolio. Management periodically evaluates the adequacy of the allowance
utilizing its internal risk rating system, outside credit review and regulatory
agency examinations to assess the quality of the loan portfolio and identify
problem loans. The evaluation process also includes management's analysis of
current and future economic conditions, composition of the loan portfolio, past
due and nonaccrual loans, concentrations of credit, lending policies and
procedures and historical loan loss experience. The provision for loan losses is
charged to expense in an amount necessary to maintain the allowance at the
appropriate level.
The provision for loan losses for the year ended December 31, 2003 was
$2,345,000, compared with $3,227,000 in 2002. The 27.3 percent decrease in the
provision was the result of certain improved quality measures, including a 13.6
percent decline in net charge-offs compared with 2002 and a 24 percent decrease
in the ratio of net charge-offs to average loans, net of unearned income, from
..25 percent in 2002 to .19 percent in 2003.
The allowance for loan losses was $11,700,000 at December 31, 2003, or 1.25
percent of total loans, compared with $11,065,000, or 1.28 percent of total
loans at the end of 2002. Total charge-offs were $2,410,000 in 2003, up
$174,000, or 7.8 percent, from 2002. Recoveries of loans previously charged off
increased nearly threefold from $256,000 in 2002 to $700,000 in 2003. A summary
of loan loss experience for the five years ended December 31, 2003 is provided
in Table 8.
Other real estate owned includes certain real estate acquired as a result of
foreclosure and deeds in lieu of foreclosure, as well as amounts reclassified as
in-substance foreclosures. At December 31, 2003 and December 31, 2002, other
real estate owned was $1,465,000 and $1,051,000, respectively.
While certain factors suggest a gradual upturn in the national economy, the
signals in South Carolina have been less clear. The state's unemployment levels
and general business conditions suggest that any rebound might lag improvements
at the national level. In this economic climate, management anticipates that the
Company could experience loan charge-off activity in the coming year at
generally comparable levels to that experienced in 2003. The Office of the
Comptroller of the Currency recommends that banks take a broad view of certain
factors in evaluating their allowance for loan losses. These factors include
loan loss experience, specific allocations and other subjective factors. In its
ongoing consideration of such factors, management considers the allowance for
loan losses to be adequate.
LIQUIDITY
Liquidity may be defined as the ability of an entity to generate cash to
meet its financial obligations. For a bank, liquidity primarily means the
consistent ability to meet loan and investments demands and deposit withdrawals.
The Company has employed its funds in a manner to provide liquidity in both
assets and liabilities sufficient to meet its cash needs.
Asset liquidity is maintained by the maturity structure of loans, investment
securities and other short-term investments. Management has policies and
procedures governing the length of time to maturity on loans and investments. As
noted in Table 4, 12 percent of the investment portfolio matures in one year or
less. This segment of the portfolio consists largely of U.S. Government Agency
securities and municipal obligations. Loans and other investments are generally
held for longer terms and not utilized for day-to-day operating needs.
Increases in the Company's liabilities provide liquidity on a day-to-day
basis. Daily liquidity needs may be met from deposit growth or from the use of
federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings.
The Company regularly obtains borrowed funds in the form of cash management
or "sweep" accounts that are accommodations to corporate and governmental
customers pursuant to sale of securities sold under agreements to repurchase
arrangements. During 2003, the Company maintained a satisfactory level of
liquidity through growth in interest-bearing and non-interest-bearing deposits,
cash management accounts, federal funds purchased, and advances from the Federal
Home Loan Bank of Atlanta.
DERIVATIVES AND SECURITIES HELD FOR TRADING
In January 1998, the Securities and Exchange Commission adopted rules that
require more comprehensive disclosure of accounting policies for derivatives as
well as enhanced quantitative and qualitative disclosures of market risk for
derivatives and other financial instruments. The market risk disclosures are
classified into two categories: financial instruments entered into for trading
purposes and all other instruments (non-trading purposes). The Company does not
have financial derivatives, nor does it maintain a trading portfolio.
18
ASSET-LIABILITY MANAGEMENT AND MARKET RISK SENSITIVITY
The Company's earnings or the value of its shareholders' equity may vary in
relation to changes in interest rates and in relation to the accompanying
fluctuations in market prices of certain of its financial instruments. The
Company uses a number of methods to measure interest rate risk, including
simulating the effect on earnings of fluctuations in interest rates, monitoring
the present value of asset and liability portfolios under various interest rate
scenarios, and monitoring the difference, or gap, between rate sensitive assets
and liabilities, as discussed below. The earnings simulation model and gap
analysis take into account the Company's contractual agreements with regard to
investments, loans and deposits. Although the Company's simulation model is
subject to the accuracy of the assumptions that underlie the process, the
Company believes that such modeling provides a better illustration of the
interest sensitivity of earnings than does static interest rate sensitivity gap
analysis. The simulation model assists in measuring and achieving growth in net
interest income while managing interest rate risk. The simulations incorporate
interest rate changes as well as projected changes in the mix and volume of
balance sheet assets and liabilities. Accordingly, the simulations are
considered to provide a good indicator of the degree of earnings risk the
Company has, or may incur in future periods, arising from interest rate changes
or other market risk factors.
The Company's policy is to monitor exposure to interest rate increases and
decreases of as much as 200 basis points ratably over a 12-month period. The
Company's policy limit for the maximum negative impact on net interest income
from a steady ("ramping") change in interest rates of 200 basis points over 12
months is 8 percent. The Company traditionally has maintained a risk position
within the policy guideline level. As of December 31, 2003, the earnings
simulations indicated that the impact of a 200 basis point decrease in rates
over 12 months would result in an approximate 7.2 percent decrease in net
interest income while a 200 basis point increase in rates over the same period
would result in an approximate 1.7 percent increase in net interest income --
both as compared with a base case unchanged interest rate environment. These
results indicate that the Company's rate sensitivity is essentially modestly
asset sensitive to the indicated change in interest rates over a one-year
horizon. The decrease in net interest income in the declining rate environment
is attributable primarily to the current (base) extremely low level of interest
rates. Certain key interest rates, such as the federal funds rate, would have to
hypothetically move to zero percent in order to drop 200 basis points from
current levels. In such a hypothetical case, the Company would not be able to
lower certain deposit and liability rates to the same extent. Also, the model
assumes that the Company's residential mortgage loans would quickly prepay in
such an extreme rate environment -- thereby lowering interest income. Actual
results may differ from simulated results due to the timing, magnitude and
frequency of interest rate changes and changes in market conditions or
management strategies, among other factors.
As mentioned above, another (though less useful) indicator of interest rate
risk exposure is the interest rate sensitivity gap and cumulative gap. Interest
rate sensitivity gap analysis is based on the concept of comparing financial
assets that reprice with financial liabilities that reprice within a stated time
period. The time period in which a financial instrument is considered to be rate
sensitive is determined by that instrument's first opportunity to reprice to a
different interest rate. For variable rate products the period in which
repricing occurs is contractually determined. For fixed rate products the
repricing opportunity is deemed to occur at the instrument's maturity or call
date, if applicable. For noninterest-bearing funding products, the "maturity" is
based solely on a scheduled decay, or runoff, rate. When more assets than
liabilities reprice within a given time period, a positive interest rate gap (or
"asset sensitive" position) exists. Asset sensitive institutions may benefit in
generally rising rate environments as assets reprice more quickly than
liabilities. Conversely, when more liabilities than assets reprice within a
given time period, a negative interest rate gap (or "liability sensitive"
position) exists. Liability sensitive institutions may benefit in generally
falling rate environments as funding sources reprice more quickly than earning
assets. However, another shortfall of static gap analysis based solely on the
timing of repricing opportunities is its lack of attention to the degree of
magnitude of rate repricings of the various financial instruments.
As shown in the gap analysis within Table 9 below, the Company has a greater
dollar value of financial assets that are subject to repricing within a 12 month
time horizon than its financial liabilities subject to repricing. Thereafter,
within successive 12-month time horizons, there are generally more financial
liabilities than financial assets with repricing opportunities. The degree of
magnitude of rate repricings of the financial assets and liabilities is, as
mentioned above, not addressed by a static gap analysis as presented in Table 9.
The Company does not currently use interest rate swaps or other derivatives
to modify the interest rate risk of its financial instruments.
The following table provides information as of December 31, 2003 about the
Company's financial instruments that are sensitive to changes in interest rates.
For fixed rate loans, securities, time deposits, federal funds and repurchase
agreements, and notes payable, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates, call dates,
or average-life terminal dates. Variable rate instruments are presented
according to their first repricing opportunities. Non-interest bearing deposits
and interest-bearing savings and checking deposits have no contractual maturity
dates. For purposes of Table 9, projected maturity dates for such deposits were
determined based on decay rate assumptions used internally by the Company to
evaluate such deposits. For further information on the fair value of financial
instruments, see Note 23 to the consolidated financial statements.
19
TABLE 9
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES
THERE
(DOLLARS IN THOUSANDS) 2004 2005 2006 2007 2008 AFTER
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $ 173,170 $ 113,743 $ 90,067 $ 42,171 $ 39,082 $ 29,490
Average interest rate 6.50% 6.58% 7.21% 6.53% 6.59% 8.20%
Variable Rate:
Book Value $ 418,159 $ 12,470 $ 13,456 $ 3,174 $ 3,955 $ 469
Average interest rate 4.27% 5.44% 4.73% 5.33% 5.31% 5.69%
Securities held-to-maturity:
Fixed Rate:
Book Value $ 4,940 $ 6,671 $ 8,248 $ 4,450 $ 3,070 $ 2,108
Average interest rate 4.81% 4.54% 4.48% 4.39% 4.27% 4.71%
Variable Rate:
Book Value -- -- -- -- -- --
Average interest rate -- -- -- -- -- --
Securities available-for-sale:
Fixed Rate:
Book Value $ 95,355 $ 2,000 $ -- $ 13,403 $ 5,045 $ --
Average interest rate 4.26% 4.00% -- 3.26% 3.67% --
Variable Rate:
Book Value $ 6,719 -- -- -- -- --
Average interest rate 2.82% -- -- -- -- --
Federal funds sold $ 11,139 -- -- -- -- --
Average interest rate .99% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 708,482 $ 134,884 $ 111,771 $ 63,198 $ 51,152 $ 32,067
- -----------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Non-interest bearing-deposits $ 21,571 $ 21,571 $ 21,571 $ 21,571 $ 21,571 $ 61,337
Average interest rate N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking $ 114,353 $ 114,266 $ 59,677 $ 59,677 $ 59,085 $ --
Average interest rate 0.44% 0.44% 0.32% 0.32% 0.32% --
Time deposits $ 306,906 $ 37,744 $ 13,610 $ 6,443 $ 3,405 $ 2,000
Average interest rate 1.95% 2.37% 3.15% 3.93% 3.99% 4.51%
Federal funds purchased
and securities sold under
agreements to repurchase $ 80,967 -- -- -- -- --
Average interest rate 0.50% -- -- -- -- --
Notes payable $ 104 $ 109 $ 7,115 $ 3,121 $ 126 $ 41,475
Average interest rate 4.86% 4.86% 4.79% -- -- 4.96%
- -----------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 523,821 $ 173,690 $ 101,973 $ 90,812 $ 84,187 $ 104,812
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 185,661 $ (38,806) $ 9,798 $ (27,614) $ (33,035) $ (73,052)
Cumulative interest rate
sensitivity gap $ 185,661 $ 146,855 $ 156,653 $ 129,039 $ 96,004 $ 23,259
Cumulative interest rate
sensitivity gap as percent
of total financial assets 16.84% 13.32% 14.21% 11.70% 8.71% 2.11%
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES(CONTINUED)
FAIR
VALUE
(DOLLARS IN THOUSANDS) TOTAL 12-31-03
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $ 487,723 $ 489,244
Average interest rate 6.76%
Variable Rate:
Book Value $ 451,683 $ 452,163
Average interest rate 4.34%
Securities held-to-maturity:
Fixed Rate:
Book Value $ 29,487 $ 30,952
Average interest rate 4.53%
Variable Rate:
Book Value -- --
Average interest rate --
Securities available-for-sale:
Fixed Rate:
Book Value $ 115,803 $ 115,803
Average interest rate 3.95%
Variable Rate:
Book Value $ 6,719
Average interest rate 2.82%
Federal funds sold $ 11,139 $ 11,139
Average interest rate .99%
- --------------------------------------------------------------
Total Financial Assets $1,102,554 $1,106,020
- --------------------------------------------------------------
Financial Liabilities:
Non-interest bearing-deposits $ 169,192 $ 166,771
Average interest rate N/A
Interest-bearing
savings and checking $ 406,978 $ 401,925
Average interest rate 0.39% --
Time deposits $ 370,108 $ 372,266
Average interest rate 2.11% --
Federal funds purchased
and securities sold under
agreements to repurchase $ 80,967 $ 80,967
Average interest rate 0.50%
Notes payable $ 52,050 $ 60,041
Average interest rate 4.63%
- --------------------------------------------------------------
Total Financial Liabilities $1,079,295 $1,081,970
- --------------------------------------------------------------
Interest rate sensitivity gap $ 22,219 --
Cumulative interest rate
sensitivity gap
Cumulative interest rate
sensitivity gap as percent
of total financial assets
DEPOSITS
Customer deposits provide the Company with its primary source of funds for
the continued growth of its loan and investment securities portfolios. At
December 31, 2003, total deposits were $946,278,000, an increase of $48,115,000,
or 5.4 percent, from $898,163,000 at the end of 2002. The 2002 balance was
$86,640,000, or 10.7 percent, greater than total deposits at year-end 2001.
Noninterest-bearing accounts grew by $23,088,000, or 15.8 percent, for the year
ended December 31, 2003. Interest-bearing deposits were $777,086,000 at end of
2003, an increase of $25,027,000, or 3.3 percent, from one year earlier.
20
Average total deposits during 2003 were $946,746,000, an increase of
$91,523,000, or 10.7 percent, over 2002. Total average interest-bearing deposits
grew by $57,026,000, or 8.0 percent, led by a $34,025,000, or 19.9 percent,
increase in average interest-bearing transaction accounts. Average
noninterest-bearing demand deposits increased $34,497,000, or 24.9 percent. In
2002, total deposits averaged $855,210,000, an increase of $52,080,000, or 6.5
percent, compared with 2001. This increase was also mainly due to growth in
average interest-bearing transaction accounts of $26,089,000, 18.0 percent, and
an increase of $20,376,000, or 17.3 percent, noninterest-bearing deposits.
At December 31, 2003, the ratio of interest-bearing deposits to total
deposits was 82.1 percent, down slightly from 83.7 percent and 84.0 percent at
the end of 2002 and 2001, respectively.
TABLE 10
MATURITY DISTRIBUTION OF CD'S OF $100,000 OR MORE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002
Within three months $ 38,514 $ 48,982
After three through six months 37,853 35,579
After six through twelve months 35,636 45,581
After twelve months 22,299 19,380
- ------------------------------------------------------------------------------
Total $ 134,302 $ 149,522
==============================================================================
SHORT-TERM BORROWED FUNDS
The distribution of SCBT Financial Corporation's short-term borrowings at
the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below. Federal funds purchased and securities sold under agreement to
repurchase generally mature within one to three days from the transaction date.
Certain of the borrowings have no defined maturity date.
TABLE 11
DECEMBER 31
(DOLLARS IN THOUSANDS)
2003 2002 2001
AMOUNT RATE AMOUNT RATE AMOUNT RATE
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $ 80,967 0.45% $ 88,616 0.82% $ 66,617 1.52%
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 52,050 4.98% 49,500 5.03% 49,500 5.03%
- -------------------------------------------------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and
$ 86,185 0.63% $ 75,956 1.15% $ 70,852 3.44%
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 51,720 4.88% 49,500 5.03% 41,134 5.13%
- -------------------------------------------------------------------------------------------------------------------------------
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $ 101,991 $ 88,617 $ 91,820
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 63,500 49,500 50,500
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL AND DIVIDENDS
A strong shareholders' equity base has provided SCBT Financial Corporation
with support for its banking operations and opportunities for growth, while
ensuring sufficient resources to absorb the risks inherent in the business. As
of December 31, 2003, shareholders' equity was $112,349,000, or 9.4 percent, of
total assets. At year-end 2002 and 2001, shareholders' equity was $103,496,000,
or 9.0 percent, and $93,065,000, or 9.1 percent, of total assets, respectively.
21
The Company and its banking subsidiaries are subject to certain risk-based
capital guidelines that measure the relationship of capital to both balance
sheet and off-balance sheet risks. Risk values are adjusted to reflect credit
risk. Pursuant to guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to those promulgated by the Office of
the Comptroller of the Currency, Tier 1 capital must be at least 50 percent of
total capital and total capital must be eight percent of risk-weighted assets.
The Tier 1 capital ratio for SCBT Financial Corporation was 11.81 percent at
December 31, 2003, 11.67 percent at December 31, 2002 and 12.32 at the end of
2001. The total capital ratio for the Company was 13.06 percent, 12.92 percent
and 13.57 percent for the years ended December 31, 2003, 2002 and 2001,
respectively.
As an additional measure of capital soundness, the regulatory agencies have
prescribed a leverage ratio of total capital to total assets. The minimum
leverage ratio assigned to banks is between three and five percent and is
dependent on the institution's composite rating as determined by its regulators.
The leverage ratio for SCBT Financial Corporation was 9.13 percent at December
31, 2003, 8.70 percent at December 31, 2002 and 8.39 percent at yearend 2001.
The Company well exceeded all minimum ratio standards established by the
regulatory agencies.
SCBT Financial Corporation pays dividends to shareholders from funds
provided mainly by dividends from its subsidiary banks. Such bank dividends are
subject to certain regulatory restrictions and require the approval of the
Office of the Comptroller of the Currency in order to pay dividends in excess of
the banks' net earnings for the current year, plus retained net profits for the
preceding two years, less any required transfers to surplus. As of December 31,
2003, approximately $25,347,000 of the banks' retained earnings was available
for distribution to the Company as dividends without prior regulatory approval.
In 2003, the Company made shareholder dividend payments of $5,070,000 as
compared with $4,420,000 in 2002 and $4,000,000 in 2001. The dividend pay-out
ratios were 33.98 percent, 31.74 percent and 32.63 percent for the years 2003,
2002 and 2001, respectively. Earnings that are retained continue to be utilized
as a basis for loan and investment portfolio growth and in support of
acquisition or other business expansion opportunities.
NONINTEREST INCOME AND EXPENSE
Noninterest income provides significant alternate sources of revenue for the
Company that are especially important during periods of economic uncertainty
such as the nation has experienced the past three years. For the year ended
December 31, 2003, noninterest income was $22,915,000, an increase of
$5,067,000, or 28.4 percent, from 2002. In 2002, noninterest income was
$17,848,000, an increase of $4,168,000, or 30.5 percent, from 2001. In 2003,
noninterest income comprised 26.1 percent of total income from both interest and
noninterest sources. In 2002 and 2001, noninterest income was 20.8 percent and
15.5 percent, respectively, of total interest and noninterest income.
Service charges on deposit accounts were $11,537,000 in 2003, comprising
50.4 percent of total noninterest income, and representing a $638,000, or 5.9
percent increase over 2002. This increase was mainly due to strong deposit
growth during 2003. For the year ended December 31, 2002, service charges on
deposit accounts were $10,899,000, or 61.6 percent of total noninterest income.
This was a $3,149,000, or 40.6 percent, increase over 2001 and resulted from
deposit growth and new customer service programs.
During 2003, other service charges and fees increased by $4,429,000, or 63.7
percent, to $11,378,000, compared with 2002. For the year 2002, other service
charges and fees were up $1,589,000, or 29.6 percent, to $6,949,000, compared
with 2001. The increases in both 2003 and 2002 were mainly attributable to
higher origination fees earned on originations of fixed rate first mortgage
loans sold into the secondary market. The historically low interest rate
environment produced significant loan production increases in each of the past
three years. The results were especially strong in 2003, particularly in the
area of mortgage refinancing. Like many lending institutions, the Company
experienced a decrease in mortgage loan originations during the fourth quarter
of 2003, as refinance activity abated. While lending rates remain low by
historical measures in early 2004, the expectation is for mortgage loan
production to continue at a less robust pace than that experienced during the
second and third quarters of 2003.
The Company recognized a $570,000 gain on the sale of equity securities in
2001. No gains or losses on disposition of securities-available-for-sale were
recorded in either 2003 or 2002.
In 2003, noninterest expense was $48,715,000, an increase of $6,148,000, or
14.4 percent, from 2002. Noninterest expense was $42,567,000 in 2002, an
increase of $5,434,000, or 14.6 percent, compared with 2001.
Salaries and employee benefits were the largest component of noninterest
expense, comprising 58.9 percent and 56.7 percent of the category totals in 2003
and 2002, respectively. In 2003, salaries and employee benefits were
$28,670,000, an increase of $4,534,000, or 18.8 percent, over 2002. This
increase resulted from planned higher levels of salary, benefits and incentive
costs associated with increased staffing lev