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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, 2004
COMMISSION FILE NUMBER 000-13663
SCBT FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0799315
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
520 GERVAIS STREET
COLUMBIA, SOUTH CAROLINA 29201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 771-2265
(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 twelve (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 $211,503,000 based on the closing sale price of $30.15 per
share on June 30, 2004. 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 1, 2005 was
8,054,818.
Documents Incorporated by Reference
Portions of the Registrant's 2004 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Registrant's Proxy Statement for its
2005 Annual Meeting of Shareholders are incorporated by reference into Part III.
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Form 10-K Cross-Reference Index
PART I
Item 1. Business ...........................................................1
Item 2. Properties .........................................................7
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) ........................................9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk .........28
Item 8. Financial Statements and Supplementary Data .......................28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures .........................................59
Item 9a. Controls and Procedures ...........................................60
Item 9b. Other Information .................................................60
PART III
Item 10. Directors and Executive Officers of the Registrant (2) ............60
Item 11. Executive Compensation (2) ........................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters (2) ...............................61
Item 13. Certain Relationships and Related Transactions (2) ................61
Item 14. Principal Accountant Fees and Services (2) ........................61
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................62
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(1) All or portions of this item are incorporated by reference to the
Registrant's 2004 Annual Report to Shareholders.
(2) All or portions of this item are incorporated by reference to the
Registrant's Proxy Statement for its 2005 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 economic value of 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 two subsidiaries, namely South
Carolina Bank and Trust, N.A. (formerly First National Bank), a national bank
which opened for business in 1934, and 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. 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 moved its common stock listing
from the American Stock Exchange to The NASDAQ Stock Market and began trading
under the symbol "SCBT".
In December 2002, South Carolina Bank and Trust, N.A., acquired the
majority of the consumer loan portfolio and related assets of CreditSouth
Financial Services Corporation ("CreditSouth"), a former subsidiary of the
Company, 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 March 2004, the remaining CreditSouth loans totaling $123,000
were donated to South Carolina Bank and Trust, N.A. and CreditSouth was
subsequently dissolved.
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 South Carolina Bank
and Trust, N.A. in order to achieve certain operating efficiencies.
In February 2004, South Carolina Bank and Trust, N.A. purchased the
Denmark, South Carolina branch of Security Federal Bank, including premises and
equipment, certain loans and deposits. At the time of the transaction, South
Carolina Bank and Trust, N.A. vacated its existing leased Denmark office, moving
its operations to the newly acquired banking facility. In March 2004, South
Carolina Bank and Trust, N.A. 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 $782,000. In September 2004, South
Carolina Bank and Trust, N.A. opened two loan production offices - a Summerville
service facility, just north of Charleston, South Carolina, which was afterward
granted a charter to provide full service banking to its customers, and an
additional Fort Mill, South Carolina office serving the Tega Cay community near
Charlotte, North Carolina. In December 2004, South Carolina Bank and Trust, N.A.
opened a facility in Hilton Head, South Carolina, converting a loan production
office to full service status.
In April 2004, The Mortgage Banc ("TMB") was incorporated as a wholly owned
subsidiary of South Carolina Bank and Trust, N.A. TMB is focusing initially on
providing mortgage products and services to other financial institutions and
mortgage companies throughout the Southeast. TMB's offices and personnel are
located in the Company's headquarters facility in Columbia, South Carolina.
Also in April 2004, the credit card loan portfolios of both of the
Company's banking subsidiaries were sold for a pre-tax gain of $953,000.
In December 2004, the Company entered into an Agreement and Plan of Merger,
by and between the Company and New Commerce BanCorp ("NCB"), pursuant to which,
among other things, NCB will be merged with and into the Company. This agreement
permitted a restructuring and the parties entered into an amendment of the
initial agreement in January 2005 (as so amended, the "Agreement"). The
Agreement provides for the simultaneous acquisition of NCB and New
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Commerce Bank pursuant to (i) the merger (the "First Step Merger") of SCBT
Interim Corporation ("SCBT Interim"), a South Carolina corporation that is a
newly formed, wholly-owned subsidiary of South Carolina Bank and Trust, N.A.,
with and into NCB, (ii) immediately followed by the merger (the "Second Step
Merger") of NCB with and into South Carolina Bank and Trust, N.A., and (iii)
immediately followed by the merger (the "Bank Merger," and collectively with the
First Step Merger and the Second Step Merger, the "Mergers") of New Commerce
Bank with and into South Carolina Bank and Trust, N.A. New Commerce Bank will
cease to exist, and South Carolina Bank and Trust, N.A., will continue to
conduct the business and operations of New Commerce Bank. All of the Mergers
will take place simultaneously and on the same business day. New Commerce Bank
will not operate as a separate subsidiary of SCBT Financial Corporation.
Pursuant to the Agreement, South Carolina Bank and Trust, N.A. will pay an
aggregate purchase price in the merger of approximately $20.2 million in cash.
Consummation of the merger is subject to regulatory approval and the approval of
NCB's shareholders, along with other customary closing conditions. NCB, which
began operations in 1999, is the parent holding company of New Commerce Bank and
is headquartered in Greenville, South Carolina. New Commerce Bank has two branch
offices in the Mauldin and Simpsonville communities of Greenville County. NCB
had total assets of approximately $96 million as of December 31, 2004. The
transaction is anticipated to close in the second quarter of 2005.
In January 2003, the Company moved its principal executive offices to 520
Gervais Street, Columbia, South Carolina 29201. The Company's mailing address at
this facility is P.O. Box 1030, Columbia, South Carolina 29202, and its
telephone number is (800) 277-2175.
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. The Company considers that it has no
significant portion of its loans concentrated within a single industry or group
of related industries, although based on OCC regulatory criteria, it had credit
concentrations in loans to lessors of nonresidential buildings, loans to
religious organizations, and other activities related to real estate (See
"Concentration of Credit Risk" on page 34.) There are no material seasonal
factors that would have a material adverse effect on the Company. The Company
does not have any foreign loans.
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 twenty-nine
(29) financial centers in eleven (11) South Carolina counties. South Carolina
Bank and Trust of the Piedmont, N.A. conducts its business from five (5)
financial centers in one (1) South Carolina county. 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, 2004,
the Company's subsidiaries had five hundred thirteen (513) 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 incentive and deferred compensation plans for officers and key
employees, a defined benefit pension plan, and a 401(k) plan.
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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.
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 has determined to remain a bank holding company but may at some future
date seek to become a financial holding company.
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 so. 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.
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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.
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 riskbased
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, 2004, the
Company, South Carolina Bank and Trust, N.A., and South Carolina Bank and Trust
of the Piedmont, N.A. had leverage ratios of 8.05%, 7.96%, and 7.87%,
respectively, and total risk adjusted capital of 11.10%, 10.95%, and 10.12%,
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.
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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%, 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 at
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.
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
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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 fifteen (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 2005.
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 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 IMLAFA.
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 that depends largely 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 many banks' 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.
6
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 11 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 three others, which are used as branches and a loan production office.
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.
ITEM 3. LEGAL PROCEEDINGS
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
2004.
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert R. Horger (Age 54). Mr. Horger was named Chairman of the Company and
South Carolina Bank and Trust, N.A. in 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 48). Mr. Frierson has served as Vice Chairman of the
Company 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 38). Mr. Hill was named President and Chief
Executive Officer of the Company and South Carolina Bank and Trust, N.A. in
November 2004. Mr. Hill served as President and Chief Operating Officer of South
Carolina Bank and Trust, N.A. from May 2000 to November 2004. 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.
Richard C. Mathis (Age 54). 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.
John C. Pollok (Age 39). Mr. Pollok was named Chief Operating Officer of the
Company and South Carolina Bank and Trust, N.A. in November 2004. He served as
President of The Mortgage Banc, a subsidiary of South Carolina Bank and Trust,
N.A., from May 2004 to November 2004. Mr. Pollok served as Senior Executive Vice
President of the Company from February 2003 to May 2004. He served as Executive
Vice President and Chief Administrative Officer of South Carolina Bank and
Trust, N.A. from May 2000 to May 2004. He served as Executive Vice President of
the South Carolina Bank and Trust, N.A. mortgage division from July 1998 until
May 2000.
Joe E. Burns (Age 50). 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.
Thomas S. Camp (Age 53). Mr. Camp has served as President and Chief
Executive Officer of South Carolina Bank and Trust of the Piedmont, N.A. since
November 1998.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Certain information required by this item is incorporated herein by
reference to the information under the caption "Stock Performance and
Statistics" on page 24 of the 2004 Annual Report to Shareholders. As of
March 1, 2005, the Company had issued and outstanding 8,054,818 shares of
Common Stock which were held of record by approximately four thousand nine
hundred (4,900) persons. The Company's Common Stock is traded on the NASDAO
Stock Market under the symbol "SCBT".
Dividends are paid by the Company from its assets which are provided
primarily 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 retained 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, 2004,
approximately $26,508,000 of the Banks' retained earnings were available
for distribution to the Company as dividends without prior regulatory
approval. For the year ended December 31, 2004, the Banks paid dividends of
approximately $5,228,000 to the Company. The Company anticipates that it
will continue to pay comparable cash dividends in the future.
(b) Not Applicable
(c) The table below sets forth information regarding the Company's purchases of
its common stock during each of the twelve months in the year ended
December 31, 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number
of Shares (d) Maximum Number
(a) Total (b) Purchased as Part of Shares
Number of Average of Publicly that May Yet Be
Shares Price Paid Announced Plans Purchased Under the
Period Purchased per Share or Programs (1) Plans or Programs (1)
January 2004 (2) 14,760 $ 31.7000 -- 250,000
February 2004 -- -- -- 250,000
March 2004 3,075 $ 31.6945 3,075 246,925
April 2004 -- -- -- 246,925
May 2004 39,285 $ 29.2341 39,285 207,640
June 2004 18,300 $ 28.2246 18,300 189,340
July 2004 2,000 $ 28.0750 2,000 187,340
August 2004 27,854 $ 28.7748 27,854 159,486
September 2004 8,214 $ 29.9800 8,214 151,272
October 2004 3,400 $ 31.3154 3,400 147,872
November 2004 (2) 1,079 $ 33.9400 -- 147,872
December 2004 (2) 2,941 $ 36.8797 -- 147,872
Total 120,908 $ 29.6571 102,128 147,872
- --------------------------------------------------------------------------------
(1) On February 19, 2004, the Board of Directors approved a share repurchase
program under which the Company was authorized to acquire up to 250,000
shares of its outstanding common stock during 2004 and 2005. Shares
displayed in columns (c) and (d) reflect shares pursuant to this program.
(2) These shares were repurchased under arrangements, authorized by the
Company's stock-based compensation plans and the Board of Directors,
whereby officers or directors may deliver previously owned Company shares
to the Company in order to pay for the exercise price of stock options.
8
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 page 3 and page 25, respectively, of
the Company's 2004 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 2000 through 2004 is discussed with particular emphasis on the years
2002 through 2004. 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 ("CreditSouth"), a consumer finance company which
began operations in Orangeburg, South Carolina, in November 1998. As noted in
Part 1, Item 1, in December 2002, South Carolina Bank and Trust, N.A. acquired
the majority of CreditSouth's consumer loan portfolio and related assets, and
CreditSouth ceased operations. In March, 2004, the remaining loans and related
assets of CreditSouth were donated to South Carolina Bank and Trust, N.A. and
CreditSouth was dissolved.
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes to Consolidated Financial Statements for information relating to
recent accounting pronouncements.
EXECUTIVE SUMMARY
The year 2004 was a period in which several factors affected the Company's
performance. This overview should be read in conjunction with detailed financial
data in the following section, "Summary of Operations." Organic growth was
strong, as total loans net of unearned income increased approximately 23% in
2004 while total deposits increased approximately 24%. Early in 2004, the
Company focused on growth in order to increase the balance of earning assets and
thereby increase net interest income. Management anticipated correctly that the
continuing low level of interest rates would negatively impact the Company's
interest rate spread between yields on earning assets and rates on deposits and
other funding sources. The increased interest income from higher levels of loans
and investment securities was expected to mitigate a decline in the net interest
margin. Consequently, the Company increased loans in nearly all sectors except
consumer installment loans. By the third quarter, the growth in assets had begun
to outpace the growth in deposits, and management decided to institute a
deposit-gathering campaign. In order to attract some intermediate-term deposits
at a point in time near the beginning of the Federal Reserve's program of rate
hikes to increase the federal funds target rate, the Company began to offer
approximately 1-1/2-year to 3-year term certificates of deposit at locally
competitive rates. Additionally, in markets where the Company's market
penetration was relatively low, it offered an attractive 3% money market deposit
account product. The intent was to attract new customers and create
opportunities to cross-sell other products. These deposit campaign products had
a moderately dampening effect on net interest margins in the third quarter.
Additional factors that influenced the Company's performance in 2004 were
the sale of a branch in Cameron, SC; the purchase and in-market consolidation of
a branch in Denmark, SC; and the sale of the Company's credit card loan
portfolio. SCBT realized a pre-tax gain of $782,000 in the Cameron transaction;
had expenses of $97,000 in the Denmark transaction; and realized a pre-tax gain
of $953,000 in the credit card portfolio sale. The gain on the credit card
portfolio sale was partially offset by reserves totaling $486,000 before taxes
for certain expected professional fees, personnel relocation, property tax, and
other expenses. The combination of these non-recurring factors served to
increase both noninterest income and non-interest expenses.
9
Another non-interest income factor influencing performance was the decline
in secondary market mortgage market activity in 2004 from 2003. While some
mortgage lenders saw declines of 50%-60% in this activity, the Company's
secondary market fee income declined approximately 44% from the historically
high level in 2003.
Altogether, 2004 was a strong year for fundamental growth accompanied by
increased loan loss provisions (approximately $2 million higher in 2004 compared
to 2003) to track the growth, moderately declining net interest margins in a
continued historically-low interest rate environment, and diminished secondary
market mortgage activity from all-timehigh levels in 2003. These factors were
the primary contributors to a $770,000, or 5.2 percent, decline in net income
from 2003 to 2004's level of $14,016,000. A rising interest rate environment
could be a positive factor for the Company's performance going forward, as the
Company continues to have a moderately asset sensitive posture, as discussed
beginning on page 21 in the section entitled "Asset-Liability Management and
Market Risk Sensitivity".
SUMMARY OF OPERATIONS
In the following analyses, all per share data have been retroactively
adjusted to give effect to a ten percent stock dividend paid to shareholders of
record as of November 22, 2002 and a five percent stock dividend paid to
shareholders of record as of December 20, 2004.
SCBT Financial Corporation reported net income of $14,016,000 in 2004,
compared with $14,786,000 and $13,834,000 in 2003 and 2002, respectively. This
represents an earnings decrease of 5.2 percent in 2004 when compared to 2003,
following an increase of 6.9 percent in 2003 compared with 2002. Basic earnings
per share decreased to $1.74 in 2004 compared with $1.83 in 2003, which was an
increase from $1.72 in 2002. Similarly, diluted earnings per share were $1.72,
$1.82, and $1.71 in 2004, 2003 and 2002, respectively.
The book value of the Company's common stock increased to $14.77 in 2004,
compared to $13.91 in 2003 and $12.85 in 2002. The return on average assets was
1.05 percent in 2004, compared with 1.23 percent in 2003 and 1.28 percent in
2002. The return on average shareholders' equity was 12.20 percent in 2004,
13.72 percent in 2003 and 14.09 percent in 2002.
Total earning assets (reflecting strong loan growth) and total deposits
increased throughout 2004. At December 31, 2004, total earning assets were
$1,351,871,000, an increase of 21.3 percent over $1,114,252,000 at year-end
2003, which was 4.4 percent more than the $1,067,549,000 at the end of 2002. In
2004, average earnings assets were $1,240,369,000, which was $116,792,000, or
10.4 percent, greater than $1,123,037,000 in 2003, which was $101,698,000, or
9.9 percent, over $1,022,339,000 in 2002.
At December 31, 2004, total deposits were $1,171,313,000, an increase of
23.6 percent from $947,399,000 at the end of 2003. The 2003 balance was 5.5
percent greater than $898,163,000 at the end of 2002. Total deposits averaged
$1,059,993,000 in 2004, an increase of 11.9 percent over $946,919,000 in 2003,
which was a 10.7 percent increase over the 2002 average of $855,223,000.
For the year ended December 31, 2004, total interest income was $67,908,000,
an increase of 4.7 percent from $64,854,000 in 2003. This increase was mainly
volume related, primarily the result of strong loan growth. In 2003, total
interest income decreased $2,470,000, or 3.7 percent, compared with $67,324,000
in 2002. This 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.
Total interest expense was $14,643,000 for the year 2004, a slight $21,000
increase over $14,622,000 in 2003. Total interest expense decreased $4,130,000,
or 22.0 percent, in 2003 from $18,752,000 in 2002. This resulted from a 63 basis
point decrease in the rate paid on total interest-bearing liabilities.
In February 2004, the Company's Board of Directors authorized a program with
no formal expiration date to repurchase up to 250,000 of its common shares in
2004 and 2005. Pursuant to this and earlier such programs, during the years
ended December 31, 2004, 2003 and 2002, the Company repurchased 120,908, 2,100
and 12,402 shares, respectively, at a cost of $3,590,000, $53,000 and $265,000,
respectively. During 2004, the Company redeemed 18,780 of its shares from four
officers at an average cost of $32.64 under an approved program designed to
facilitate stock option exercises under the Company's stock option plans. These
shares are included in the 120,908 shares repurchased in 2004.
10
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.
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 noninterestbearing, utilized to support earning assets. Net
interest margin is distinguished by the inclusion of the impact of interest free
funds.
Net interest income was $53,265,000 in 2004, an increase of $3,033,000, or
6.0 percent over 2003. This increase was all volume related, as total average
earning assets grew by $116,792,000, or 10.4 percent. A significant offset to
the strong earning assets growth was the continuing low level of interest rates
in general as the net interest spread decreased by 16 basis points, from 4.17
percent in 2003 to 4.01 percent in 2004. Net interest income in 2003 was
$50,232,000, an increase of $1,660,000, or 3.4 percent, from the previous year.
Similar to 2004, this increase was basically volume driven as total average
earning assets grew $100,698,000, or 9.9 percent. A 20 basis point decrease in
the net interest spread from 2002 partially offset the impact of strong earning
asset growth, reflecting a greater decline in rates earned on earning assets as
compared with rates paid on interest-bearing liabilities.
As a result of the continued historically low interest rate environment
throughout most of 2004, the net interest margin (taxable equivalent) decreased
19 basis points to 4.37 percent compared with 2003. Contributing to this decline
was a two basis point decrease in the impact of interest free funds. The taxable
equivalent net interest margin was 4.56 percent in 2003, a decrease of 28 basis
points from 2002. This was basically attributable to the aforementioned low
interest rate environment.
11
Table 1
Volume and Rate
Variance Analysis
2004 Compared to 2003 2003 Compared to 2002
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) $ 7,116 $ (4,132) $ 2,984 $ 9,763 $ (9,436) $ 327
Investments:
Taxable (96) 270 174 (1,522) (802) (2,324)
Tax exempt (3) (224) (50) (274) (54) (406) (460)
Funds sold 207 (151) 56 (31) 6 (25)
Interest -bearing deposits with banks 61 53 114 40 (28) 12
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 7,064 (4,010) 3,054 8,196 (10,666) (2,470)
==========================================================================================================================
Interest expense on:
Deposits:
Interest-bearing transaction accounts
96 (120) (24) 163 (218) (55)
Savings accounts 305 829 1,134 101 (1,199) (1,098)
Certificates of deposit (45) (1,377) (1,422) 490 (3,164) (2,674)
Funds purchased 27 115 142 118 (451) (333)
Notes payable 337 (146) 191 112 (82) 30
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 720 (699) 21 984 (5,114) (4,130)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,344 $ (3,311) $ 3,033 $ 7,212 $ (5,552) $ 1,660
==========================================================================================================================
- --------------------------------------------------------------------------------
(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.
12
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2004
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 1,057,813 $ 61,267 5.79%
Investment securities:
Taxable
127,370 4,856 3.81
Tax exempt 33,417 1,472 4.40
Funds sold 11,156 138 1.24
Interest-earning deposits with banks 10,613 175 1.65
----------- -----------
Total earning assets 1,240,369 67,908 5.47
----------- -----------
Cash and other assets 101,796
Less allowance for loan losses (13,026)
-----------
Total assets $ 1,329,139
===========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 230,749 $ 739 0.32%
Savings 229,545 2,120 0.92
Certificates of deposit 391,542 8,384 2.14
Funds purchased 90,445 687 0.76
Notes payable 58,630 2,713 4.63
----------- -----------
Total interest-bearing liabilities 1,000,911 14,643 1.46
----------- -----------
Demand deposits 208,157
Other liabilities 5,191
Shareholders' equity 114,880
-----------
Total liabilities and shareholders' equity $ 1,329,139
===========
Net interest spread 4.01
Impact of interest free funds 0.28
-----------
Net interest margin (non-taxable equivalent) 4.29%
Net interest income $ 53,265 ===========
===========
13
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2003
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 942,717 $ 58,283 6.18%
Investment securities:
Taxable
130,048 4,682 3.60
Tax exempt 38,339 1,746 4.55
Funds sold 6,605 82 1.24
Interest-bearing deposits with banks 5,328 61 1.14
----------- -----------
Total earning assets 1,123,037 64,854 5.77
----------- -----------
Cash and other assets 86,455
Less allowance for loan losses (11,214)
-----------
Total assets $ 1,198,278
===========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 205,077 $ 763 0.37%
Savings 175,347 986 0.56
Certificates of deposit 393,365 9,806 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 173,130
Other liabilities 5,688
Shareholders' equity 107,766
-----------
Total liabilities and shareholders' equity $ 1,198,278
===========
Net interest spread 4.17
Impact of interest free funds 0.30
-----------
Net interest margin (non-taxable equivalent) 4.47%
Net interest income $ 50,232 ===========
===========
14
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2002
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 806,801 $ 57,956 7.18%
Investment securities:
Taxable
166,128 7,006 4.22
Tax exempt 39,302 2,206 5.61
Funds sold 7,162 107 1.49
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 $ 818 0.48%
Savings 167,268 2,084 1.25
Certificates of deposit 378,443 12,480 3.30
Funds purchased 75,956 878 1.16
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 (non-taxable equivalent) 4.76%
Net interest income $ 48,572 ===========
===========
15
INVESTMENT SECURITIES
The second largest category of earning assets is investment securities,
which are used to provide liquidity, employ excess funds, pledge as collateral
for certain public funds deposits and purchased funds, and may be liquidated in
some instances to provide cash to fund earning asset growth or replace deposits.
At December 31, 2004, investment securities were $165,446,000 or 12.3 percent of
earning assets, compared with $152,009,000, or 13.6 percent of earning assets at
the end of 2003. 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 $1,175,000 in 2004, a decrease of
$208,000, or 15.0 percent, from the $1,383,000, earned in 2003. The decrease was
due to an average portfolio balance that was $4,475,000, or 14.6 percent, less
than the balance in 2003. Contributing to a lesser extent was a three basis
point decrease in yield from year to year. In 2003, this portfolio segment
earned $118,000, or 7.9 percent less than 2002 interest of $1,501,000. This
decrease was due primarily 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 the average yield from 2002 to 2003. The
average maturity of the held to maturity portfolio was 1.8 years, 2.4 years and
3.2 years at December 31, 2004, 2003 and 2002, respectively.
Securities available for sale consist mainly of U.S. Government Agency and
mortgage-backed securities. In 2004, interest earned on this portfolio was
$5,154,000, compared with $5,047,000, including $67,000 earned on money market
investments in 2003. The overall increase of $107,000, or 2.1 percent, was the
result of a 16 basis point increase in the average earning rate partially offset
by a $3,125,000, or 2.3 percent average balance decline from year to year.
Average earning rates on available-for-sale securities were 3.83 percent during
2004, as compared to 3.67 percent in 2003. Average outstanding balances were
$137,637,000 in 2004. In 2003, earnings from this segment of the investment
securities portfolio were $2,664,000, or 34.6 percent less than the $7,711,000
earned in 2002. This 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 in 2003, 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.
At December 31, 2004, the fair value of the investment securities portfolio
was $166,248,000, or 0.5 percent higher than the carrying value, including the
effect of a $802,000 higher market value of held-to-maturity securities,
compared to their amortized cost. The differences between fair and carrying
values at December 31, 2003 and 2002 were also favorable at $1,465,000, or 1.0
percent and $1,833,000, or 1.1 percent, respectively. At December 31, 2004,
investment securities with an amortized cost of $134,842,000 and fair value of
$135,058,000 were classified as available for sale. The positive adjustment of
$216,000 to the carrying value of these securities has been reflected, net of
tax, in the consolidated balance sheets as accumulated other comprehensive
income. At December 31, 2004, investment securities (principally Federal Reserve
Bank stock and Federal Home Loan Bank of Atlanta stock, each with no readily
determinable market value) with an amortized cost and fair value of $5,784,000
were classified as other investments. The Company realized a net gain on the
disposition of investment securities of less than $1,000 in 2004 and no gains or
losses in either 2003 or 2002.
16
Table 3
Book Value of Investment Securities
December 31,
(Dollars in thousands) 2004 2003 2002 2001 2000
Held to Maturity
U.S. Treasury and other U.S. Government agencies -- -- -- -- --
Mortgage-backed -- -- 51 247 --
State and municipal 24,604 29,487 33,160 34,767 38,550
- --------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 24,604 29,487 33,211 35,014 38,550
- --------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury and other U.S. Government agencies 25,185 25,453 45,859 44,265 93,479
Mortgage-backed 94,664 78,560 74,694 101,728 46,726
Corporate bonds 10,300 6,500 -- -- --
Corporate stocks 4,909 6,734 6,414 4,360 289
- --------------------------------------------------------------------------------------------------------------------
Total Available for Sale 135,058 117,247 126,967 150,353 140,494
- --------------------------------------------------------------------------------------------------------------------
Total Other Investments 5,784 5,275 4,773 4,566 4,154
- --------------------------------------------------------------------------------------------------------------------
Total Investment Securities $165,446 $152,009 $164,951 $189,933 $183,198
====================================================================================================================
Table 4
Maturity Distribution and Yields of Investment Securities
Due in Due After Due After Due After
December 31, 2004 1 Yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value Value
Held to Maturity
State and municipal 5,588 6.80% 16,133 6.48% 2,883 7.57% -- 0.00% 24,604 6.68% 24,535 25,406
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 5,588 6.80% 16,133 6.48% 2,883 7.57% -- 0.00% 24,604 6.68% 24,535 25,406
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury and U.S.
Government agencies 4,981 3.42% 20,204 3.75% -- 0.00% -- 0.00% 25,185 3.69% 25,400 25,185
Mortgage-backed -- 0.00% 76,645 4.14% 18,019 4.24% -- 0.00% 94,664 4.16% 94,034 94,664
Corporate bonds -- 0.00% -- 0.00% -- 0.00% 10,300 3.96% 10,300 3.96% 10,300 10,300
Corporate stocks (1) -- 0.00% 4,000 5.74% -- 0.00% 909 0.97% 4,909 4.86% 4,909 4,909
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 4,981 3.42% 100,849 4.13% 18,019 4.24% 11,209 3.72% 135,058 4.08% 134,643 135,058
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Investments (1) -- 0.00% -- 0.00% -- 0.00% 5,784 4.14% 5,784 4.14% 5,784 5,784
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10,569 5.20% 116,982 4.45% 20,902 4.70% 16,993 3.86% 165,446 4.47% 164,962 166,248
====================================================================================================================================
Percent of Total 6% 71% 13% 10%
Cumulative Percent of Total 6% 77% 90% 100%
- --------------------------------------------------------------------------------
(1) Federal Reserve Bank and other corporate stocks have no set maturity date
and are classified in "Due after 10 years."
17
LOAN PORTFOLIO
Loans held for investment, net of unearned income, the largest category of
earning assets, were $1,153,230,000 at December 31, 2004, an increase of
$214,470,000, or 22.8 percent, compared to $938,760,000 at the end of 2003.
Average loans outstanding during 2004 were $1,057,813,000, an increase of
$115,096,000, or 12.1 percent, over the 2003 average of $942,717,000.
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
December 31, 2004, real estate mortgage loans were $846,694,000, and comprised
73.4 percent of the total loan portfolio. This was an increase of $168,465,000,
or 24.8 percent, over year-end 2003. Commercial, financial, agricultural and
other loans were $161,442,000, representing 14.0 percent of all loans at
December 31, 2004. This category increased $28,387,000, or 21.3 percent,
compared to the balance at the end of 2003. Consumer installment loans,
comprising $104,179,000, or 9.1 percent of the loan portfolio at December 31,
2004, increased 2.4 percent from the previous year.
Loan interest income, including fees, was $61,267,000 in 2004, an increase
of $2,984,000, or 5.1 percent, over 2003 earnings of $58,283,000. The increase
was mainly the result of the substantial increase in the total average
outstanding loan balance in 2004 compared with 2003, while overall yields were
lower. The average loan portfolio yield in 2004 was 5.79, or 39 basis points
lower than 6.18 percent in 2003. Interest and fee income for 2003 was 0.6
percent above the 2002 income of $57,956,000, as strong loan growth was largely
offset by the continued decline in lending rates, reflecting the historically
low interest rate environment. The average loan yield in 2003 was 100 basis
points below the 2002 yield of 7.18 percent. Table 6 shows the maturity and
interest rate sensitivity of the loan portfolio at December 31, 2004. Loans that
mature in one year or less were $208,265,000, or 17.8 percent of total loans. Of
the loans due after one year, 506,571,000 or 53.6 percent, had fixed interest
rates, compared with variable rate loans of $438,571,000, or 46.4 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 that
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become one hundred twenty (120) days past due.
Unsecured commercial loans are charged off on or before the date they become
ninety (90) days past due and, therefore, do not reach nonaccrual status.
Commercial and real estate loans that are partially secured are written down to
the collateral value and placed on nonaccrual status on or before becoming
ninety (90) days past due. Closed end consumer loans are charged off or written
down to the contractual value on or before becoming one hundred twenty (120)
days past due. Open end consumer loans are charged off or written down to the
contractual value on or before becoming one hundred eighty (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 against the allowance for loan losses. At
December 31, 2004, nonaccrual loans were $2,429,000, compared with $4,669,000 at
year-end 2003. At December 31, 2004, loans that were 90 days or more past due
and still accruing were $840,000 compared to $2,082,000 at the end of 2003.
Interest income that was foregone was an immaterial amount for each of the
three years ended December 31, 2004. The Company does not have any loans that
have been restructured or any foreign loans.
The Company attempts to avoid making loans that, in an aggregate amount,
exceed 10 percent of total loans to a multiple number of borrowers engaged in
similar business activities which could cause these aggregated loans to be
similarly impacted by economic or other conditions. As of December 31, 2004,
there were no such aggregated credit concentrations.
The level of risk elements in the loan portfolio for the past five years is
shown in Table 7.
18
19
TABLE 5
DISTRIBUTION OF NET LOANS
BY TYPE
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Commercial, financial,
agricultural and other $ 161,442 $ 133,055 $ 149,385 $ 118,819 $ 103,468
Real estate - construction 40,915 26,511 40,338 37,709 32,256
Real estate - mortgage 846,694 678,229 562,179 475,110 471,772
Consumer 104,179 100,965 111,520 116,442 120,194
- ------------------------------------------------------------------------------------------------------------------------------
Total loans net of unearned income $ 1,153,230 $ 938,760 $ 863,422 $ 748,080 $ 727,690
==============================================================================================================================
Percent of Total
Commercial, financial,
agricultural and other 14.0% 14.2% 17.3% 15.9% 14.2%
Real estate - construction 3.5 2.8 4.7 5.0 4.4
Real estate - mortgage 73.4 72.2 65.1 63.5 64.8
Consumer 9.1 10.8 12.9 15.6 16.6
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==============================================================================================================================
TABLE 6
MATURITY DISTRIBUTION OF LOANS
DECEMBER 31, 2004 MATURITY
1 YEAR 1 - 5 OVER 5
(DOLLARS IN THOUSANDS) TOTAL OR LESS YEARS YEARS
Commercial, financial
agricultural and other $ 161,442 $ 57,627 $ 94,428 $ 9,387
Real estate - construction 40,915 9,456 8,167 23,292
Real estate - mortgage 846,694 130,445 481,798 234,451
Consumer 104,179 10,737 91,662 1,780
- ------------------------------------------------------------------------------------------------------------------
Total $ 1,153,230 $ 208,265 $ 676,055 $ 268,910
==================================================================================================================
Loans due after one year with:
Predetermined interest rates $ 506,394
Floating or adjustable interest rates $ 438,571
ASSET QUALITY
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment securities or loan
portfolio, is reviewed by management for credit risk. To facilitate this review,
SCBT Financial Corporation has established credit and investment policies that
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, 2004 and
2003, 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 used. 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. Government 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 0.15 percent in 2004, compared with 0.19 percent in 2003 and
0.25 percent in 2002. See "Loans" for a discussion of the Company's chargeoff
and nonaccrual policies.
19
TABLE 7
NONACCRUAL AND PAST DUE LOANS
DECEMBER 31
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Loans past due 90 days or more $ 840 $ 2,082 $ 1,729 $ 1,561 $ 1,838
Loans on a nonaccruing basis 2,429 4,669 3,010 3,317 1,481
- ----------------------------------------------------------------------------------------------------------------------
Total $ 3,269 $ 6,751 $ 4,739 $ 4,878 $ 3,319
======================================================================================================================
TABLE 8
SUMMARY OF LOAN
LOSS EXPERIENCE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Allowance for loan losses - January 1 $ 11,700 $ 11,065 $ 9,818 $ 8,922 $ 7,886
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (2,008) (2,410) (2,236) (1,808) (1,004)
Total recoveries 446 700 256 400 202
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,562) (1,710) (1,980) (1,408) (802)
Provision for loan losses 4,332 2,345 3,227 2,304 1,838
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - December 31 $ 14,470 $ 11,700 $ 11,065 $ 9,818 $ 8,922
===================================================================================================================================
Average loans - net of unearned income $ 1,043,471 $ 899,421 $ 792,594 $ 732,587 $ 680,217
Ratio of net charge-offs to average
loans - net of unearned income 0.15% 0.19% 0.25% 0.19% 0.12%
LOAN LOSS PROVISION
The Company maintains an allowance for loan losses at a level that
management believes is sufficient to provide for potential losses in the loan
portfolio. Management periodically evaluates the adequacy of the allowance
through 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, 2004 was
$4,332,000, compared with $2,345,000 in 2003 and $3,227,000 in 2002. The higher
provision in 2004 reflects management's close attention to asset quality and
response to strong loan growth throughout the year. The allowance for loan
losses was $14,470,000 at December 31, 2004, or 1.25 percent of total loans, net
of unearned discount, compared with $11,700,000, or 1.25 percent of total net
loans at the end of 2003. Total charge-offs were $2,008,000 in 2004, a decrease
of $402,000, or 16.7 percent, from 2003. Recoveries of loans previously charged
off were $446,000, a decrease of $254,000, or 36.3 percent from the previous
year.
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, 2004 and December 31, 2003, other
real estate owned was $1,712,000 and $1,465,000, respectively.
Improvements in the national economy in 2004 enabled the Federal Reserve to
initiate several one-quarter point upward adjustments in short-term interest
rates. Most predictions for 2005 appear similarly disposed toward a continued
gradual upturn. In South Carolina, meanwhile, business activity has been more
restrained, mainly due to job losses in certain sectors and continued concern
over the overall rate of employment. In this environment, management expects
loan charge off levels in the coming months to be similar to those experienced
during 2004. 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 Company's allowance for loan losses to be adequate.
20
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, six percent of the investment portfolio contractually 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 used 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 shortterm 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 2004, the Company maintained a prudent level of liquidity
through growth in interestbearing 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
The Securities and Exchange Commission has adopted rules that require
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 currently employ
financial derivatives, nor does it maintain a trading portfolio.
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 guideline 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, 2004, the
earnings simulations indicated that the impact of a 200 basis point decrease in
rates over 12 months would result in an approximate 7.5 percent decrease in net
interest income while a 200 basis point increase in rates over the same period
would result in an approximate 4.6 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 moderately
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 0.25 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 current 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. The shape of the fixed-income yield
curve can also influence interest rate risk sensitivity, with a "flat" yield
curve having a dampening effect on the Company's asset sensitivity.
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
21
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
non-interest-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 in 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 that are subject to repricing.
Cumulatively thereafter through 4 additional 12-month time horizons, there are
generally more financial liabilities than financial assets with repricing
opportunities. However, the Company has a cumulatively positive interest rate
gap for the 5-year aggregate period. The degree of magnitude of rate repricings
of the financial assets and liabilities is, as mentioned above, not accounted
for by a static gap analysis such as that 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, 2004 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.
22
TABLE 9
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES
FAIR
THERE VALUE
(DOLLARS IN THOUSANDS) 2005 2006 2007 2008 2009 AFTER TOTAL 12-31-04
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $169,243 $122,973 $127,267 $ 78,819 $ 60,053 $ 31,081 $589,436 $583,253
Average interest rate 6.14% 5.99% 5.69% 5.96% 5.78% 6.92% 5.99%
Variable Rate:
Book Value $499,023 $ 22,658 $ 12,775 $ 14,959 $ 13,185 $ 511 $563,111 $561,372
Average interest rate 5.27% 4.75% 4.76% 5.41% 5.44% 6.11% 5.24%
Securities held to maturity:
Fixed Rate:
Book Value $ 6,848 $ 8,297 $ 3,760 $ 2,563 $ 2,035 $ 1,101 $ 24,604 $ 25,406
Average interest rate 4.19% 4.92% 4.32% 4.27% 4.20% 5.14% 4.51%
Variable Rate:
Book Value -- -- -- -- -- -- -- --
Average interest rate -- -- -- -- -- -- --
Securities available for sale:
Fixed Rate:
Book Value $ 29,613 $ 24,113 $ 22,989 $ 20,923 $ 18,626 $ 8,334 $124,598 $124,415
Average interest rate 4.27% 4.01% 3.59% 3.35% 4.13% 4.20% 3.91%
Variable Rate:
Book Value $ 10,461 -- -- -- -- $ 10,461 $ 10,461
Average interest rate 3.95% -- -- -- -- -- 3.95%
Other investments:
Fixed Rate:
Book Value $ -- $ -- $ -- $ -- $ 1,046 $ -- $ 1,046 $ 1,046
Average interest rate 0.00% 0.00% 0.00% 0.00% 6.00% 0.00% 6.00%
Variable Rate:
Book Value $ 4,737 -- -- -- -- $ 4,737 $ 4,737
Average interest rate 3.63% -- -- -- -- -- 3.63%
Federal funds sold $ 17,876 -- -- -- -- -- $ 17,876 $ 17,876
Average interest rate 1.98% -- -- -- -- -- 1.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $737,801 $178,041 $166,791 $117,264 $ 94,945 $ 41,027 $1,335,869 $1,328,566
====================================================================================================================================
Financial Liabilities:
Non-interest bearing-deposits $ 28,403 $ 28,403 $ 28,403 $ 28,403 $ 28,403 $ 82,742 $224,757 $204,705
Average interest rate N/A N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking $177,584 $177,584 $ 59,038 $ 59,038 $ 58,559 $ -- $531,803 $516,575
Average interest rate 1.30% 1.30% 0.30% 0.30% 0.30% -- 0.97% --
Time deposits $285,487 $ 79.991 $ 39,636 $ 3,975 $ 3,405 $ 2,989 $415,483 $415,297
Average interest rate 2.12% 2.83% 3.72% 3.50% 3.55% 3.86% 2.45% --
Federal funds purchased
and securities sold under
agreements to repurchase $ 89,208 -- -- -- -- -- $ 89,208 $ 89,208
Average interest rate 1.42% -- -- -- -- -- 1.42%
Notes payable $ 123 $ 7,125 $ 127 $ 3,128 $ 10,130 $ 31,295 $ 51,928 $ 55,952
Average interest rate 4.94% 4.79% 4.93% 5.49% 4.92% 4.54% 4.71% --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $580,805 $293,103 $127,204 $ 94,544 $100,497 $117,026 $1,313,179 $1,281,737
====================================================================================================================================
Interest rate sensitivity gap $156,996 $(115,062) $ 39,587 $ 22,720 $ (5,552) $(75,999) $ 22,690
Cumulative interest rate
sensitivity gap $156,996 $ 41,934 $ 81,521 $104,241 $ 98,689 $ 22,690
Cumulative interest rate
sensitivity gap as percent
of total financial assets 11.75% 3.14% 6.10% 7.80% 7.39% 1.70%
23
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, 2004, total deposits were $1,171,313,000, an increase of
$223,914,000 or 23.6 percent, from $947,399,000 at the end of 2003. The 2003
balance was $49,236,000, or 5.2 percent, greater than total deposits at year-end
2002. Noninterest-bearing accounts grew by $53,714,000, or 31.5 percent, for the
year ended December 31, 2004. Interest-bearing deposits were $947,286,000 at end
of 2004, an increase of $170,200,000, or 21.9 percent, from one year earlier.
Contributing to these increases was a corporate-wide free checking deposit
campaign to increase new account activity which resulted in 10,771 new personal
accounts and 2,512 new business checking accounts. This represents a 42%
increase in new checking account activity from 2003.
Average total deposits during 2004 were $1,059,942,000, an increase of
$113,070,000, or 11.9 percent, over 2003. Total average interest-bearing
deposits grew by $78,047,000, or 10.1 percent, led by a $25,679,000, or 12.5
percent, increase in average interest-bearing transaction accounts. Average
noninterest-bearing demand deposits increased $34,976,000, or 20.2 percent. In
2003, total deposits averaged $946,919,000, an increase of $91,696,000, or 10.7
percent, compared with 2002. This increase was also mainly due to growth in
average interest-bearing transaction accounts of $34,025,000, 19.9 percent, and
an increase of $34,670,000, or 25.0 percent, in noninterest-bearing deposits.
At December 31, 2004, the ratio of interest-bearing deposits to total
deposits was 80.4 percent, down slightly from 81.7 percent and 83.8 percent at
the end of 2003 and 2002, respectively.
TABLE 10
MATURITY DISTRIBUTION OF CD'S OF $100,000 OR MORE
DECEMBER 31 2004 2003
(DOLLARS IN THOUSANDS)
Within three months $ 35,032 $ 38,514
After three through six months 21,342 37,853
After six through twelve months 49,774 35,636
After twelve months 50,830 22,299
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Total $ 156,978 $ 134,302
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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 most typically have maturities 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)
2004 2003 2002
AMOUNT RATE AMOUNT RATE AMOUNT RATE
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $ 89,208 1.43% $ 80,967 0.45% $ 88,616 0.82%
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Other borrowings 51,928 5.03% 52,050 4.98% 49,500 5.0