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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 000-13663
SCBT FINANCIAL CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0799315
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
520 GERVAIS STREET
COLUMBIA, SOUTH CAROLINA 29201
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 771-2265
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK - $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $173,284,000 based on the closing sale price of $24.66 per
share on June 30, 2003. For purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of common stock outstanding as of March 2, 2004 was
7,720,033.
Documents Incorporated by Reference
Portions of the Registrant's 2003 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Registrant's Proxy Statement for its
2004 Annual Meeting of Shareholders are incorporated by reference into Part III.
Page
Form 10-K Cross-Reference Index
PART I
Item 1. Business ............................................................1
Item 2. Properties...........................................................6
Item 3. Legal Proceedings ...................................................7
Item 4. Submission of Matters to a Vote of Security Holders..................7
PART II
Item 5. Market for the Registrant's Common Equity Related Stockholder
Matters and Issuer Purchases of Equity Securities (1) ...............8
Item 6. Selected Financial Data (1)..........................................8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................8
Item 7a. Quantitative and Qualitative Disclosure about Market Risk...........24
Item 8. Financial Statements and Supplementary Data ........................25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures...............................................53
Item 9A. Controls and Procedures.............................................56
PART III
Item 10. Directors and Executive Officers of the Registrant (2)..............56
Item 11. Executive Compensation (2)..........................................56
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters (2).................................57
Item 13. Certain Relationships and Related Transactions (2)..................57
Item 14. Principal Accountant Fees and Services (2)..........................57
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....57
(1) All or portions of this item are incorporated by reference to the
Registrant's 2003 Annual Report to Shareholders.
(2) All or portions of this item are incorporated by reference to the
Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders.
FORWARD LOOKING STATEMENTS
Statements included in this report, including in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which are not
historical in nature are intended to be, and are hereby identified as, forward
looking statements for purposes of the safe harbor provided by Section 21E of
the Securities Exchange Act of 1934, as amended. SCBT Financial Corporation
cautions readers that forward looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
forecasted results. Such risk factors include, among others, the following
possibilities: (1) Credit risk associated with an obligor's failure to meet the
terms of any contract with the bank or otherwise fail to perform as agreed; (2)
Interest rate risk involving the effect of a change in interest rates on both
the bank's earnings and the market value of portfolio equity; (3) Liquidity risk
affecting the bank's ability to meet its obligations when they come due; (4)
Price risk focusing on changes in market factors that may affect the value of
traded instruments in mark-to-market portfolios; (5) Transaction risk arising
from problems with service or product delivery; (6) Compliance risk involving
risk to earnings or capital resulting from violations of or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards; (7)
Strategic risk resulting from adverse business decisions or improper
implementation of business decisions; and (8) Reputation risk that adversely
affects earnings or capital arising from negative public opinion.
PART I
ITEM 1. BUSINESS
GENERAL
SCBT Financial Corporation (the "Company"), formerly First National
Corporation, is a bank holding company incorporated under the laws of South
Carolina in 1985. The Company owns 100% of three subsidiaries, namely South
Carolina Bank and Trust, N.A. (formerly First National Bank), a national bank
which opened for business in 1934; South Carolina Bank and Trust of the
Piedmont, N.A. (formerly National Bank of York County), a national bank which
opened for business in 1996; and CreditSouth Financial Services Corporation
("CreditSouth"), a consumer finance company which opened for business in 1998
and has ceased operations. The names of the Company's banking subsidiaries were
changed in May 2002 in order to bring the group under a common marketing
identity. Similarly, the name of the Company was changed in February 2004,
pursuant to shareholder approval at the 2003 annual meeting. In March 2004,
following the corporate name change, the Company switched its common stock
listing from the American Stock Exchange to The NASDAQ Stock Market and began
trading under the symbol "SCBT".
On December 1, 2002, South Carolina Bank and Trust, N.A. (the "Bank"),
acquired the majority of the consumer loan portfolio and related assets of
CreditSouth and assumed the continuing lending activities of that business.
Thereafter, CreditSouth ceased active lending programs and focused on servicing
a retained portfolio of loans that were delinquent at the time of the
acquisition.
In July 2003, South Carolina Bank and Trust of the Pee Dee, N.A., formerly a
wholly-owned subsidiary of the Company, was merged with the Bank in order to
achieve certain operating efficiencies.
In February 2004, the Bank purchased the Denmark, South Carolina branch of
Security Federal Bank, including premises and equipment, certain loans and
deposits. At the time of the transaction, the Bank vacated its existing leased
Denmark office, moving its operations to the newly acquired banking facility. In
March 2004, the Bank sold its Cameron, South Carolina branch, including
premises, equipment and certain deposits, to Farmers and Merchants Bank of South
Carolina and recognized a pre-tax gain of approximately $760,000.
In January 2003, the Company moved its principal executive offices to 520
Gervais Street, Columbia, South Carolina 29201. The Company's mailing address at
its new headquarters is P.O. Box 1030, Columbia, South Carolina 29202, and its
telephone number is (803) 771-2265.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for businesses, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, correspondent banking services, and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers, and no significant portion of its
loans is concentrated within a single industry or group of related industries.
There are no material seasonal factors that would have a material adverse effect
on the Company. The Company does not have any foreign loans.
1
The Company maintains an Internet site at http://www.SCBandT.com. The
information contained in the Company's web site is not incorporated into this
report. The Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to these reports are available
free of charge through the Company's Internet site as soon as reasonably
practicable after they are filed with, or furnished to, the Securities and
Exchange Commission.
TERRITORY SERVED AND COMPETITION
South Carolina Bank and Trust, N.A. conducts its business from 33 offices in
18 South Carolina towns. South Carolina Bank and Trust of the Piedmont, N.A.
conducts its business from four locations in three South Carolina towns. In
certain of their markets, the two banks (the "Banks") encounter strong
competition from several major banks that dominate the commercial banking
industry in their service areas and in South Carolina generally. Several
competitors have substantially greater resources and higher lending limits than
the Banks and they offer certain services for their customers that the Banks do
not offer. In addition to commercial banks, savings institutions and credit
unions, the Banks compete for deposits and loans with other financial
intermediaries and investment alternatives, including mortgage companies, credit
card issuers, leasing companies, finance companies, money market mutual funds,
brokerage firms, governmental and corporation bonds and other securities.
Various of these nonbank competitors are not subject to the same regulatory
restrictions as the Company and many have substantially greater resources than
the Company.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial resources
of the consolidated enterprise and thereby maintains financial, operational and
administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends.
EMPLOYEES
The Company does not have any salaried employees. As of December 31, 2003,
the Company's subsidiaries had 514 full-time equivalent employees. The Company
considers its relationship with its employees to be excellent. The employee
benefit programs the Company provides include group life, health and dental
insurance, paid vacation, sick leave, educational opportunities, a cash
incentive plan, a stock award program, a stock purchase plan, stock option plans
for officers and key employees, a defined benefit pension plan, and a 401(k)
plan.
SUPERVISION AND REGULATION
GENERAL
The Company is a "bank holding company" registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and is
subject to the supervision of, and to regular inspection by, the Federal Reserve
Board. Each of the Banks is organized as a national banking association and
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency (the "OCC"). In addition, the Company and each of
the Banks is subject to regulation (and in certain cases examination) by the
Federal Deposit Insurance Corporation (the "FDIC"), other federal regulatory
agencies and the South Carolina State Board of Financial Institutions (the
"State Board"). The following discussion summarizes certain aspects of banking
and other laws and regulations that affect the Company and its subsidiaries.
Under the Bank Holding Company Act (the "BHC Act"), the Company's activities
and those of its subsidiaries are limited to banking, managing or controlling
banks, furnishing services to or performing services for its subsidiaries, or
any other activity which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The BHC Act requires prior Federal Reserve Board approval for, among
other things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. The BHC Act also prohibits a bank
holding company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto. Further, under South
Carolina law, it is unlawful without the prior approval of the State Board for
any South Carolina bank holding company (i) to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank or any
other bank holding company, (ii) to acquire all or substantially all of the
assets of a bank or any other bank holding company, or (iii) to merge or
consolidate with any other bank holding company.
2
The Graham-Leach-Bliley Act amended a number of federal banking laws
affecting the Company and the Banks. In particular, the Graham-Leach-Bliley Act
permits a bank holding company to elect to become a "financial holding company,"
provided certain conditions are met. A financial holding company, and the
companies it controls, are permitted to engage in activities considered
"financial in nature" as defined by the Graham-Leach-Bliley Act and Federal
Reserve Board interpretations (including, without limitation, insurance and
securities activities), and therefore may engage in a broader range of
activities than permitted by bank holding companies and their subsidiaries. The
Company continues to evaluate whether to seek to become a financial holding
company under the Graham-Leach-Bliley Act.
INTERSTATE BANKING
In July 1994, South Carolina enacted legislation which effectively provided
that, after June 30, 1996, out-of-state bank holding companies may acquire other
banks or bank holding companies in South Carolina, subject to certain
conditions. Further, pursuant to the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a
bank holding company became able to acquire banks in states other than its home
state, beginning in September 1995, without regard to the permissibility of such
acquisition under state law, subject to certain exceptions. The Interstate
Banking and Branching Act also authorized banks to merge across state lines,
thereby creating interstate branches, unless a state, prior to the July 1, 1997
effective date, determined to "opt out" of coverage under this provision. In
addition, the Interstate Banking and Branching Efficiency Act authorized a bank
to open new branches in a state in which it does not already have banking
operations if such state enacted a law permitting such "de novo" branching.
Effective July 1, 1996, South Carolina law was amended to permit interstate
branching but not de novo branching by an out-of-state bank. The Company
believes that the foregoing legislation has increased takeover activity of South
Carolina financial institutions by out-of-state financial institutions.
OBLIGATIONS OF HOLDING COMPANY TO ITS SUBSIDIARY BANKS
Under the policy of the Federal Reserve Board, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it otherwise might not desire or be able to do. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" within the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC's claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders', pro rata, and if any
such assessment is not paid by any shareholder after three months notice, to
sell the stock of such shareholder to make good the deficiency.
3
CAPITAL ADEQUACY
The various federal bank regulators, including the Federal Reserve Board and
the OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments ("Tier 1 Capital"). Tier 2 capital consists
primarily of the allowance for possible loan losses (subject to certain
limitations) and certain subordinated and other qualifying debt ("Tier 2
Capital"). A minimum ratio of total capital to risk-weighted assets of 8.00% is
required and Tier 1 Capital must be at least 50% of total capital. The Federal
Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to
adjusted average total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital
to average total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and is used in conjunction with the risk-based
ratio in determining the overall capital adequacy of banking organizations.
The Federal Reserve Board and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve Board has not advised the Company of any
specific minimum leverage ratio applicable to it. As of December 31, 2003, the
Company, South Carolina Bank and Trust, N.A., and South Carolina Bank and Trust
of the Piedmont, N.A. had leverage ratios of 9.13%, 8.77%, and 8.41%,
respectively, and total risk adjusted capital of 13.06%, 12.57%, and 12.59%,
respectively.
FDICIA, among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA also imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan (see
"Obligations of Holding Company to its Subsidiary Banks," above). In addition,
FDICIA requires the various regulatory agencies to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, a total capital ratio of a least 8% and a leverage
ratio of a least 4%, or 3% in some cases. Under these guidelines, each of the
Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentration of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position), and (iii) risks from non-traditional activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with the amended guidelines, if the
Company and the Banks were to engage in significant trading activity (as defined
in the amendment) they must incorporate a measure for market risk in their
respective regulatory capital calculations effective for reporting periods after
January 1, 1998.
4
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its subsidiaries,
and the Company's funds for cash distributions to its shareholders are derived
primarily from dividends received from the Banks. Each of the Banks is subject
to various general regulatory policies and requirements relating to the payment
of dividends. Any restriction on the ability of the Banks to pay dividends will
indirectly restrict the ability of the Company to pay dividends.
The approval of the OCC is required if the total of all dividends declared
by a national bank in any calendar year will exceed the total of its retained
net profits for that year combined with its retained net profits for the two
preceding years, less any required transfers to surplus. In addition, national
banks can only pay dividends to the extent that retained net profits (including
the portion transferred to surplus) exceed statutory bad debts in excess of the
bank's allowance for loan losses. Further, if in the opinion of the OCC a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), the OCC may require, after notice and a
hearing, that such bank cease and desist from such practice. The OCC has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve Board, the OCC and the FDIC have issued policy statements which provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
In addition to the foregoing, the ability of the Company and the Banks to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors of the Company's subsidiaries.
CERTAIN TRANSACTIONS BY THE COMPANY AND ITS AFFILIATES
Various legal limitations place restrictions on the ability of the Banks to
lend or otherwise supply funds to the Company and its affiliates. The Federal
Reserve Act limits a bank's "covered transactions," which include extensions of
credit, with any affiliate to 10% of such bank's capital and surplus. All
covered transactions with all affiliates cannot in the aggregate exceed 20% of a
bank's capital and surplus. All covered and exempt transactions between a bank
and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Also, the Federal
Reserve Act requires that all of a bank's extensions of credit to an affiliate
be appropriately secured by acceptable collateral, generally United States
government or agency securities. In addition, the Federal Reserve Act limits
covered and other transactions among affiliates to terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to a bank holding company, a bank or a subsidiary of either as
prevailing at the time for transactions with unaffiliated companies.
INSURANCE OF DEPOSITS
As FDIC-insured institutions, the Banks are subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid by
FDIC-insured institutions is as specified in a schedule required to be issued by
the FDIC that specifies, at semi-annual intervals, target reserve ratios
designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
estimated insured deposits (or such higher ratio as the FDIC may determine in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department of
the Treasury. The actual assessment to be paid by each FDIC-insured institution
is based on the institution's assessment risk classification, which is
determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized", as such terms have been defined
in applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns
(see "--Capital Adequacy" above). As a result of the current provisions of
federal law, the assessment rates on deposits could increase over present
levels. Based on the current financial condition and capital levels of the
Banks, the Company does not expect that the current FDIC risk-based assessment
schedule will have a material adverse effect on the Banks' earnings in 2004.
INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF
2001
On October 26, 2001, the President signed the USA Patriot Act of 2001 into
law. This act contains the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers and certain other financial institutions. The
5
IMLAFA requires U. S. financial institutions to adopt new policies and
procedures to combat money laundering and grants the Secretary of the Treasury
broad authority to establish regulations and to impose requirements and
restrictions on financial institution's operations. The Company has adopted
policies and procedures to comply with the provisions of the Act.
OTHER LAWS AND REGULATIONS
Interest and certain other charges collected or contracted for by the Banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Banks' operations are also subject to certain federal laws applicable
to credit transactions, such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, the Community Reinvestment
Act requiring financial institutions to meet their obligations to provide for
the total credit needs of the communities they serve (which includes the
investment of assets in loans to low- and moderate-income borrowers), the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks also are subject to the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and Regulation E issued
by the Federal Reserve Board to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
From time to time, bills are pending before the United States Congress and
in the South Carolina state legislature which in certain cases contain
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking, and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company and its
subsidiaries may be affected thereby.
FISCAL AND MONETARY POLICY
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitute the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve Board. The Federal Reserve Board regulates the supply of
money through various means, including open-market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve Board, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company cannot be
predicted.
ITEM 2. PROPERTIES
In January 2003 the Company relocated its executive headquarters to a new
four-story facility at 520 Gervais Street, Columbia, South Carolina. The lead
branch in the Midlands region of South Carolina Bank and Trust, N.A. also moved
into the 57,000 square foot building. The main offices of South Carolina Bank
and Trust, N.A. are located at 950 John C. Calhoun Drive, S.E., Orangeburg,
South Carolina in a four-story facility that affords 48,000 square feet of space
for operating and administrative purposes. Both of these facilities are owned by
South Carolina Bank and Trust, N.A, which also owns 25 other properties and
leases 12 properties, substantially all of which are used as branch locations or
for housing other operational units.
South Carolina Bank and Trust of the Piedmont, N.A. owns a 12,000 square
foot office building that serves as its main office located at 1127 Ebenezer
Road, Rock Hill, South Carolina. The bank owns one additional property and
leases two others, which are used as branches.
Although the properties leased and owned are generally considered adequate,
there is a continuing program of modernization, expansion, and, as needs
materialize, occasional replacement of facilities.
6
ITEM 3. LEGAL PROCEEDINGS
In the opinion of directors and management, neither the Company nor any of
its subsidiaries is a party to, nor is any of their property the subject of, any
material pending legal proceedings, other than ordinary routine proceedings
incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the fourth quarter of
2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
C. John Hipp, III (Age 52). Mr. Hipp has served as President and Chief
Executive Officer of the Company and Chief Executive Officer of South Carolina
Bank and Trust, N.A. (formerly known as First National Bank) since April 1994.
He also served as President of South Carolina Bank and Trust, N.A. from April
1994 to May 2000. From 1990 to 1994, Mr. Hipp served as President of Rock Hill
National Bank and Rock Hill National Corporation.
Robert R. Horger (Age 53). Mr. Horger was named Chairman of the Company and
South Carolina Bank and Trust, N.A. in January 1998 and served as Vice Chairman
of the Company and South Carolina Bank and Trust, N.A. from April 1994 to
January 1998. Mr. Horger became a director of the Company in April 1991. Mr.
Horger is an attorney with Horger, Barnwell and Reid in Orangeburg, South
Carolina.
Dwight W. Frierson (Age 47). Mr. Frierson has served as Vice Chairman of
First National Corporation and South Carolina Bank and Trust, N.A. since January
2000 and has been a director of the Company since April 1996. Mr. Frierson is
Vice President and General Manager of Coca-Cola Bottling Company of Orangeburg.
Robert R. Hill, Jr. (Age 37). Mr. Hill has served as President and Chief
Operating Officer of South Carolina Bank and Trust, N.A. since May 2000. He
served as Senior Executive Vice President and Chief Operating Officer of South
Carolina Bank and Trust, N.A. from November 1998 to May 2000. He served as
President and Chief Executive Officer of South Carolina Bank and Trust of the
Piedmont, N.A. (formerly known as National Bank of York County) from July 1996
to November 1998. Mr. Hill was an organizer of South Carolina Bank and Trust of
the Piedmont, N.A. from October 1995 to July 1996 and team leader for
NationsBank northern region of South Carolina from March 1995 to October 1995.
Richard C. Mathis (Age 53). Mr. Mathis has served as Executive Vice
President and Chief Financial Officer of the Company since May 2000. He was
owner of Carolina MasterCom LLC, an automotive services company, from January
1999 to May 2000. Mr. Mathis served as Executive Vice President and Chief
Financial Officer of M&M Financial Corporation/First National South from January
1998 to January 1999, through that bank's acquisition. Mr. Mathis was Senior
Vice President in the Fixed Income Division of Sterne, Agee & Leach, Inc. in
Atlanta, Georgia, from 1996 through 1997.
John C. Pollok (Age 38). Mr. Pollok was named Senior Executive Vice
President of the Company in February 2003. He has served as Executive Vice
President and Chief Administrative Officer of South Carolina Bank and Trust,
N.A. since May 2000. He served as Executive Vice President of South Carolina
Bank and Trust, N.A. mortgage division from July 1998 until May 2000. Mr. Pollok
served as Senior Vice President of South Carolina Bank and Trust of the
Piedmont, N.A. from January 1996 to July 1998.
Joe E. Burns (Age 49). Mr. Burns has served as Executive Vice President and
Chief Credit Officer of the Company since November 2000. He served as Senior
Vice President and Private Lending Manager for Bank of America from July 1995 to
November 2000.
James A. Shuford, III (52). Mr. Shuford has served as Executive Vice
President of South Carolina Bank and Trust, N.A. since August 1999. He served as
President and Chief Executive Officer of FirstBancorporation, Inc. and
FirstBank, N. A. in Beaufort, South Carolina from October 1993 to August 1999,
when they were acquired by the Company.
Thomas S. Camp (Age 52). Mr. Camp has served as President and Chief
Executive Officer of South Carolina Bank and Trust of the Piedmont, N.A. since
November 1998. He served as Principal and Manager of First Union National Bank
of South Carolina for the Private Client Group from August 1997 to November
1998. Mr. Camp was Vice President of Sales and Marketing at Seibels Bruce
Insurance Co. in Columbia from November 1996 to August 1997. He served as Senior
Vice President of First Union National Bank in South Carolina from February 1989
until November 1996.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Certain information required by this item is incorporated herein by
reference to the information under the caption "Stock Performance and
Statistics" on page 18 of the 2003 Annual Report to Shareholders. As of March 2,
2004, the Company had issued and outstanding 7,720,033 shares of Common Stock
which were held of record by approximately 4,900 persons. The Company's Common
Stock is traded on The NASDAQ Stock Market under the symbol "SCBT".
Dividends are paid by the Company from its assets which, are provided by
dividends paid to the Company by its subsidiaries. Certain restrictions exist
regarding the ability of the Company's subsidiaries to transfer funds to the
Company in the form of cash dividends, loans or advances. The approval of the
OCC is required to pay dividends in excess of the Banks' respective net profits
for the current year plus retained net profits (net profits less dividends paid)
for the preceding two years, less any required transfers to surplus. As of
December 31, 2003, approximately $25,347,000 of the Banks' retained earnings
were available for distribution to the Company as dividends without prior
regulatory approval. For the year ended December 31, 2003, the Banks paid
dividends of approximately $5,069,000 to the Company. The Company anticipates
that it will continue to pay comparable cash dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the information set forth under the captions "Financial Highlights" and
"Selected Consolidated Financial Data" on the inside front cover and page 19,
respectively, of the Company's 2003 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of SCBT
Financial Corporation and its operating subsidiaries, South Carolina Bank and
Trust, N.A., and South Carolina Bank and Trust of the Piedmont, N.A. The five
year period 1999 through 2003 is discussed with particular emphasis on the years
2001 through 2003. This commentary should be reviewed in conjunction with the
financial statements and related footnotes and the other statistical information
related to SCBT Financial Corporation contained elsewhere herein.
In 1996, the Company sponsored the organization of South Carolina Bank and
Trust of the Piedmont, N.A. (formerly National Bank of York County) in Rock
Hill, South Carolina, and sold shares of the Company's common stock to
capitalize the new bank and pay organizational and pre-opening expenses. South
Carolina Bank and Trust of the Piedmont, N.A. began operations on July 11, 1996,
as a wholly-owned subsidiary of the Company.
In 1998, the Company sponsored the organization of South Carolina Bank and
Trust of the Pee Dee, N.A. (formerly Florence County National Bank) in Florence,
South Carolina, and sold shares of the Company's common stock to capitalize the
new bank and pay organizational and pre-opening expenses. South Carolina Bank
and Trust of the Pee Dee, N.A. began operations on April 1, 1998, as a
wholly-owned subsidiary of the Company. This bank was merged with South Carolina
Bank and Trust, N.A. in July 2003 in order to achieve certain operating
efficiencies.
Also in 1998, the Company sponsored the organization of CreditSouth
Financial Services Corporation, a consumer finance company which began
operations in Orangeburg, South Carolina, on November 1, 1998. As noted in Part
1, Item 1, on December 1, 2002, South Carolina Bank and Trust, N.A. acquired the
majority of CreditSouth's consumer loan portfolio and related assets, and
CreditSouth ceased operations.
8
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes to Consolidated Financial Statements for information relating to
recent accounting pronouncements.
SUMMARY OF OPERATIONS
Earnings of SCBT Financial Corporation were $14,786,000, $13,834,000, and
$12,257,000 in 2003, 2002 and 2001, respectively. Net income increased 6.9
percent in 2003 when compared to 2002 and increased 12.9 percent in 2002
compared with 2001. Basic earnings per share increased to $1.93 in 2003 compared
to $1.80 in 2002 and $1.59 in 2001. Diluted earnings per share increased to
$1.91 in 2003 from $1.79 in 2002 and $1.59 in 2001. All per share data has been
adjusted to give effect to a ten percent stock dividend paid to shareholders on
December 6, 2002.
The book value per share of SCBT Financial Corporation stock increased to
$14.61 in 2003 compared with $13.49 in 2002 and $12.15 in 2001. The return on
average assets was 1.23 percent in 2003, compared with 1.28 percent in 2002 and
1.21 percent in 2001. The return on average shareholders' equity was 13.72
percent in 2003, 14.09 percent in 2002, and 13.64 percent in 2001. Cash
dividends declared per common share were $0.66 in 2003, compared with $0.59 in
2002 and $0.57 in 2001.
Total earning assets and total deposits increased in 2003 compared to 2002.
At December 31, 2003, total earning assets were $1,114,252,000, an increase of
4.4 percent over $1,067,549,000 at year-end 2002, which was 11.2 percent greater
than the 2001 balance of $959,846,000. In 2003, average earning assets were
$1,123,037,000, an increase of 9.9 percent over $1,022,339,000 in 2002, which
was 7.0 percent greater than the 2001 average of $955,155,000. The increases in
average earning assets in 2003 and 2002 were mainly the result of in-house and
secondary market loan growth.
At December 31, 2003, total deposits were $946,278,000, an increase of 5.4
percent from $898,163,000 at the end of 2002. The 2002 balance was 10.7 greater
than $811,523,000 at year-end 2001. Total deposits averaged $946,746,000 during
2003, an increase of 10.7 percent over $855,223,000 in 2002. The 2002 deposits
average was a 6.3 percent increase over $803,130,000 in 2001.
For the year ended December 31, 2003, total interest income was $64,854,000,
a decrease of $2,470,000, or 3.7 percent, from $67,324,000 in 2002. The decrease
was mainly interest rate related, as the rate earned on average earning assets
declined 82 basis points from 6.59 percent in 2002 to 5.77 percent in 2003. In
2002, total interest income decreased $7,148,000 or 9.6 percent, compared with
$74,472,000 in 2001. This increase was also mainly due to lower interest rates,
as the rate earned on average earning assets declined 121 basis points from 7.80
percent in 2001 to 6.59 percent the following year.
Total interest expense was $14,622,000 for the year 2003, a $4,130,000, or
22.0 percent, decrease from $18,752,000 in 2002. This resulted from a 63 basis
point decrease in the rate paid on total interest-bearing liabilities, partially
offset by a $69,475,000, 8.3 percent, increase in average total interest-bearing
liabilities. Total interest expense in 2002 decreased $11,220,000, or 37.4
percent, from $29,972,000 in 2001. This resulted mainly from a 153 basis point
decline in the average rate paid on interest-bearing liabilities.
In March 2003, the Company's board of directors authorized the extension of
a repurchase program to acquire up to 250,000 shares of the Company's
outstanding common stock. During the years ended December 31, 2003, 2002 and
2001, the Company repurchased 2,100, 12,402 and 138,253 shares, respectively, at
a cost of $53,000, $265,000 and $2,518,000, respectively.
COMPETITION
SCBT Financial Corporation competes with a number of financial institutions
and other firms that engage in activities similar to banking. For example, the
Company competes for deposits with savings and loan associations, credit unions,
brokerage firms and other commercial banks. In its lending activities, the
Company competes with the industries mentioned above as well as consumer finance
companies, leasing companies and other lenders. In today's challenging financial
climate, all lenders are searching for quality borrowers. Competition is strong
for attracting borrowers and originating acceptable grade loans.
A number of financial institution mergers were completed in recent years,
continuing the trend toward consolidation, especially among larger regional and
national financial institutions. Although these mergers reduced the number of
banks and branches, they intensified competition for quality funds and loans.
9
NET INTEREST INCOME
Net interest income is the difference between interest income and interest
expense. In the analysis of net interest income, two significant factors are net
interest spread and net interest margin. Net interest spread is the difference
between the yield on average earning assets and the rate on average
interest-bearing liabilities. Net interest margin is the difference between the
yield on average earning assets and the rate on all average liabilities,
interest and noninterest-bearing, utilized to support earning assets. Net
interest margin is distinguished by the inclusion of the impact of interest free
funds.
Net interest income was $50,232,000 in 2003, an increase of $1,660,000, or
3.4 percent over 2002. This increase was virtually all volume related, as total
average earning assets grew by $100,698,000, or 9.9 percent. A significant
offset to the strong earning assets growth was the continuing decline in
interest rates in general as the net interest spread decreased by 19 basis
points, from 4.36 percent in 2002 to 4.17 percent in 2003. Net interest income
in 2002 was $48,572,000, an increase of $4,072,000, or 9.2 percent, from the
previous year. This resulted from an increase in total average earning assets of
$67,184,000, or 7.0 percent, and from a 32 basis point increase in the net
interest spread, reflecting a greater decline in rates paid on interest-bearing
liabilities as compared with the decrease in rates earned on earning assets.
As a result of the continued historically low interest rate environment in
2003, the net interest margin (non-taxable equivalent) decreased 28 basis points
to 4.47 percent compared with 2002. Contributing to this decline was a ten basis
point decrease in the impact of interest free funds. The net interest margin was
4.75 percent in 2002, an increase of 9 basis points over 2001. This was largely
attributable to the aforementioned decline in interest-bearing liability rates
outpacing the decrease in rates on earning assets.
TABLE 1
VOLUME AND RATE
VARIANCE ANALYSIS
2003 COMPARED TO 2002 2002 COMPARED TO 2001
CHANGES DUE TO CHANGES DUE TO
INCREASE (DECREASE) IN INCREASE (DECREASE) IN
(DOLLARS IN THOUSANDS) VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
Interest income on:
Loans (2) $ 9,763 $ (9,432) $ 331 $ 5,371 $ (10,615) $ (5,244)
Investments:
Taxable (1,538) (1,127) (2,665) 709 (2,086) (1,377)
Tax exempt (3) (123) 5 (118) (91) (14) (105)
Funds sold (7) (17) (24) (326) (141) (467)
Interest -bearing deposits with banks 38 (32) 6 106 (61) 45
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income 8,132 (10,602) (2,470) 5,769 (12,917) (7,148)
===================================================================================================================================
Interest expense on:
Deposits:
Interest-bearing transaction accounts
381 (1,535) (1,154) 257 233 490
Savings accounts 96 (1,087) (991) 152 (2,006) (1,854)
Certificates of deposit 453 (2,139) (1,686) (42) (8,631) (8,673)
Funds purchased 118 (447) (329) 176 (1,740) (1,564)
Notes payable 112 (82) 30 429 (48) 381
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,159 (5,289) (4,130) 972 (12,192) (11,220)
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,973 $ (5,313) $ 1,660 $ 4,797 $ (725) $ 4,072
===================================================================================================================================
(1) The rate/volume variance for each category has been allocated on an equal
basis between rate and volumes.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a taxable-equivalent basis in the
above analysis.
10
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2003
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 942,717 $ 58,283 6.18%
Investment securities:
Taxable
137,637 5,047 3.67
Tax exempt 30,750 1,383 4.50
Funds sold 6,703 86 1.30
Interest-bearing deposits with banks 5,230 55 1.05
------------ ------------
Total earning assets 1,123,037 64,854 5.77
------------ ------------
Cash and other assets 86,258
Less allowance for loan losses (11,214)
------------
Total assets $ 1,198,081
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 205,077 $ 763 0.37%
Savings 175,347 988 0.56
Certificates of deposit 393,365 9,804 2.49
Funds purchased 86,185 545 0.63
Notes payable 51,720 2,522 4.88
------------ ------------
Total interest-bearing liabilities 911,694 14,622 1.60
------------ ------------
Demand deposits 172,957
Other liabilities 5,639
Shareholders' equity 107,791
------------
Total liabilities and shareholders' equity $ 1,198,081
============
Net interest spread 4.17
Impact of interest free funds 0.30
------------
Net interest margin 4.47%
============
Net interest income $ 50,232
============
11
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2002
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 806,801 $ 57,956 7.18%
Investment securities:
Taxable
171,926 7,711 4.49
Tax exempt 33,504 1,501 4.48
Funds sold 7,162 107 1.55
Interest-earning deposits with banks 2,946 49 1.66
------------ ------------
Total earning assets 1,022,339 67,324 6.59
------------ ------------
Cash and other assets 73,018
Less allowance for loan losses (10,171)
------------
Total assets $ 1,085,186
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 171,052 $ 1,916 1.12%
Savings 167,268 1,978 1.18
Certificates of deposit 378,443 11,488 3.04
Funds purchased 75,956 878 1.15
Notes payable 49,500 2,492 5.03
------------ ------------
Total interest-bearing liabilities 842,219 18,752 2.23
------------ ------------
Demand deposits 138,460
Other liabilities 6,336
Shareholders' equity 98,171
------------
Total liabilities and shareholders' equity $ 1,085,186
============
Net interest spread 4.36
Impact of interest free funds 0.40
------------
Net interest margin 4.75%
============
Net interest income $ 48,572
============
12
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2001
(DOLLARS IN THOUSANDS) AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
Assets
Interest earning assets:
Loans, net of unearned income $ 743,602 $ 63,196 8.50%
Investment securities:
Taxable
159,482 9,088 5.70
Tax exempt 35,522 1,606 4.52
Funds sold 16,442 578 3.52
Interest-earning deposits with banks 107 4 3.74
------------ ------------
Total earning assets 955,155 74,472 7.80
------------ ------------
Cash and other assets 65,827
Less allowance for loan losses (9,265)
------------
Total assets $ 1,011,717
============
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 144,963 $ 1,427 0.98%
Savings 160,890 3,833 2.38
Certificates of deposit 379,193 20,163 5.32
Funds purchased 70,852 2,438 3.44
Notes payable 41,134 2,111 5.13
------------ ------------
Total interest-bearing liabilities 797,032 29,972 3.76
------------ ------------
Demand deposits 118,084
Other liabilities 6,550
Shareholders' equity 90,051
------------
Total liabilities and shareholders' equity $ 1,011,717
============
Net interest spread 4.04
Impact of interest free funds 0.62
------------
Net interest margin 4.66%
============
Net interest income $ 44,500
============
13
INVESTMENT SECURITIES
The second largest category of earning assets is investment securities,
which are used to fund loan growth and deposit liquidations, provide liquidity,
employ excess funds, and pledge as collateral for certain public funds deposits
and purchased funds. At December 31, 2003, investment securities were
$152,009,000 or 13.6 percent of earning assets, compared with $164,951,000, or
15.5 percent of earning assets at the end of 2002. As securities are purchased,
they are designated as held-to-maturity or available-for-sale based upon
management's intent, which incorporates liquidity needs, interest rate
expectations, asset/liability management strategies, and capital requirements.
Interest earned on the held-to-maturity portfolio, consisting mainly of tax
exempt state and municipal securities, was $1,383,000 in 2003, a decrease of
$118,000, or 7.9 percent, from the $1,501,000 earned in 2002. The decrease was
due to an average portfolio balance that was $2,754,000, or 8.2 percent, less
than the balance in 2002. This decrease was slightly offset by a two basis point
increase in yield from year to year. In 2002, this portfolio segment earned
$105,000, or 6.5 percent less than 2001 interest of $1,606,000. This decrease
was due primarily to an average portfolio balance that was $2,018,000, or 5.7
percent less than the balance in 2001. Contributing to a lesser extent was the
four basis point decline in the average yield from 2001 to 2002. The average
maturity of the held-to-maturity portfolio was 2.4 years, 3.2 years and 3.9
years at December 31, 2003, 2002 and 2001, respectively.
Securities available-for-sale consist mainly of U.S. Government Agency and
mortgage-backed securities. In 2003, interest earned on this portfolio was
$5,047,000, including $67,000 attributable to short-term money market fund
investments, compared with $7,711,000, including $404,000 earned on money market
investments in 2002. The overall decrease of $2,664,000, or 34.6 percent, was
the result of both rate and average balance declines from year to year. Average
earning rates on available-for-sale securities were 3.67 percent during 2003, or
82 basis points less than 2002. Average outstanding balances were $137,637,000,
a $34,289,000, or 19.9 percent decrease from the prior year, as funds were
redeployed to meet higher yielding loan demand throughout the period. In 2002,
earnings from this segment of the investment securities portfolio were
$1,377,000, or 15.2 percent less than the $9,088,000 earned in 2001. This was
the result of lower rates which were 131 basis points less in 2002 than 2001.
The earnings decrease was partially offset by an available-for-sale portfolio
that averaged $12,444,000, or 7.8 percent more in 2002 that 2001.
At December 31, 2003, the fair value of the investment securities portfolio
was $153,474,000, or 1.0 percent higher than the carrying value, including the
effect of a $1,465,000 higher market value of held-to-maturity securities,
compared to their amortized cost. The differences between fair and carrying
values at December 31, 2002 and 2001 were also favorable at $1,833,000, or 1.1
percent and $648,000, or 0.3 percent, respectively. At December 31, 2003,
investment securities with an amortized cost of $121,531,000 and fair value of
$122,522,000 were classified as available-for-sale. The positive adjustment of
$991,000 to the carrying value of these securities has been reflected, net of
tax, in the consolidated balance sheets as accumulated other comprehensive
income.
The Company realized no gains or losses on the disposition of investment
securities in either 2003 or 2002 and a gain of $570,000 on the sale of equity
securities in 2001.
TABLE 3
BOOK VALUE OF INVESTMENT SECURITIES
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
HELD-TO-MATURITY
U. S. Treasury and other Government agencies -- -- -- -- 3,031
Mortgage-backed -- 51 247 -- 1,304
State and municipal 29,487 33,160 34,767 38,550 42,933
- -------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity 29,487 33,211 35,014 38,550 47,268
- -------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U. S. Treasury and other Government agencies
25,453 45,859 44,265 93,479 93,033
Mortgage-backed 78,560 74,694 101,728 46,726 51,502
Other investments 18,509 11,187 8,926 4,443 3,769
- -------------------------------------------------------------------------------------------------------------
Total Available-for-Sale 122,522 131,740 154,919 144,648 148,304
- -------------------------------------------------------------------------------------------------------------
Total $152,009 $164,951 $189,933 $183,198 $195,572
=============================================================================================================
14
TABLE 4
MATURITY DISTRIBUTION AND YIELDS OF INVESTMENT SECURITIES
DUE IN DUE AFTER DUE AFTER DUE AFTER
DECEMBER 31, 2003 1 YR. OR LESS 1 THRU 5 YRS. 5 THRU 10 YRS. 10 YRS.
(DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
HELD-TO-MATURITY
State and municipal 4,714 6.57% 20,238 6.53% 4,535 6.91% -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity 4,714 6.57% 20,238 6.53% 4,535 6.91% -- --
- --------------------------------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and
Government agencies 9,978 3.80% 15,475 3.62% -- -- -- --
Mortgage-backed 2,883 2.30% 71,741 4.20% 3,936 3.48% -- --
Other investments (1) -- -- 4,000 5.74% 8,509 3.38% 6,000 3.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale 12,861 3.47% 91,216 4.17% 12,445 3.41% 6,000 3.64%
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 17,575 4.30% $111,454 4.60% $ 16,980 4.35% $6,000 3.64%
================================================================================================================================
Percent of Total 12% 73% 11% 4%
Cumulative % of Total 12% 85% 96% 100%
DECEMBER 31, 2003 TOTAL PAR FAIR
(DOLLARS IN THOUSANDS) AMOUNT YIELD VALUE VALUE
State and municipal 29,487 6.59% 29,355 30,952
- ----------------------------------------------------------------------------------
Total Held-to-Maturity 29,487 6.59% 29,355 30,952
- ----------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and
Government agencies 25,453 3.69% 25,450 25,453
Mortgage-backed 78,560 4.09% 76,860 78,560
Other investments (1) 18,509 3.97% 18,500 18,509
- ----------------------------------------------------------------------------------
Total Available-for-Sale 122,522 3.99% 120,810 122,522
- ----------------------------------------------------------------------------------
Total $152,009 4.50% $150,165 $153,474
==================================================================================
(1) Federal Reserve Bank and other corporate stocks have no set maturity and are
classified in "Due after 10 years."
LOAN PORTFOLIO
Loans, net of unearned discount, the largest category of earning assets,
were $951,106,000 at December 31, 2003, an increase of $48,543,000, or 5.4
percent, compared to $902,563,000 at the end of 2002. Average loans outstanding
during 2003 were $942,717,000, an increase of 16.9 percent over the 2002 average
of $806,801,000. Included in these balances were mortgage loans held for sale,
which averaged $43,296,000 during 2003, up 204.8 percent from $14,207,000 in
2002, reflecting the strong mortgage loan refinance market in the past year.
Real estate mortgage loans continue to comprise the largest segment of the
loan portfolio. All commercial and residential loans secured by real estate,
except real estate construction loans, are included in this category. At the end
of 2003, real estate mortgage loans were $689,797,000, including $12,346,000 of
mortgage loans held for sale, and comprised 72.5 percent of the total loan
portfolio. This was an increase of $88,477,000, or 14.7 percent, over year-end
2002. Commercial, financial, agricultural and other loans were $133,055,000,
representing 14.7 percent of all loans at December 31, 2003. This loan category
decreased $16,330,000, or 10.9 percent, compared to the balance at the end of
2002. Consumer installment loans, comprising 10.7 percent of the portfolio at
the end of 2003, were $101,743,000, a decrease of $9,777,000, or 8.8 percent
from the previous year.
Loan interest and fee income was $58,283,000 in 2003, a slight increase over
2002 earnings of $57,956,000. Substantial increases in average loan balances in
2003 compared with 2002 were largely offset by the continued decline in lending
rates, reflecting the historically low general interest rate environment. The
average loan portfolio yield in 2003 was 6.18 percent, or 100 basis points below
the 2002 yield of 7.18 percent. Interest and fee income for 2002 was $5,240,000,
or 8.3 percent, less than the $63,196,000 earned in 2001. This decrease was the
result of a 132 basis point decline in the average yield in 2002 from 8.50
percent in 2001, offset in part by an average loan balance increase of
$63,199,000, or 8.5 percent, year to year. Table 6 shows the maturity and
interest rate sensitivity of the loan portfolio at December 31, 2003. Loans that
mature in one year or less were $176,526,000, comprising 18.6 percent of total
loans. Of the loans due after one year, $418,324,000, or 54.0 percent, had fixed
interest rates, compared with variable rate loans of $356,256,000, or 46.0
percent.
The placement of loans on a nonaccrual status is dependent upon the type of
loan, the past due status and the collection activities in progress. Loans which
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become 120 days past due. Unsecured commercial loans
are charged off on or before the date they become 90 days past due and,
therefore, do not reach nonaccrual status. Commercial and real estate loans
which are partially secured are written down to the collateral value and placed
on nonaccrual status on or before becoming 90 days past due. Closed end consumer
loans are charged off or written down to the contractual value on or before
becoming 120 days past due. Open end consumer loans are charged off or written
down to the contractual value on or before becoming 180 days past due. All
interest accrued in the current year but unpaid at the date a loan is placed on
nonaccrual status is deducted from interest income, while interest accrued from
previous years is charged
15
against the reserve for loan losses. At December 31, 2003, nonaccrual loans were
$4,669,000, compared with $3,010,000 at year-end 2002. At December 31, 2003,
loans that were 90 days or more past due and still accruing were $2,082,000
compared to $1,729,000 at the end of 2002.
Interest income that was foregone was an immaterial amount for each of the
three years ended December 31, 2003. The Company does not have any loans that
have been restructured or any foreign loans.
Concentrations of credit are considered to exist when the amounts loaned to a
multiple number of borrowers engaged in similar business activities which would
cause them to be similarly impacted by economic or other conditions exceed 10
percent of total loans. As of December 31, 2003, there were no such credit
concentrations.
The level of risk elements in the loan portfolio for the past five years is
shown in Table 7.
TABLE 5
DISTRIBUTION OF NET LOANS
BY TYPE
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Commercial, financial,
agricultural and other $133,055 $149,385 $118,819 $103,468 $ 87,098
Real estate - construction 26,511 40,338 37,709 32,256 27,555
Real estate - mortgage 689,797 601,320 495,894 473,131 396,158
Consumer 101,743 111,520 116,442 120,194 99,730
- -------------------------------------------------------------------------------------------------------------
Total $951,106 $902,563 $768,864 $729,049 $610,541
=============================================================================================================
Percent of Total
Commercial, financial,
agricultural and other 14.0% 16.5% 15.5% 14.1% 14.2%
Real estate - construction 2.8 4.5 4.9 4.4 4.5
Real estate - mortgage 72.5 66.6 64.5 64.6 64.5
Consumer 10.7 12.4 15.1 16.9 16.8
- -------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================================================================================
TABLE 6
MATURITY DISTRIBUTION OF LOANS
DECEMBER 31, 2003 MATURITY
1 YEAR 1 - 5 OVER 5
(DOLLARS IN THOUSANDS) TOTAL OR LESS YEARS YEARS
Commercial, financial
agricultural and other $133,055 $ 49,182 $ 76,960 $ 6,913
Real estate - construction 26,511 9,725 7,008 9,778
Real estate - mortgage 689,797 106,983 395,080 187,734
Consumer 101,743 10,636 86,017 5,090
- -------------------------------------------------------------------------------------------------------------------
Total $951,106 $176,526 $565,065 $209,515
===================================================================================================================
Loans due after one year with:
Predetermined interest rates $418,324
Floating or adjustable interest rates $356,256
16
ASSET QUALITY
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment securities, loan, or
short-term investment portfolio, is reviewed by management for credit risk. To
facilitate this review, SCBT Financial Corporation has established credit and
investment policies which include credit limits, documentation, periodic
examination and follow-up. In addition, these portfolios are examined for
exposure to concentration in any one industry, government agency, or geographic
location. At December 31, 2003 and 2002, the Company did not have more than ten
percent of the loan portfolio in any one industry and had no foreign loans.
Each category of earning assets has a degree of credit risk. To measure
credit risk, various techniques are utilized. Credit risk in the investment
portfolio can be measured through bond ratings published by independent
agencies. In the investment securities portfolio, 99.5 percent of the
investments consist of U.S. Treasury securities, U.S. Agency securities and
tax-free securities having a rating of "A" or better by at least one of the
major bond rating agencies. The credit risk of the loan portfolio can be
measured by historical experience. The Company maintains its loan portfolio in
accordance with its established credit policies. Net loan charge-offs as a
percentage of net average loans improved to .19 percent in 2003, compared with
..25 percent in 2002. The ratio was also .19 percent in 2001. See "Loans" for a
discussion of the Company's charge-off and nonaccrual policies.
TABLE 7
NONACCRUAL AND PAST DUE LOANS
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Loans past due 90 days or more $ 2,082 $ 1,729 $ 1,561 $ 1,838 $ 729
Loans on a nonaccruing basis 4,669 3,010 3,317 1,481 1,537
- -----------------------------------------------------------------------------------------------
Total $ 6,751 $ 4,739 $ 4,878 $ 3,319 $ 2,266
===============================================================================================
TABLE 8
SUMMARY OF LOAN
LOSS EXPERIENCE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002 2001 2000 1999
Allowance for loan losses - January 1 $ 11,065 $ 9,818 $ 8,922 $ 7,886 $ 6,934
- ----------------------------------------------------------------------------------------------------------------
Total charge-offs (2,410) (2,236) (1,808) (1,004) (826)
Total recoveries 700 256 400 202 165
- ----------------------------------------------------------------------------------------------------------------
Net charge-offs (1,710) (1,980) (1,408) (802) (661)
Provision for loan losses 2,345 3,227 2,304 1,838 1,613
- ----------------------------------------------------------------------------------------------------------------
Allowance for loan losses - December 31 $ 11,700 $ 11,065 $ 9,818 $ 8,922 $ 7,886
================================================================================================================
Average loans - net of unearned income $899,421 $792,594 $732,587 $680,217 $541,434
Ratio of net charge-offs to average
loans - net of unearned income .19% .25% .19% .12% .12%
17
LOAN LOSS PROVISION
The Company maintains an allowance for loan losses at a level which
management believes is sufficient to provide for potential losses in the loan
portfolio. Management periodically evaluates the adequacy of the allowance
utilizing its internal risk rating system, outside credit review and regulatory
agency examinations to assess the quality of the loan portfolio and identify
problem loans. The evaluation process also includes management's analysis of
current and future economic conditions, composition of the loan portfolio, past
due and nonaccrual loans, concentrations of credit, lending policies and
procedures and historical loan loss experience. The provision for loan losses is
charged to expense in an amount necessary to maintain the allowance at the
appropriate level.
The provision for loan losses for the year ended December 31, 2003 was
$2,345,000, compared with $3,227,000 in 2002. The 27.3 percent decrease in the
provision was the result of certain improved quality measures, including a 13.6
percent decline in net charge-offs compared with 2002 and a 24 percent decrease
in the ratio of net charge-offs to average loans, net of unearned income, from
..25 percent in 2002 to .19 percent in 2003.
The allowance for loan losses was $11,700,000 at December 31, 2003, or 1.25
percent of total loans, compared with $11,065,000, or 1.28 percent of total
loans at the end of 2002. Total charge-offs were $2,410,000 in 2003, up
$174,000, or 7.8 percent, from 2002. Recoveries of loans previously charged off
increased nearly threefold from $256,000 in 2002 to $700,000 in 2003. A summary
of loan loss experience for the five years ended December 31, 2003 is provided
in Table 8.
Other real estate owned includes certain real estate acquired as a result of
foreclosure and deeds in lieu of foreclosure, as well as amounts reclassified as
in-substance foreclosures. At December 31, 2003 and December 31, 2002, other
real estate owned was $1,465,000 and $1,051,000, respectively.
While certain factors suggest a gradual upturn in the national economy, the
signals in South Carolina have been less clear. The state's unemployment levels
and general business conditions suggest that any rebound might lag improvements
at the national level. In this economic climate, management anticipates that the
Company could experience loan charge-off activity in the coming year at
generally comparable levels to that experienced in 2003. The Office of the
Comptroller of the Currency recommends that banks take a broad view of certain
factors in evaluating their allowance for loan losses. These factors include
loan loss experience, specific allocations and other subjective factors. In its
ongoing consideration of such factors, management considers the allowance for
loan losses to be adequate.
LIQUIDITY
Liquidity may be defined as the ability of an entity to generate cash to
meet its financial obligations. For a bank, liquidity primarily means the
consistent ability to meet loan and investments demands and deposit withdrawals.
The Company has employed its funds in a manner to provide liquidity in both
assets and liabilities sufficient to meet its cash needs.
Asset liquidity is maintained by the maturity structure of loans, investment
securities and other short-term investments. Management has policies and
procedures governing the length of time to maturity on loans and investments. As
noted in Table 4, 12 percent of the investment portfolio matures in one year or
less. This segment of the portfolio consists largely of U.S. Government Agency
securities and municipal obligations. Loans and other investments are generally
held for longer terms and not utilized for day-to-day operating needs.
Increases in the Company's liabilities provide liquidity on a day-to-day
basis. Daily liquidity needs may be met from deposit growth or from the use of
federal funds purchased, securities sold under agreements to repurchase and
other short-term borrowings.
The Company regularly obtains borrowed funds in the form of cash management
or "sweep" accounts that are accommodations to corporate and governmental
customers pursuant to sale of securities sold under agreements to repurchase
arrangements. During 2003, the Company maintained a satisfactory level of
liquidity through growth in interest-bearing and non-interest-bearing deposits,
cash management accounts, federal funds purchased, and advances from the Federal
Home Loan Bank of Atlanta.
DERIVATIVES AND SECURITIES HELD FOR TRADING
In January 1998, the Securities and Exchange Commission adopted rules that
require more comprehensive disclosure of accounting policies for derivatives as
well as enhanced quantitative and qualitative disclosures of market risk for
derivatives and other financial instruments. The market risk disclosures are
classified into two categories: financial instruments entered into for trading
purposes and all other instruments (non-trading purposes). The Company does not
have financial derivatives, nor does it maintain a trading portfolio.
18
ASSET-LIABILITY MANAGEMENT AND MARKET RISK SENSITIVITY
The Company's earnings or the value of its shareholders' equity may vary in
relation to changes in interest rates and in relation to the accompanying
fluctuations in market prices of certain of its financial instruments. The
Company uses a number of methods to measure interest rate risk, including
simulating the effect on earnings of fluctuations in interest rates, monitoring
the present value of asset and liability portfolios under various interest rate
scenarios, and monitoring the difference, or gap, between rate sensitive assets
and liabilities, as discussed below. The earnings simulation model and gap
analysis take into account the Company's contractual agreements with regard to
investments, loans and deposits. Although the Company's simulation model is
subject to the accuracy of the assumptions that underlie the process, the
Company believes that such modeling provides a better illustration of the
interest sensitivity of earnings than does static interest rate sensitivity gap
analysis. The simulation model assists in measuring and achieving growth in net
interest income while managing interest rate risk. The simulations incorporate
interest rate changes as well as projected changes in the mix and volume of
balance sheet assets and liabilities. Accordingly, the simulations are
considered to provide a good indicator of the degree of earnings risk the
Company has, or may incur in future periods, arising from interest rate changes
or other market risk factors.
The Company's policy is to monitor exposure to interest rate increases and
decreases of as much as 200 basis points ratably over a 12-month period. The
Company's policy limit for the maximum negative impact on net interest income
from a steady ("ramping") change in interest rates of 200 basis points over 12
months is 8 percent. The Company traditionally has maintained a risk position
within the policy guideline level. As of December 31, 2003, the earnings
simulations indicated that the impact of a 200 basis point decrease in rates
over 12 months would result in an approximate 7.2 percent decrease in net
interest income while a 200 basis point increase in rates over the same period
would result in an approximate 1.7 percent increase in net interest income --
both as compared with a base case unchanged interest rate environment. These
results indicate that the Company's rate sensitivity is essentially modestly
asset sensitive to the indicated change in interest rates over a one-year
horizon. The decrease in net interest income in the declining rate environment
is attributable primarily to the current (base) extremely low level of interest
rates. Certain key interest rates, such as the federal funds rate, would have to
hypothetically move to zero percent in order to drop 200 basis points from
current levels. In such a hypothetical case, the Company would not be able to
lower certain deposit and liability rates to the same extent. Also, the model
assumes that the Company's residential mortgage loans would quickly prepay in
such an extreme rate environment -- thereby lowering interest income. Actual
results may differ from simulated results due to the timing, magnitude and
frequency of interest rate changes and changes in market conditions or
management strategies, among other factors.
As mentioned above, another (though less useful) indicator of interest rate
risk exposure is the interest rate sensitivity gap and cumulative gap. Interest
rate sensitivity gap analysis is based on the concept of comparing financial
assets that reprice with financial liabilities that reprice within a stated time
period. The time period in which a financial instrument is considered to be rate
sensitive is determined by that instrument's first opportunity to reprice to a
different interest rate. For variable rate products the period in which
repricing occurs is contractually determined. For fixed rate products the
repricing opportunity is deemed to occur at the instrument's maturity or call
date, if applicable. For noninterest-bearing funding products, the "maturity" is
based solely on a scheduled decay, or runoff, rate. When more assets than
liabilities reprice within a given time period, a positive interest rate gap (or
"asset sensitive" position) exists. Asset sensitive institutions may benefit in
generally rising rate environments as assets reprice more quickly than
liabilities. Conversely, when more liabilities than assets reprice within a
given time period, a negative interest rate gap (or "liability sensitive"
position) exists. Liability sensitive institutions may benefit in generally
falling rate environments as funding sources reprice more quickly than earning
assets. However, another shortfall of static gap analysis based solely on the
timing of repricing opportunities is its lack of attention to the degree of
magnitude of rate repricings of the various financial instruments.
As shown in the gap analysis within Table 9 below, the Company has a greater
dollar value of financial assets that are subject to repricing within a 12 month
time horizon than its financial liabilities subject to repricing. Thereafter,
within successive 12-month time horizons, there are generally more financial
liabilities than financial assets with repricing opportunities. The degree of
magnitude of rate repricings of the financial assets and liabilities is, as
mentioned above, not addressed by a static gap analysis as presented in Table 9.
The Company does not currently use interest rate swaps or other derivatives
to modify the interest rate risk of its financial instruments.
The following table provides information as of December 31, 2003 about the
Company's financial instruments that are sensitive to changes in interest rates.
For fixed rate loans, securities, time deposits, federal funds and repurchase
agreements, and notes payable, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates, call dates,
or average-life terminal dates. Variable rate instruments are presented
according to their first repricing opportunities. Non-interest bearing deposits
and interest-bearing savings and checking deposits have no contractual maturity
dates. For purposes of Table 9, projected maturity dates for such deposits were
determined based on decay rate assumptions used internally by the Company to
evaluate such deposits. For further information on the fair value of financial
instruments, see Note 23 to the consolidated financial statements.
19
TABLE 9
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES
THERE
(DOLLARS IN THOUSANDS) 2004 2005 2006 2007 2008 AFTER
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $ 173,170 $ 113,743 $ 90,067 $ 42,171 $ 39,082 $ 29,490
Average interest rate 6.50% 6.58% 7.21% 6.53% 6.59% 8.20%
Variable Rate:
Book Value $ 418,159 $ 12,470 $ 13,456 $ 3,174 $ 3,955 $ 469
Average interest rate 4.27% 5.44% 4.73% 5.33% 5.31% 5.69%
Securities held-to-maturity:
Fixed Rate:
Book Value $ 4,940 $ 6,671 $ 8,248 $ 4,450 $ 3,070 $ 2,108
Average interest rate 4.81% 4.54% 4.48% 4.39% 4.27% 4.71%
Variable Rate:
Book Value -- -- -- -- -- --
Average interest rate -- -- -- -- -- --
Securities available-for-sale:
Fixed Rate:
Book Value $ 95,355 $ 2,000 $ -- $ 13,403 $ 5,045 $ --
Average interest rate 4.26% 4.00% -- 3.26% 3.67% --
Variable Rate:
Book Value $ 6,719 -- -- -- -- --
Average interest rate 2.82% -- -- -- -- --
Federal funds sold $ 11,139 -- -- -- -- --
Average interest rate .99% -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 708,482 $ 134,884 $ 111,771 $ 63,198 $ 51,152 $ 32,067
- -----------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Non-interest bearing-deposits $ 21,571 $ 21,571 $ 21,571 $ 21,571 $ 21,571 $ 61,337
Average interest rate N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking $ 114,353 $ 114,266 $ 59,677 $ 59,677 $ 59,085 $ --
Average interest rate 0.44% 0.44% 0.32% 0.32% 0.32% --
Time deposits $ 306,906 $ 37,744 $ 13,610 $ 6,443 $ 3,405 $ 2,000
Average interest rate 1.95% 2.37% 3.15% 3.93% 3.99% 4.51%
Federal funds purchased
and securities sold under
agreements to repurchase $ 80,967 -- -- -- -- --
Average interest rate 0.50% -- -- -- -- --
Notes payable $ 104 $ 109 $ 7,115 $ 3,121 $ 126 $ 41,475
Average interest rate 4.86% 4.86% 4.79% -- -- 4.96%
- -----------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 523,821 $ 173,690 $ 101,973 $ 90,812 $ 84,187 $ 104,812
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 185,661 $ (38,806) $ 9,798 $ (27,614) $ (33,035) $ (73,052)
Cumulative interest rate
sensitivity gap $ 185,661 $ 146,855 $ 156,653 $ 129,039 $ 96,004 $ 23,259
Cumulative interest rate
sensitivity gap as percent
of total financial assets 16.84% 13.32% 14.21% 11.70% 8.71% 2.11%
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES(CONTINUED)
FAIR
VALUE
(DOLLARS IN THOUSANDS) TOTAL 12-31-03
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $ 487,723 $ 489,244
Average interest rate 6.76%
Variable Rate:
Book Value $ 451,683 $ 452,163
Average interest rate 4.34%
Securities held-to-maturity:
Fixed Rate:
Book Value $ 29,487 $ 30,952
Average interest rate 4.53%
Variable Rate:
Book Value -- --
Average interest rate --
Securities available-for-sale:
Fixed Rate:
Book Value $ 115,803 $ 115,803
Average interest rate 3.95%
Variable Rate:
Book Value $ 6,719
Average interest rate 2.82%
Federal funds sold $ 11,139 $ 11,139
Average interest rate .99%
- --------------------------------------------------------------
Total Financial Assets $1,102,554 $1,106,020
- --------------------------------------------------------------
Financial Liabilities:
Non-interest bearing-deposits $ 169,192 $ 166,771
Average interest rate N/A
Interest-bearing
savings and checking $ 406,978 $ 401,925
Average interest rate 0.39% --
Time deposits $ 370,108 $ 372,266
Average interest rate 2.11% --
Federal funds purchased
and securities sold under
agreements to repurchase $ 80,967 $ 80,967
Average interest rate 0.50%
Notes payable $ 52,050 $ 60,041
Average interest rate 4.63%
- --------------------------------------------------------------
Total Financial Liabilities $1,079,295 $1,081,970
- --------------------------------------------------------------
Interest rate sensitivity gap $ 22,219 --
Cumulative interest rate
sensitivity gap
Cumulative interest rate
sensitivity gap as percent
of total financial assets
DEPOSITS
Customer deposits provide the Company with its primary source of funds for
the continued growth of its loan and investment securities portfolios. At
December 31, 2003, total deposits were $946,278,000, an increase of $48,115,000,
or 5.4 percent, from $898,163,000 at the end of 2002. The 2002 balance was
$86,640,000, or 10.7 percent, greater than total deposits at year-end 2001.
Noninterest-bearing accounts grew by $23,088,000, or 15.8 percent, for the year
ended December 31, 2003. Interest-bearing deposits were $777,086,000 at end of
2003, an increase of $25,027,000, or 3.3 percent, from one year earlier.
20
Average total deposits during 2003 were $946,746,000, an increase of
$91,523,000, or 10.7 percent, over 2002. Total average interest-bearing deposits
grew by $57,026,000, or 8.0 percent, led by a $34,025,000, or 19.9 percent,
increase in average interest-bearing transaction accounts. Average
noninterest-bearing demand deposits increased $34,497,000, or 24.9 percent. In
2002, total deposits averaged $855,210,000, an increase of $52,080,000, or 6.5
percent, compared with 2001. This increase was also mainly due to growth in
average interest-bearing transaction accounts of $26,089,000, 18.0 percent, and
an increase of $20,376,000, or 17.3 percent, noninterest-bearing deposits.
At December 31, 2003, the ratio of interest-bearing deposits to total
deposits was 82.1 percent, down slightly from 83.7 percent and 84.0 percent at
the end of 2002 and 2001, respectively.
TABLE 10
MATURITY DISTRIBUTION OF CD'S OF $100,000 OR MORE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2003 2002
Within three months $ 38,514 $ 48,982
After three through six months 37,853 35,579
After six through twelve months 35,636 45,581
After twelve months 22,299 19,380
- ------------------------------------------------------------------------------
Total $ 134,302 $ 149,522
==============================================================================
SHORT-TERM BORROWED FUNDS
The distribution of SCBT Financial Corporation's short-term borrowings at
the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below. Federal funds purchased and securities sold under agreement to
repurchase generally mature within one to three days from the transaction date.
Certain of the borrowings have no defined maturity date.
TABLE 11
DECEMBER 31
(DOLLARS IN THOUSANDS)
2003 2002 2001
AMOUNT RATE AMOUNT RATE AMOUNT RATE
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $ 80,967 0.45% $ 88,616 0.82% $ 66,617 1.52%
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 52,050 4.98% 49,500 5.03% 49,500 5.03%
- -------------------------------------------------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and
$ 86,185 0.63% $ 75,956 1.15% $ 70,852 3.44%
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 51,720 4.88% 49,500 5.03% 41,134 5.13%
- -------------------------------------------------------------------------------------------------------------------------------
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $ 101,991 $ 88,617 $ 91,820
- -------------------------------------------------------------------------------------------------------------------------------
Other borrowings 63,500 49,500 50,500
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL AND DIVIDENDS
A strong shareholders' equity base has provided SCBT Financial Corporation
with support for its banking operations and opportunities for growth, while
ensuring sufficient resources to absorb the risks inherent in the business. As
of December 31, 2003, shareholders' equity was $112,349,000, or 9.4 percent, of
total assets. At year-end 2002 and 2001, shareholders' equity was $103,496,000,
or 9.0 percent, and $93,065,000, or 9.1 percent, of total assets, respectively.
21
The Company and its banking subsidiaries are subject to certain risk-based
capital guidelines that measure the relationship of capital to both balance
sheet and off-balance sheet risks. Risk values are adjusted to reflect credit
risk. Pursuant to guidelines of the Board of Governors of the Federal Reserve
System, which are substantially similar to those promulgated by the Office of
the Comptroller of the Currency, Tier 1 capital must be at least 50 percent of
total capital and total capital must be eight percent of risk-weighted assets.
The Tier 1 capital ratio for SCBT Financial Corporation was 11.81 percent at
December 31, 2003, 11.67 percent at December 31, 2002 and 12.32 at the end of
2001. The total capital ratio for the Company was 13.06 percent, 12.92 percent
and 13.57 percent for the years ended December 31, 2003, 2002 and 2001,
respectively.
As an additional measure of capital soundness, the regulatory agencies have
prescribed a leverage ratio of total capital to total assets. The minimum
leverage ratio assigned to banks is between three and five percent and is
dependent on the institution's composite rating as determined by its regulators.
The leverage ratio for SCBT Financial Corporation was 9.13 percent at December
31, 2003, 8.70 percent at December 31, 2002 and 8.39 percent at yearend 2001.
The Company well exceeded all minimum ratio standards established by the
regulatory agencies.
SCBT Financial Corporation pays dividends to shareholders from funds
provided mainly by dividends from its subsidiary banks. Such bank dividends are
subject to certain regulatory restrictions and require the approval of the
Office of the Comptroller of the Currency in order to pay dividends in excess of
the banks' net earnings for the current year, plus retained net profits for the
preceding two years, less any required transfers to surplus. As of December 31,
2003, approximately $25,347,000 of the banks' retained earnings was available
for distribution to the Company as dividends without prior regulatory approval.
In 2003, the Company made shareholder dividend payments of $5,070,000 as
compared with $4,420,000 in 2002 and $4,000,000 in 2001. The dividend pay-out
ratios were 33.98 percent, 31.74 percent and 32.63 percent for the years 2003,
2002 and 2001, respectively. Earnings that are retained continue to be utilized
as a basis for loan and investment portfolio growth and in support of
acquisition or other business expansion opportunities.
NONINTEREST INCOME AND EXPENSE
Noninterest income provides significant alternate sources of revenue for the
Company that are especially important during periods of economic uncertainty
such as the nation has experienced the past three years. For the year ended
December 31, 2003, noninterest income was $22,915,000, an increase of
$5,067,000, or 28.4 percent, from 2002. In 2002, noninterest income was
$17,848,000, an increase of $4,168,000, or 30.5 percent, from 2001. In 2003,
noninterest income comprised 26.1 percent of total income from both interest and
noninterest sources. In 2002 and 2001, noninterest income was 20.8 percent and
15.5 percent, respectively, of total interest and noninterest income.
Service charges on deposit accounts were $11,537,000 in 2003, comprising
50.4 percent of total noninterest income, and representing a $638,000, or 5.9
percent increase over 2002. This increase was mainly due to strong deposit
growth during 2003. For the year ended December 31, 2002, service charges on
deposit accounts were $10,899,000, or 61.6 percent of total noninterest income.
This was a $3,149,000, or 40.6 percent, increase over 2001 and resulted from
deposit growth and new customer service programs.
During 2003, other service charges and fees increased by $4,429,000, or 63.7
percent, to $11,378,000, compared with 2002. For the year 2002, other service
charges and fees were up $1,589,000, or 29.6 percent, to $6,949,000, compared
with 2001. The increases in both 2003 and 2002 were mainly attributable to
higher origination fees earned on originations of fixed rate first mortgage
loans sold into the secondary market. The historically low interest rate
environment produced significant loan production increases in each of the past
three years. The results were especially strong in 2003, particularly in the
area of mortgage refinancing. Like many lending institutions, the Company
experienced a decrease in mortgage loan originations during the fourth quarter
of 2003, as refinance activity abated. While lending rates remain low by
historical measures in early 2004, the expectation is for mortgage loan
production to continue at a less robust pace than that experienced during the
second and third quarters of 2003.
The Company recognized a $570,000 gain on the sale of equity securities in
2001. No gains or losses on disposition of securities-available-for-sale were
recorded in either 2003 or 2002.
In 2003, noninterest expense was $48,715,000, an increase of $6,148,000, or
14.4 percent, from 2002. Noninterest expense was $42,567,000 in 2002, an
increase of $5,434,000, or 14.6 percent, compared with 2001.
Salaries and employee benefits were the largest component of noninterest
expense, comprising 58.9 percent and 56.7 percent of the category totals in 2003
and 2002, respectively. In 2003, salaries and employee benefits were
$28,670,000, an increase of $4,534,000, or 18.8 percent, over 2002. This
increase resulted from planned higher levels of salary, benefits and incentive
costs associated with increased staffing levels and lending activities, and
commissions to mortgage loan originators based on strong loan production. In
2002, salaries and employee benefits were $24,136,000, an increase of
$4,379,000, or 22.2 percent, over 2001. The main contributors to the 2002
increase were
22
again higher staffing levels and commissions associated with strong mortgage
loan activity. At December 31, 2003, the Company employed 514 full-time
equivalent employees, compared with 480 and 442 at the end of 2002 and 2001,
respectively. Payments under a cash incentive plan covering all employees were
$868,000 in 2003, $921,000 in 2002 and $730,000 in 2001.
Net occupancy expense was $2,887,000, $2,319,000 and $2,053,000 in 2003,
2002, 2001, respectively. These expenses increased 24.5 percent from 2002 to
2003, mainly due to branch openings and the new Columbia corporate headquarters
completed and occupied in January 2003. In 2002, net occupancy expense was 13.0
percent higher that the previous year, due similarly to increased operating
expenses associated with new banking facilities.
Furniture and equipment expense was $4,397,000 in 2003, an increase of
$539,000, or 14.0 percent, from 2002. This increase was mainly due to higher
depreciation expense and costs of leasing data processing and other equipment in
connection with new facilities. In 2002, furniture and equipment expense was
$3,858,000, an increase of $135,000, or 3.6 percent, from 2001. Higher equipment
leasing costs were the main contributors to the 2002 increase.
For the year 2003, other expense was $12,761,000, an increase of $507,000,
or 4.1 percent, from 2002. Other expense variations from 2002 to 2003 included
an increase of $232,000 in facilities operating expenses, including
communications, supplies, printing and postage in connection with new banking
facilities; an increase in city and county taxes of $203,000 resulting from new
facilities and higher tax levies on existing facilities; an increase in legal
fees of $118,000 associated with Sarbanes-Oxley compliance and various corporate
initiatives; an increase in public relations expense of $116,000 due to
increased community involvement activities; and a decrease in consulting fees of
$293,000, mainly attributable to new customer service programs in 2002. In 2002,
other expense was $12,254,000, an increase of $654,000, or 5.6 percent, from
2001. Consulting fees noted above were $613,000 higher in 2002 than 2001;
advertising and marketing costs increased by $415,000 in connection with
changing the names of the banking subsidiaries to South Carolina Bank and Trust;
facilities expenses were up $360,000 in connection with new bank properties; and
amortization of intangible assets decreased by $495,000.
TABLE 12
QUARTERLY RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
2003 QUARTERS 2002 QUARTERS
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
Interest income $ 15,487 $ 16,411 $ 16,536 $ 16,420 $ 16,672 $ 17,195 $ 16,767 $ 16,690
Interest expense 3,052 3,511 3,986 4,073 4,352 4,692 4,629 5,002
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,435 12,900 12,550 12,347 12,320 12,503 12,138 11,688
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 445 831 230 839 1,208 884 644 491
Noninterest income 5,510 6,432 5,639 5,334 5,144 4,372 4,104 4,151
Noninterest expense 12,062 12,828 12,196 11,629 10,525 11,276 10,525 10,241
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,438 5,673 5,763 5,213 5,731 4,715 5,073 5,107
Income taxes 1,770 1,787 1,952 1,792 1,931 1,460 1,670 1,731
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,668 $ 3,886 $ 3,811 $ 3,421 $ 3,800 $ 3,255 $ 3,403 $ 3,376
===================================================================================================================================
CRITICAL ACCOUNTING POLICIES
SCBT Financial Corporation has established various accounting policies that
govern the application of accounting principles generally accepted in the United
States of America in the preparation of the Company's financial statements. The
significant accounting policies of the Company are described in Note 1 to the
consolidated financial statements. Certain of these policies involve significant
judgments and estimates by management that have a material impact on the
carrying value of certain assets and liabilities. Different assumptions in the
application of these policies could result in material changes in the Company's
financial position and results of operations.
The allowance for loan losses reflects the estimated losses that will
result from the inability of the banks' borrowers to make required loan
payments. In determining an appropriate level for the allowance, management
identifies portions applicable to specific loans as well as providing amounts
that are not identified with any specific loan but are derived with reference to
actual loss experience, loan types, loan volumes, economic conditions, and
industry standards. Changes in these factors may cause management's estimate of
the allowance to increase or decrease and result in adjustments to the Company's
provision for loan losses. See "Loan Loss Provision" in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
"Allowance for Loan Losses" in Note 1 to the consolidated financial statements
for further detailed descriptions of the Company's estimation process and
methodology related to the allowance for loan losses.
23
Intangible assets, included in other assets in the consolidated balance
sheets, consist of goodwill and core deposit premium costs that resulted from
the acquisition of branches from other commercial banks. Core deposit premium
costs represent the estimated value of long-term deposit relationships acquired
in these transactions. These costs are amortized over the estimated useful lives
of the deposit accounts acquired on a method that management believes reasonably
approximates the anticipated benefit stream from the accounts. The estimated
useful lives are periodically reviewed for reasonableness. Goodwill represents
the excess of the purchase price over the sum of the estimated fair values of
the tangible and identifiable intangible assets acquired less the estimated fair
value of the liabilities assumed. Beginning January 1, 2002, goodwill is no
longer amortized, but is evaluated at least annually for impairment.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America which
require the measure of financial position and results of operations in terms of
historical dollars, without consideration of changes in the relative purchasing
power over time due to inflation. Unlike most other industries, the majority of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant effect on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While the effect of inflation on banks is normally not as significant as is
its influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses. Inflation also affects the bank's customers which may result in an
indirect effect on the banks' business.
CONTRACTUAL OBLIGATIONS
The following table presents payment schedules for certain contractual
obligations of the Company as of December 31, 2003. Long-term debt obligations
totaling $52,050,000 include advance agreements (borrowings) with the Federal
Home Loan Bank of Atlanta. These advances are collateralized by stock in the
FHLB of Atlanta and qualifying first mortgage loans and commercial real estate
loans under a blanket floating lien. Further information regarding these
advances is contained in Table 11 of this Management's Discussion and Analysis
of Financial Condition and Results of Operations. Operating lease obligations of
$3,036,000 pertained to banking facilities and equipment. Certain lease
agreements include payment of property taxes and insurance and contain various
renewal options. Additional information regarding leases is contained in Note 19
to the consolidated financial statements.
(IN THOUSANDS OF DOLLARS)
PAYMENT DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
Long-term debt obligations $ 52,050 $ 122 $ 7,248 $ 3,255 $ 41,425
Operating lease obligations 3,036 598 836 547 1,055
------------------------------------------------------------
Total $ 55,086 $ 720 $ 8,084 $ 3,802 $ 42,480
============================================================
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See "Derivatives and Securities Held for Trading" and "Asset-Liability
Management and Market Risk Sensitivity" in Management's Discussion and Analysis
of Financial Condition and Results of Operations for quantitative and
qualitative disclosures about market risk.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF
MANAGEMENT
The financial statements, accompanying notes, and other financial
information in this Report were prepared by management of SCBT Financial
Corporation which is responsible for the integrity of the information given. The
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and include amounts which are based on
management's judgment or best estimates.
The Company maintains a system of internal controls to reasonably assure the
safeguarding of assets and proper execution of transactions according to
management's directives. The control system consists of written policies and
procedures, segregation of duties, and an internal audit program. Management is
cognizant of the limitations of such controls, but feels reasonable assurance of
effectiveness is achieved without extending costs beyond benefits derived.
Internal audit reports are prepared for the Audit Committee of the Board of
Directors and copies are made available to the independent auditors. The Audit
Committee of the Board of Directors consists solely of outside independent
directors who meet periodically with management, internal auditors, and the
independent auditors. The Audit Committee reviews matters relating to the audit
scope, quality of financial reporting and control, and evaluation of
management's performance of its financial reporting responsibility. Access to
the Audit Committee is available to both internal and independent auditors
without management present.
J. W. Hunt and Company, LLP independent auditors, has audited the financial
statements and notes included in this Annual Report. Their audit was conducted
in accordance with auditing standards generally accepted in the United States of
America, and their opinion presents an objective evaluation of management's
discharge of its responsibility to fairly present the financial statements of
the Company. Their opinion is contained in their report below. All financial
information appearing in this Annual Report is consistent with that in the
audited financial statements.
SCBT Financial
Corporation Columbia,
South Carolina February
2, 2004
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Shareholders and
the Board of
Directors SCBT
Financial Corporation
We have audited the accompanying consolidated balance sheets of SCBT
Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SCBT
Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
J. W. Hunt and Company, LLP
Columbia, South Carolina
February 2, 2004
25
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT PAR VALUE)
DECEMBER 31,
2003 2002
---- ----
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 38,541 $ 40,479
Interest-bearing deposits with banks 4,083 35
Federal funds sold 4,500 --
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 47,124 40,514
- ---------------------------------------------------------------------------------------------------------------------
Investment securities:
Securities held-to-maturity (fair value of $30,952 in 2003 and $35,044 in 2002) 29,487 33,211
Securities available-for-sale, at fair value 122,522 131,740
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 152,009 164,951
- ---------------------------------------------------------------------------------------------------------------------
Loans held for sale 12,346 39,141
- ---------------------------------------------------------------------------------------------------------------------
Loans 939,538 864,815
Less unearned income (778) (1,393)
Less allowance for loan losses (11,700) (11,065)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 927,060 852,357
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 32,647 28,186
- ---------------------------------------------------------------------------------------------------------------------
Other assets 26,506 19,799
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,197,692 $ 1,144,948
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 169,192 $ 146,104
Interest-bearing 777,086 752,059
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 946,278 898,163
Federal funds purchased and securities
sold under agreements to repurchase 80,967 88,616
Notes payable 52,050 49,500
Other liabilities 6,048 5,173
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 1,085,343 1,041,452
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000
shares, issued and outstanding 7,690,186 shares in
2003 and 7,673,339 shares in 2002 19,225 19,183
Surplus 62,722 62,423
Retained earnings 29,787 20,071
Accumulated other comprehensive income 615 1,819
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 112,349 103,496
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,197,692 $ 1,144,948
=====================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
26
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Interest income:
Loans, including fees $ 58,283 $ 57,956 $ 63,196
Investment securities:
Taxable 4,980 7,307 8,980
Tax-exempt 1,383 1,501 1,606
Money market funds 67 404 108
Federal funds sold 86 107 578
Deposits with banks 55 49 4
- -----------------------------------------------------------------------------------------------------------
Total interest income 64,854 67,324 74,472
- -----------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 11,555 15,382 25,423
Federal funds purchased and securities
sold under agreements to repurchase 545 878 2,438
Notes payable 2,522 2,492 2,111
- -----------------------------------------------------------------------------------------------------------
Total interest expense 14,622 18,752 29,972
- -----------------------------------------------------------------------------------------------------------
Net interest income:
Net interest income 50,232 48,572 44,500
Provision for loan losses 2,345 3,227 2,304
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 47,887 45,345 42,196
- -----------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 11,537 10,899 7,750
Other service charges and fees 11,378 6,949 5,360
Gain on sale of securities available-for-sale -- -- 570
- -----------------------------------------------------------------------------------------------------------
Total noninterest income 22,915 17,848 13,680
- -----------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 28,670 24,136 19,757
Net occupancy expense 2,887 2,319 2,053
Furniture and equipment expense 4,397 3,858 3,723
Other expense 12,761 12,254 11,600
- -----------------------------------------------------------------------------------------------------------
Total noninterest expense 48,715 42,567 37,133
- -----------------------------------------------------------------------------------------------------------
Earnings:
Income before provision for income taxes 22,087 20,626 18,743
Provision for income taxes 7,301 6,792 6,486
- -----------------------------------------------------------------------------------------------------------
Net income $ 14,786 $ 13,834 $ 12,257
===========================================================================================================
Earnings per share
Basic $ 1.93 $ 1.80 $ 1.59
===========================================================================================================
Diluted $ 1.91 $ 1.79 $ 1.59
===========================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
27
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME/LOSS TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 7,026,901 $ 17,567 $ 47,488 $ 20,228 $ (347) $ 84,936
Comprehensive income:
Net income -- -- -- 12,257 -- 12,257
Change in net unrealized gain on
securities available-for-sale, net of
tax effects -- -- -- -- 1,499 1,499
----------
Total comprehensive income 13,756
----------
Cash dividends declared at $.57 per share -- -- -- (4,000) -- (4,000)
----------
Stock options exercised 76,230 191 700 -- -- 891
----------
Common stock repurchased (138,253) (346) (2,172) -- -- (2,518)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 6,964,878 17,412 46,016 28,485 1,152 93,065
----------
Comprehensive income:
Net income -- -- -- 13,834 -- 13,834
Change in net unrealized gain on
securities available-for-sale, net of
tax effects -- -- -- -- 667 667
----------
Total comprehensive income 14,501
----------
Cash dividends declared at $.59 per share -- -- -- (4,420) -- (4,420)
----------
Stock options exercised 4,300 11 67 -- -- 78
----------
Employee stock purchases 3,776 9 72 -- -- 81
----------
Restricted stock awards 17,000 43 413 -- 456
----------
Common stock repurchased (12,402) (31) (234) -- -- (265)
----------
Common stock dividend of 10%, record date,
November 22, 2002 695,787 1,739 16,089 (17,828) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 7,673,339 19,183 62,423 20,071 1,819 103,496
----------
Comprehensive income:
Net income -- -- -- 14,786 -- 14,786
Change in net unrealized gain on
securities available-for-sale, net of
tax effects -- -- -- -- (1,204) (1,204)
----------
Total comprehensive income 13,582
----------
Cash dividends declared at $.66 per share -- -- -- (5,070) -- (5,070)
----------
Stock options exercised 5,723 14 86 -- -- 100
----------
Employee stock purchases 11,224 28 217 -- -- 245
----------
Restricted stock awards 2,000 5 44 -- -- 49
----------
Common stock repurchased (2,100) (5) (48) -- -- (53)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 7,690,186 $ 19,225 $ 62,722 $ 29,787 $ 615 $ 112,349
===================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
Cash flows from operating activities: 2003 2002 2001
---- ---- ----
Net income $ 14,786 $ 13,834 $ 12,257
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
2,498 2,005 2,439
Provision for loan losses 2,345 3,227 2,304
Deferred income taxes 186 (109) (465)
Gain on sale of securities available-for-sale -- -- (570)
(Gain) loss on sale of premises and equipment (7) 4 17
Net amortization of investment securities 1,054 962 189
Net change in:
Loans held for sale 26,795 (18,363) (19,425)
Accrued interest receivable 362 667 1,569
Prepaid assets (1) (771) 582
Miscellaneous other assets (7,470) (3,978) (405)
Accrued interest payable (739) (687) (1,312)
Accrued income taxes (502) 95 244
Miscellaneous other liabilities 2,115 690 772
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 41,422 (2,424) (1,804)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available-for-sale -- -- 14,044
Proceeds from maturities of investment securities
held-to-maturity 3,666 2,807 3,459
Proceeds from maturities of investment securities
available-for-sale 118,467 277,106 172,001
Purchases of investment securities held-to-maturity -- (1,073) --
Purchases of investment securities available-for-sale (112,188) (253,744) (193,450)
Net increase in customer loans (77,747) (117,572) (22,198)
Recoveries on loans previously charged off 700 256 400
Purchases of premises and equipment (6,022) (10,773) (4,997)
Proceeds from sale of premises and equipment 23 187 280
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (73,101) (102,806) (30,461)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits 48,116 86,640 53,948
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (7,648) 21,999 668
Proceeds from issuance of debt 46,550 -- 54,500
Repayment of debt (44,000) -- (62,050)
Common stock issuance 294 537 --
Common stock repurchase (53) (265) (2,518)
Dividends paid (5,070) (4,420) (4,000)
Stock options exercised 100 78 891
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 38,289 104,569 41,439
- --------------------------------------------------------------------------------------------------------------
29
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Net increase (decrease) in cash and cash equivalents $ 6,610 $ (661) $ 9,174
Cash and cash equivalents at beginning of year 40,514 41,175 32,001
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 47,124 $ 40,514 $ 41,175
===============================================================================================================
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest $ 15,361 $ 18,282 $ 31,685
===============================================================================================================
Income taxes $ 7,761 $ 6,705 $ 6,715
===============================================================================================================
Schedule of Noncash Investing Transactions:
Real estate acquired in full or partial settlement of loans $ 1,465 $ 1,051 $ 798
===============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
SCBT Financial Corporation (the "Company") is a bank holding company
whose principal activity is the ownership and management of its wholly-owned
subsidiaries, South Carolina Bank and Trust, N.A., South Carolina Bank and Trust
of the Piedmont, N.A., (the "Banks"), and CreditSouth Financial Services
Corporation ("CreditSouth"). The accounting and reporting policies of the
Company and its subsidiaries conform with accounting principles generally
accepted in the United States of America. The Banks provide general banking
services within the State of South Carolina ("South Carolina").
On December 1, 2002, South Carolina Bank and Trust, N.A. acquired the majority
of the consumer loan portfolio and related assets of CreditSouth and assumed the
continuing lending activities of that entity. Thereafter, CreditSouth ceased
active lending programs and focused on servicing a retained portfolio of loans
that were delinquent at the time of the acquisition.
In July 2003, South Carolina Bank and Trust of the Pee Dee, N.A., was merged
with South Carolina Bank and Trust, N.A., in order to achieve certain operating
efficiencies.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of SCBT Financial
Corporation and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
SEGMENTS:
The Company, through its subsidiaries, provides a broad range of financial
services to individuals and companies in South Carolina. These services include
demand, time and savings deposits; lending and credit card servicing; ATM
processing; and trust services. While the Company's decision-makers monitor the
revenue streams of the various financial products and services, operations are
managed and financial performance is evaluated on an organization-wide basis.
Accordingly, the Company's banking and finance operations are not considered by
management to be more than one reportable operating segment.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, fair value of
financial instruments, and valuation of deferred tax assets. In connection with
the determination of the allowance for loan losses, management has identified
30
specific loans as well as adopted a policy of providing amounts for loan
valuation purposes which are not identified with any specific loan but are
derived from actual loss experience ratios, loan types, loan volume, economic
conditions and industry standards. Management believes that the allowance for
loan losses is adequate. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, regulatory agencies, as an
integral part of the examination process, periodically review the banking
subsidiaries' allowance for loan losses. Such agencies may require additions to
the allowance based on their judgments about information available to them at
the time of their examination.
CONCENTRATIONS OF CREDIT RISK:
The Company's subsidiaries grant agribusiness, commercial, and residential loans
to customers throughout South Carolina. Although the subsidiaries have a
diversified loan portfolio, a substantial portion of their debtors' ability to
honor their contracts is dependent upon economic conditions within South
Carolina and the surrounding region.
The Company considers concentrations of credit to exist when, pursuant to
regulatory guidelines, the amounts loaned to a multiple number of borrowers
engaged in similar business activities which would cause them to be similarly
impacted by general economic conditions represents 25% of total risk-based
capital, or $29,981,000 at December 31, 2003. Based on this criteria, the
Company had two credit concentrations at the end of the year, including
$60,188,000 of loans to lessors of nonresidential buildings and $38,702,000 of
loans to religious organizations.
INVESTMENT SECURITIES:
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held-to-maturity" and carried at amortized cost.
Securities not classified as held-to-maturity, including equity securities with
readily determinable fair values, are classified as "available-for-sale" and
carried at fair value with unrealized gains and losses excluded from earnings
and reported in other comprehensive income (loss).
Purchase premiums and discounts are recognized in interest income using methods
approximating the interest method over the terms of the securities. Declines in
the fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses realized on sales of securities
available-for-sale are determined using the specific identification method. In
estimating other-thantemporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuers, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
LOANS HELD FOR SALE:
Loans originated and intended for sale in the secondary market are carried at
the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
LOANS:
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their unpaid
principal balances, less unearned discounts and the allowance for loan losses.
Unearned discounts on installment loans are recognized as income over the terms
of the loans by methods which generally approximate the interest method.
Interest on other loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Loans are most typically
placed on nonaccrual when a loan is specifically determined to be impaired or
when principal or interest is delinquent for 120 days or more. A nonaccrual loan
may not be considered impaired if it is expected that the delay in payment is
minimal. Interest accrued in the current year but unpaid at the date a loan is
placed on nonaccrual status is deducted from interest income. Interest accrued
from previous years is charged against the allowance for loan losses. Interest
income is subsequently recognized only to the extent of interest payments
received.
A loan is considered impaired when, in management's judgement, based on current
information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Management determines when loans become impaired through its normal loan
administration and review functions. Those loans identified as substandard or
doubtful as a result of the loan review process are potentially impaired loans.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired provided that management expects to
collect all amounts due, including interest accrued at the contractual interest
rate, for the period of delay. Impairment is measured on a loan by loan basis
for commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
31
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
credit card, residential mortgage, overdraft protection, home equity lines,
accounts receivable financing, and consumer installment loans for impairment
disclosures.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established for estimated loan charge-offs
through a provision for loan losses charged to earnings. Loan losses are charged
against the allowance when management believes that the collectibility of the
principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
Although management uses available information to recognize losses on loans,
because of uncertainties associated with local economic conditions, collateral
values, and future cash flows on impaired loans, it is reasonably possible that
a material change could occur in the allowance for loan losses in the near term.
However, the amount of the change that is reasonably possible cannot be
estimated. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses.
OTHER REAL ESTATE OWNED (OREO):
Real estate acquired in satisfaction of a loan and in-substance foreclosures are
reported in other assets. In-substance foreclosures are properties in which the
borrower has little or no equity in the collateral. Properties acquired by
foreclosure or deed in lieu of foreclosure and in-substance foreclosures are
transferred to OREO and recorded at the lower of the outstanding loan balance at
the time of acquisition or the estimated market value. Market value is
determined on the basis of the properties being disposed of in the normal course
of business and not on a liquidation or distress basis. Loan losses arising from
the acquisition of such properties are charged against the allowance for loan
losses. Gains or losses arising from the sale of OREO are reflected in current
operations.
TRANSFERS OF FINANCIAL ASSETS:
Transfers of financial assets are accounted for as sales when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
PREMISES AND EQUIPMENT:
Land is carried at cost. Office equipment, furnishings, and buildings are
carried at cost less accumulated depreciation computed principally on the
declining-balance and straight-line methods over the estimated useful lives of
the assets. Leasehold improvements are amortized on the straight-line method
over the shorter of the estimated useful lives of the improvements or the terms
of the related leases. Additions to premises and equipment and major
replacements are added to the accounts at cost. Maintenance and repairs and
minor replacements are charged to expense when incurred. Gains and losses on
routine dispositions are reflected in current operations.
INTANGIBLE ASSETS:
Intangible assets consist primarily of goodwill and core deposit premium costs
which resulted from the acquisition of branches from other commercial banks.
Core deposit premium costs represent the value of long-term deposit
relationships acquired in these transactions. Goodwill represents the excess of
the purchase price over the sum of the fair values of the tangible and
identifiable intangible assets acquired less the fair value of the liabilities
assumed. Core deposit premium costs are being amortized over the estimated
useful lives of the deposit accounts acquired on a
32
method which reasonably approximates the anticipated benefit stream from the
accounts. Beginning January 1, 2002, goodwill is no longer amortized, but is
reviewed for potential impairment. The impairment tests are performed at a
reporting unit level annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. To the extent that
impairment exists, write-downs to realizable value are recorded.
EMPLOYEE BENEFIT PLANS:
A summary of the Company's various employee benefit plans follows:
PENSION PLAN - The Company and its subsidiaries have a non-contributory defined
benefit pension plan covering all employees who have attained age twenty-one and
have completed one year of eligible service. The Company's funding policy is to
contribute annually the amount necessary to satisfy the Internal Revenue
Service's funding standards.
PROFIT-SHARING PLAN - The Company and its subsidiaries have a profit-sharing
plan, including Internal Revenue Code Section 401(k) provisions. Electing
employees are eligible to participate after attaining age twenty-one and
completing one year of eligible service. Plan participants elect to contribute
1% to 4% of annual base compensation as a before tax contribution. The Company
matches 50% of these contributions, however, beginning in April 2004, the
Company will match 50% of an employee's contribution up to 6% of compensation.
Employer contributions may be made from current or accumulated net profits.
Participants may additionally elect to contribute 1% to 6% of annual base
compensation as a before tax contribution with no employer matching
contribution.
RETIREE MEDICAL PLAN - Post-retirement health and life insurance benefits are
provided to eligible employees, such benefits being limited to those employees
of the Company eligible for early retirement under the pension plan on or before
December 31, 1993, and former employees who are currently receiving benefits.
The plan was unfunded at December 31, 2002, and the liability for future
benefits has been recorded in the consolidated financial statements.
EMPLOYEE STOCK PURCHASE PLAN - The Company has registered 300,000 shares of
common stock in connection with the establishment of an Employee Stock Purchase
Plan. The Plan, which is effective for the seven year period commencing July 1,
2002, is available to all employees who have attained age 21 and completed one
year of service. The price at which common stock may be purchased for each
quarterly option period is the lesser of 85 percent of the common stock's fair
value on either the first or last day of the quarter.
CASH AND CASH EQUIVALENTS:
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, cash items in process of
collection, amounts due from banks, interest bearing deposits with banks, and
federal funds sold. Due from bank balances are maintained in other financial
institutions. Federal funds sold are generally purchased and sold for one-day
periods.
INCOME TAXES:
Income taxes are provided for the tax effects of the transactions reported in
the accompanying consolidated financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences between the
basis of available-for-sale securities, allowance for loan losses, accumulated
depreciation, consumer loan income, accretion income, intangible assets, and
pension plan and post-retirement benefits. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are reflected at
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The Company files a consolidated federal income tax
return with its subsidiaries.
ADVERTISING COSTS:
The Company expenses advertising production costs as they are incurred and
advertising communication costs the first time the advertising takes place.
STOCK COMPENSATION PLANS:
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, allows all entities to adopt a fair value based method
of accounting for employee stock compensation plans, whereby compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plans have no intrinsic value at the grant date, and
under APB Opinion No. 25 no compensation cost is recognized for them. The
Company has elected to
33
continue with the accounting methodology in APB Opinion No. 25 and, as a result,
has provided pro forma disclosures of net income and earnings per share and
other disclosures, as if the fair value based method of accounting had been
applied. The pro forma disclosures include the effects of all awards granted on
or after January 1, 1995. (See NOTE 17.)
EARNINGS PER SHARE:
Basic earnings per share represents income available to shareholders divided by
the weighted-average number of shares outstanding during the year. Diluted
earnings per share reflects additional shares that would have been outstanding
if dilutive potential shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential shares that may be
issued by the Company relate solely to outstanding stock options, and are
determined using the treasury stock method. Under the treasury stock method, the
number of incremental shares is determined by assuming the issuance of the
outstanding stock options, reduced by the number of shares assumed to be
repurchased from the issuance proceeds, using the average market price for the
year of the Company's stock.
COMPREHENSIVE INCOME (LOSS):
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. (See NOTE 13.)
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. SFAS No. 143 requires that an
entity recognize the fair value of a liability for an asset retirement
obligation in the period in which a reasonable estimate of fair value can be
made. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002,
with early adoption permitted. The adoption of this standard did not have a
significant impact on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO.
4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS.
SFAS No. 145 requires the recording of gains and losses from the extinguishment
of debt to be classified as operating income, as opposed to previous
requirements which reflected such gains and losses as extraordinary items. SFAS
No. 145 is effective for fiscal years beginning on or after May 15, 2002. The
adoption of SFAS 145 did not have a significant impact on the Company's
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH
EXIT OR DISPOSAL ACTIVITIES. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, LIABILITY RECOGNITION FOR
CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY
(INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). This Statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is incurred. The provisions of SFAS
No. 146 were effective for exit and disposal activities initiated after December
31, 2002. SFAS No. 146 did not have a significant impact on the Company's
financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES. This interpretation addresses consolidation by
business enterprises of certain variable interest entities in which they have
controlling financial interests. This interpretation applied immediately to any
variable interest entities created after January 31, 2003, and was effective
July 1, 2003 for variable interests acquired prior to February 1, 2003. The
effective date was later delayed, however the Company adopted the requirements
of FIN 46 effective July 1, 2003, with no impact on the financial condition or
operating results of the Company. In December 2003, the FASB issued a revised
FIN 46 that incorporated guidance from certain FASB staff positions relating to
the original interpretation. The revised FIN 46 is effective for periods ending
after December 15 or March 15, 2004, depending on the type of variable interest
entity. The issuance of the revised FIN 46 did not affect the Company's initial
adoption. The interpretation of FIN 46 and its application to various
transaction types and structures are still evolving and management will continue
to monitor these emerging issues.
In April 2003, the FASB issued SFAS No. 149, AMENDMENT OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement amends SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. This
Statement is effective for contracts entered into or modified after June 30,
2003, except in certain circumstances, and for hedging relationships designated
after June 30, 2003. This Statement did not have a material effect on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This Statement
provides new rules on the accounting for certain financial instruments that,
under precious guidance, issuers could account for as equity. Such financial
instruments include mandatorily redeemable
34
shares, instruments that require the issuer to buy back some of its shares in
exchange for cash or other assets, or obligations that can be settled with
shares, the monetary value of which is fixed. Most of the guidance in SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 30, 2003. This Statement had no effect on the
Company's consolidated financial statements.
In December 2003, the Securities and Exchange Commission (SEC) staff issued
informal interim guidance relating to the accounting for interest rate lock
commitments that are subject to SFAS No. 133 Implementation Issue No. C13, which
includes the Company's mortgage loan interest rate lock commitments. The SEC
interim guidance will require that all interest rate lock commitments entered
into in the period beginning after March 15, 2004 (April 1, 2004 for the
Company), be recorded as a written option liability with a corresponding expense
charge. As the guidance has not yet been formalized in a Staff Accounting
Bulletin and details of the valuation methodology are not available, it is
difficult to ascertain the effect on the Company; however, it is not anticipated
that the adoption of this guidance will have a material effect on the financial
condition or the operating results of the Company.
OTHER:
Certain amounts previously reported have been restated in order to conform with
current year presentation. Such reclassifications had no effect on net income.
NOTE 2 - RESTRICTION ON CASH AND DUE FROM BANKS:
The Banks are required to maintain a specified average amount of reserve funds
in cash or on deposit with the Federal Reserve Bank. The average amount of such
reserve funds at December 31, 2003 and 2002 was approximately $11,413,000 and
$9,148, 000, respectively.
At December 31, 2003, the Company and its subsidiaries had due from bank
balances in excess of federally insured limits of approximately $3,583,000. The
risk associated with this excess is limited due to the soundness of the
financial institutions with which the funds are deposited.
NOTE 3 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities
held-to-maturity at December 31, 2003 and 2002:
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS OF DOLLARS)
Mortgage-backed $ -- $ -- $ -- $ --
State and municipal 29,487 1,465 -- 30,952
- ---------------------------------------------------------------------------------------------------------
Total $ 29,487 $ 1,465 $ -- $ 30,952
=========================================================================================================
2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS OF DOLLARS)
Mortgage-backed $ 51 $ -- $ -- $ 51
State and municipal 33,160 1,836 (3) 34,993
- ---------------------------------------------------------------------------------------------------------
Total $ 33,211 $ 1,836 $ (3) $ 35,044
=========================================================================================================
The fair values of obligations of states and political subdivisions are
established with the assistance of an independent pricing service. The values
are based on data which often reflect transactions of relatively small size and
are not necessarily indicative of the value of the securities when traded in
large volumes.
35
The following is the amortized cost and fair value of securities
available-for-sale at December 31, 2003 and 2002:
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS OF DOLLARS)
U. S. Treasury and other
Government agencies $ 25,448 $ 44 $ (39) $ 25,453
Mortgage-backed 77,906 1,177 (523) 78,560
Other investments 18,177 332 -- 18,509
- ---------------------------------------------------------------------------------------------------------
Total $ 121,531 $ 1,553 $ (562) $ 122,522
=========================================================================================================
2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS OF DOLLARS)
U. S. Treasury and other
Government agencies $ 45,319 $ 543 $ (3) $ 45,859
Mortgage-backed 72,337 2,358 (1) 74,694
Other investments 11,096 97 (6) 11,187
- ---------------------------------------------------------------------------------------------------------
Total $ 128,752 $ 2,998 $ (10) $ 131,740
=========================================================================================================
The amortized cost and fair value of debt securities at December 31, 2003 by
contractual maturity are detailed below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
SECURITIES SECURITIES
HELD-TO-MATURITY AVAILABLE-FOR-SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(IN THOUSANDS OF DOLLARS)
Due in one year or less $ 4,714 $ 4,759 $ 12,830 $ 12,861
Due after one year through
five years 20,238 21,256 90,526 91,216
Due after five years through
ten years 4,535 4,937 12,498 12,445
- ---------------------------------------------------------------------------------------------------------
Subtotal 29,487 30,952 115,854 116,522
No contractual maturity -- -- 5,677 6,000
- ---------------------------------------------------------------------------------------------------------
Total $ 29,487 $ 30,952 $ 121,531 $ 122,522
=========================================================================================================
There were no sales or transfers of held-to-maturity securities during 2003,
2002 or 2001.
The following table summarizes information with respect to sale of
available-for-sale securities:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Sale proceeds $ -- $ -- $ 14,044
- -------------------------------------------------------------------------------------
Gross realized gains $ -- $ -- $ 597
Gross realized losses -- -- 27
- -------------------------------------------------------------------------------------
Net realized gain $ -- $ -- $ 570
=====================================================================================
36
Information pertaining to securities with gross unrealized losses at December
31, 2003, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:
LESS THAN TWELVE MONTHS OVER TWELVE MONTHS
----------------------- ------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
------ ----- ------ -----
(IN THOUSANDS OF DOLLARS)
Securities Held-to-Maturity
- ---------------------------
State and municipal $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity $ -- $ -- $ -- $ --
=============================================================================================================
Securities Available-for-Sale
- -----------------------------
U.S. Treasury and
Government agencies $ 39 $ 3,712 $ -- $ --
Mortgage-backed 523 39,068 -- --
Other investments -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total Available-for-Sale $ 562 $ 42,780 $ -- $ --
=============================================================================================================
At December 31, 2003, debt securities with unrealized losses have depreciated
only 1.3% from the Company's amortized cost basis. These unrealized losses
relate principally to mortgage-backed securities whose prepayment speeds were
higher than anticipated at the time of purchase. Consequently, any premiums paid
(above par) have adjusted to revised market expectations in the fair value price
analysis. In analyzing an issuer's financial condition, management considers
whether the securities are issued by the federal government or its agencies,
whether downgrades by bond rating agencies have occurred, and the results of
reviews of the issuer's financial condition. As management has the ability to
hold debt securities until maturity, or for the foreseeable future if classified
as available for sale, no declines are deemed to be other than temporary.
Management evaluates securities for other-than temporary impairment at least on
a monthly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
The Banks, as members of the Federal Home Loan Bank ("FHLB") of Atlanta, are
required to own capital stock in the FHLB of Atlanta based generally upon their
balances of residential mortgage loans and FHLB advances. FHLB capital stock
owned by the Banks is pledged as collateral on FHLB advances. No secondary
market exists for this stock, and it has no quoted market price. However,
redemption through the FHLB of this stock has historically been at par value.
At December 31, 2003 and 2002, investment securities with a carrying value of
$56,014,000 and $70,045,000, respectively, were pledged to secure public
deposits, FHLB advances and for other purposes required and permitted by law. At
December 31, 2003 and 2002, the carrying amount of securities pledged to secure
repurchase agreements was $73,207,000 and $73,179,000, respectively.
37
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 2003 and 2002:
2003 2002
---- ----
(IN THOUSANDS OF DOLLARS)
Commercial, financial and agricultural $ 133,055 $ 149,385
Real estate - construction 26,511 40,338
Real estate - mortgage 678,229 562,179
Consumer 101,743 112,913
- -------------------------------------------------------------------------------------------------------------
Total loans 939,538 864,815
Less, unearned income 778 1,393
Less, allowance for loan losses 11,700 11,065
- -------------------------------------------------------------------------------------------------------------
Loans, net $ 927,060 $ 852,357
=============================================================================================================
Changes in the allowance for loan losses for the three years ended December 31,
2003, were as follows:
2003 2002 2001
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Balance at beginning of year $ 11,065 $ 9,818 $ 8,922
Loans charged-off (2,410) (2,236) (1,808)
Recoveries of loans previously charged-off 700 256 400
- -------------------------------------------------------------------------------------------------------------------------
Balance before provision for loan losses 9,355 7,838 7,514
Provision for loan losses 2,345 3,227 2,304
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 11,700 $ 11,065 $ 9,818
=========================================================================================================================
The following is a summary of information pertaining to impaired and nonaccrual
loans:
2003 2002
---- ----
(IN THOUSANDS OF DOLLARS)
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 2,871 835
- -------------------------------------------------------------------------------------------------------------
Total impaired loans $ 2,871 $ 835
=============================================================================================================
Valuation allowance related to impaired loans $ 971 $ 720
Total nonaccrual loans $ 4,669 $ 3,010
Total loans past-due ninety days or more and still accruing $ 2,082 $ 1,729
Interest income which was foregone was an immaterial amount for each of the
three years in the period ended December 31, 2003. There were no restructured
loans at December 31, 2003 and 2002. Included in the balance sheet under the
caption "Other assets" are certain real properties which were acquired as a
result of completed foreclosure proceedings. Also included in the caption are
amounts reclassified as in-substance foreclosures. Other real estate totaled
$1,465,000 and $1,051,000 at December 31, 2003 and 2002, respectively.
38
39
NOTE 5 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31, consisted of the following:
USEFUL LIFE 2003 2002
----------- ---- ----
(IN THOUSANDS OF DOLLARS)
Land $ 6,051 $ 3,408
Buildings and leasehold improvements 15-40 years 27,886 26,646
Equipment and furnishings 5-10 years 15,147 12,609
- -------------------------------------------------------------------------------------------------------------
Total 49,084 42,663
Less, accumulated depreciation 16,437 14,477
- -------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 32,647 $ 28,186
=============================================================================================================
Depreciation expense charged to operations was $2,012,000, $1,467,000, and
$1,474,000 in 2003, 2002, and 2001, respectively.
Computer software with an original cost of $2,426,000 is being amortized using
the straight-line method over thirty-six months. Amortization expense totaled
$285,000, $333,000, $241,000 for the years ended December 31, 2003, 2002, and
2001 respectively.
NOTE 6 - INTANGIBLE ASSETS:
As a result of the adoption of SFAS 142, the Company ceased amortization of its
$2,363,000 of goodwill as of January 1, 2002. The Company has determined that
there has been no impairment of goodwill, based on testing performed through
December 31, 2003.
The following is a summary of gross carrying amounts and accumulated
amortization of core deposit premium costs at December 31, 2003 and 2002:
2003 2002
---- ----
(IN THOUSANDS OF DOLLARS)
Gross carrying amount $ 5,538 $ 5,538
Accumulated amortization (4,608) (4,414)
Estimated amortization expense for core deposit premium costs for each of the
next five years is as follows:
YEAR ENDING DECEMBER 31: (IN THOUSANDS OF DOLLARS)
2004 $ 173
2005 155
2006 138
2007 120
2008 102
39
The following table presents actual results for the years ended December 31,
2003 and 2002, and adjusted net income and adjusted earnings per share for the
year ended December 31, 2001 assuming the nonamortization provisions of SFAS No.
142 were effective January 1, 2001:
2003 2002 2001
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Reported net income $ 14,786 $ 13,834 $ 12,257
Add back:
Goodwill amortization -- -- 199
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 14,786 $ 13,834 $ 12,456
=======================================================================================================================
Basic earnings per share:
Reported net income $ 1.93 $ 1.80 $ 1.59
Add back:
Goodwill amortization -- -- .02
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.93 $ 1.80 $ 1.61
=======================================================================================================================
Diluted earnings per share:
Reported net income $ 1.91 $ 1.79 $ 1.59
Add back:
Goodwill amortization -- -- .02
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 1.91 $ 1.79 $ 1.61
=======================================================================================================================
NOTE 7 - DEPOSITS:
The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2003 and 2002 was $134,302,000 and $149,522,000, respectively.
At December 31, 2003, the scheduled maturities of time deposits of all
denominations are as follows:
(IN THOUSANDS OF DOLLARS)
2004 $ 307,068
2005 37,743
2006 13,610
2007 5,554
2008 4,294
Thereafter 2,000
---------
$ 370,269
=========
NOTE 8 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE:
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to three days from the transaction date but may have
maturities as long as nine months. Certain of the borrowings have no defined
maturity date. Securities sold under agreements to repurchase are reflected at
the amount of cash received in connection with the transaction. The Company
monitors the fair value of the underlying securities on a daily basis. All
securities underlying these agreements are institution-owned securities.
Information concerning federal funds purchased and securities sold under
agreements to repurchase is included in Table 11 of Management's Discussion and
Analysis of Financial Condition and Results of Operations.
40
NOTE 9 - NOTES PAYABLE:
The Banks have entered into advance (borrowing) agreements with the FHLB of
Atlanta. Advances under these agreements are collateralized by stock in the FHLB
of Atlanta, and qualifying first mortgage loans and commercial real estate loans
under a blanket floating lien. A summary of advances during the years ended
December 31, 2003 and 2002, is as follows (dollars in thousands):
2003 2002
---- ----
Advances outstanding at December 31 $52,050 $49,500
Maximum amount outstanding at any month-end 63,500 49,500
Average amount outstanding during the year 51,720 49,500
Weighted-average interest rate at December 31 4.98% 5.03%
Weighted-average interest rate during the year 4.88% 5.03%
Principal maturities of FHLB advances are summarized below:
(IN THOUSANDS OF DOLLARS)
Year Ending December 31,:
2004 $ 122
2005 123
2006 7,125
2007 127
2008 3,128
Thereafter 41,425
--------
$ 52,050
========
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Current:
Federal $ 6,506 $ 6,308 $ 6,346
State 609 593 605
- ------------------------------------------------------------------------------------------------------------
Total current tax expense 7,115 6,901 6,951
- ------------------------------------------------------------------------------------------------------------
Deferred:
Federal 141 (67) (419)
State 45 (42) (46)
- ------------------------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) 186 (109) (465)
- ------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 7,301 $ 6,792 $ 6,486
============================================================================================================
Temporary differences in the recognition of revenue and expense for tax and
financial reporting purposes resulted in net deferred income tax expense
(benefit) as follows:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Provision for loan losses $ (262) $ (611) $ (401)
Pension cost and post-retirement benefits (6) 35 44
Consumer loan income (49) (33) 26
Depreciation 393 399 (56)
Other 110 101 (78)
- ------------------------------------------------------------------------------------------------------------
Total $ 186 $ (109) $ (465)
=============================================================================================================
41
The provision for income taxes differs from that computed by applying the
federal statutory income tax rate of 35% to income before provision for income
taxes, as indicated in the following analysis:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Income taxes at federal statutory rate $ 7,730 $ 7,219 $ 6,560
Increase (reduction) of taxes resulting from:
State income taxes, net of federal
tax benefit 415 401 393
Tax-exempt interest income (550) (589) (608)
Other, net (294) (239) 141
- -------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 7,301 $ 6,792 $ 6,486
=============================================================================================================
The components of the net deferred tax asset, included in other assets, are as
follows:
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Allowance for loan losses $ 4,229 $ 3,967
Post-retirement benefits 104 113
Intangible assets 287 390
Start-up expenses -- 19
State net operating loss carry forward 87 60
- -------------------------------------------------------------------------------------------------------------
Total deferred tax assets 4,707 4,549
- -------------------------------------------------------------------------------------------------------------
Depreciation 1,483 1,090
Unrealized gains on investment securities available-for-sale 377 1,115
Consumer loan income 220 269
Bond discount accretion 7 19
Pension plan 395 410
Passive losses 2 --
- -------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 2,484 2,903
- -------------------------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 2,223 1,646
Less valuation allowance (90) (64)
- -------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 2,133 $ 1,582
=============================================================================================================
At December 31, 2003, the Company had net operating loss carryforwards for state
income tax purposes of approximately $1,748,000 available to offset future state
taxable income. The carryforwards expire in the years 2010 to 2018. The
valuation allowance is based on management's estimate of the ultimate
realization of the deferred tax asset.
42
NOTE 11 - OTHER EXPENSE:
The following is a summary of the components of other noninterest expense:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Telephone and postage $ 1,480 $ 1,389 $ 1,169
Professional fees 1,399 1,727 1,089
Office supplies 1,021 969 807
Advertising 1,286 1,519 1,464
Amortization 486 562 965
Regulatory fees 743 701 621
Insurance 197 204 178
Other 6,149 5,183 5,307
- -----------------------------------------------------------------------------------------------------------
Total $ 12,761 $ 12,254 $ 11,600
===========================================================================================================
NOTE 12 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
2003 2002 2001
---- ---- ----
Numerator:
Net income - numerator for basic
and diluted earnings per share $ 14,786 $ 13,834 $ 12,257
- -----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 7,680 7,664 7,712
Effect of dilutive securities:
Employee stock options 77 59 12
- -----------------------------------------------------------------------------------------------------------
Dilutive potential shares:
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 7,757 7,723 7,724
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.93 $ 1.80 $ 1.59
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.91 $ 1.79 $ 1.59
- -----------------------------------------------------------------------------------------------------------
The calculation of diluted earnings per share excludes outstanding stock options
that have exercise prices greater than the average market price of the common
shares for the year as follows:
2003 2001
---- ----
Number of shares 16,600 7,000
- --------------------------------------------------------------------------------
Range of exercise prices $28.15 TO $30.96 $25.45 to $25.91
43
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax effects are
as follows:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Change in unrealized holding gains (losses) on available-for-sale securities $ (1,942) $ 1,130 $ 2,408
Tax effect 738 (463) (909)
- ------------------------------------------------------------------------------------------------------------------------------
Net-of-tax amount $ (1,204) $ 667 $ 1,499
==============================================================================================================================
NOTE 14 - RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS OR ADVANCES:
Dividends are paid by the Company from its assets which are mainly provided by
dividends from the banking subsidiaries. However, certain restrictions exist
regarding the ability of the subsidiaries to transfer funds to the Company in
the form of cash dividends, loans or advances. The approval of the Office of the
Comptroller of the Currency (OCC) is required to pay dividends in excess of the
subsidiaries' net profits for the current year plus retained net profits (net
profits less dividends paid) for the preceding two years, less any required
transfers to surplus. As of December 31, 2003, approximately $25,347,000 of the
Banks' retained earnings are available for distribution to the Company as
dividends without prior regulatory approval. In addition, dividends paid by the
Banks to the Company would be prohibited if the effect thereof would cause the
Banks' capital to be reduced below applicable minimum capital requirements.
Under Federal Reserve regulation, the Banks are also limited as to the amount
they may lend to the Company unless such loans are collateralized by specified
obligations. The maximum amount available for transfer from the Banks to the
Company in the form of loans or advances was approximately $21,479,000 at
December 31, 2003.
NOTE 15 - RETIREMENT PLANS:
The following sets forth the pension plan's funded status and amounts recognized
in the Company's accompanying consolidated financial statements at
December 31, 2003 and 2002:
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,628 $ 8,172
Service cost 653 472
Interest cost 677 579
Actuarial, gain (loss) 781 678
Benefits paid (228) (273)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at October 31 and December 31, respectively 11,511 9,628
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year
8,041 8,011
Actual return on plan assets 843 (197)
Employer contribution 597 500
Benefits paid (228) (273)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at October 31 and December 31, respectively 9,253 8,041
- ---------------------------------------------------------------------------------------------------------
Funded status (2,258) (1,587)
Unrecognized net actuarial loss 3,173 2,696
Unrecognized prior service cost 4 5
Employee contributions between measurement date and fiscal year end 162 --
- ---------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 1,081 $ 1,114
=========================================================================================================
44
The components of net periodic pension cost are as follows:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Service cost $ 653 $ 472 $ 391
Interest cost 677 579 530
Expected return on plan assets (714) (650) (633)
Amortization of prior service cost 1 1 1
Recognized net actuarial gain/loss 176 39 --
Amortization of transition asset -- -- (28)
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 793 $ 441 $ 261
=============================================================================================================
Information as of October 31 and December 31, respectively:
2003 2002
---- ----
Projected benefit obligation $ 11,511 $ 9,628
Accumulated benefit obligation 9,041 7,813
Fair value of plan assets 9,253 8,041
Measurement date OCTOBER 31 December 31
Weighted-average assumptions used to determine benefit
obligations at measurement date:
Discount rate 6.50% 6.75%
Rate of compensation increase 5.00% 5.00%
For the years ended December 31, 2003, 2002 and 2001, the assumptions used to
determine net periodic pension cost are as follows:
2003 2002 2001
---- ---- ----
Discount rate 6.75% 7.25% 7.25%
Expected long-term return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 6.00%
The Company's pension plan asset allocation at December 31, 2003 and 2002,
target allocation for 2004, and expected long-term rate of return by asset
category are as follows:
WEIGHTED
AVERAGE
PERCENTAGE EXPECTED
OF PLAN ASSETS LONG-TERM
TARGET AT DECEMBER 31, RATE
ASSET ALLOCATION ------------------------- OF RETURN -
CATEGORY 2004 2003 2002 2003
-------- ---- ---- ---- ----
Equity securities 50% 49% 49% 10.20%
Debt securities 45% 46% 46% 6.00%
Cash 5% 5% 5% 3.30%
---- ----
Total 100% 100% 8.00%
==== ====
Equity securities include the Company's common stock in the amounts of $503,000
(5.4% of plan assets) and $419,000 (5.2% of plan assets) at October 31, 2003 and
December 31, 2002, respectively.
45
Estimated future benefit payments (including expected future service as
appropriate):
(IN THOUSANDS OF DOLLARS)
2004 $ 298
2005 330
2006 363
2007 399
2008 437
2009 - 2013 2,848
Expenses incurred and charged against operations with regard to all of the
Company's retirement plans were as follows:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Pension $ 801 $ 441 $ 261
Profit-sharing 352 265 224
- -------------------------------------------------------------------------------
Total $ 1,153 $ 706 $ 485
===============================================================================
The expected rate of return for the pension plan represents the average rate of
return to be earned on plan assets over the period the benefits included in the
benefit obligation are to be paid. In developing the expected rate of return,
the Company considered long-term compound annualized returns of historical
market data as well as historical actual returns on the Company's plan assets.
Using this reference information, the Company developed forward-looking return
expectations for each asset category and a weighted average expected long-term
rate of return for a targeted portfolio allocated across these investment
categories. The portfolio's equity weighting is consistent with the long-term
nature of the plans' benefit obligation, and the expected annual returns of the
portfolio of 8%.
The Company changed the measurement date in 2003 to October 31 in order to
provide additional time for accumulation of data and calculation of actual
results for the year. The Company expects to contribute approximately $832,000
to the pension plan in 2004.
NOTE 16 - POST-RETIREMENT BENEFITS:
The following sets forth the plans funded status and amounts recognized in the
Company's accompanying consolidated financial statements at December 31,
2003 and 2002:
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 560 $ 494
Interest cost 38 38
Actuarial gain loss 31 76
Benefits paid (47) (48)
- ---------------------------------------------------------------------------------------------------------
Benefit obligation at October 31 and December 31, respectively 582 560
- ---------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contribution 47 48
Benefits paid (47) (48)
- ---------------------------------------------------------------------------------------------------------
Fair value of plan assets at October 31 and December 31, respectively -- --
- ---------------------------------------------------------------------------------------------------------
Funded status at October 31 and December 31, respectively (582) (560)
Unrecognized net actuarial (gain) loss 18 (13)
Unrecognized transition obligation 284 315
- ---------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (280) $ (258)
=========================================================================================================
46
2003 2002
---- ----
Measurement date OCTOBER 31 December 31
Weighted-average assumption used to determine benefit
obligations at measurement date:
Discount rate 6.50% 6.75%
Weighted-average assumptions used to determine net
periodic benefit cost for years ended December 31:
Discount rate 6.75% 7.25%
Expected long-term return on plan assets NA NA
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year 5.00% 5.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) NA NA
Year that the rate reaches the ultimate trend rate 2003 2002
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Components of net periodic benefit cost:
Interest cost $ 38 $ 38 $ 35
Amortization of transition obligation 31 31 32
Recognized net actuarial gain -- -- (4)
- -----------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 69 $ 69 $ 63
===========================================================================================================
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A onepercentage-point change in assumed
health care cost trend rates would have the following effects at the end of
2003:
1-PERCENTAGE- 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $ 3,302 $ (2,908)
Effect on post-retirement benefit obligation 53,408 (46,999)
Estimated future benefit payments (including expected future service as
appropriate):
(IN THOUSANDS OF DOLLARS)
2004 $ 51
2005 50
2006 48
2007 47
2008 46
2009 - 2013 213
The Company expects to contribute approximately $51,000 to the post-retirement
benefit plan in 2004.
47
NOTE 17 - STOCK-BASED COMPENSATION PLANS:
During 1996 and 1999, Company adopted stock option plans under which incentive
and nonqualified stock options may be granted periodically to key employees and
non-employee directors. With the exception of options granted to directors under
the 1999 plan, which may be exercised at any time prior to expiration, options
granted under the plans may not be exercised in whole or in part within one year
following the date of the grant , and thereafter become exercisable in 25%
increments over the next four years. The options are granted at an exercise
price at least equal to the fair value of the common stock at the date of grant
and have terms ranging from five to ten years. No options were granted under the
1996 plan after December 18, 2000, and the plan has since terminated other than
for any options still unexercised and outstanding. No options may be granted
under the 1999 plan after May 31, 2009. In the Proxy Statement for the 2004
Annual Shareholders meeting, the SCBT Financial Corporation Stock incentive Plan
is presented for shareholders consideration. If approved by a majority of
shareholders, no additional issuances will be made from the 1999 Plan.
Activity in the Company's stock option plans is summarized in the following
table. All information has been retroactively adjusted for stock dividends and
stock splits.
2003 2002 2001
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding, January 1 223,905 $ 17.81 171,820 $ 17.81 213,620 $ 15.74
Granted 96,250 $ 25.28 76,560 $ 21.22 69,080 $ 14.18
Exercised (5,723) $ 17.58 (4,730) $ 16.36 (83,853) $ 10.63
Expired (14,602) $ 19.66 (19,745) $ 20.16 ( 27,027) $ 14.34
------- ------- -------
Outstanding, December 31 299,830 $ 20.09 223,905 $ 17.73 171,820 $ 17.81
======= ======= =======
Exercisable, December 31 131,710 $ 19.56 82,498 $ 18.92 147,434 $ 17.58
======= ======= =======
Weighted-average fair value
of options granted during
the year $ 8.01 $ 5.59 $ 4.44
======= ======= =======
Information pertaining to options outstanding at December 31, 2003, is as
follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
------ ----------- ---- ----- ----------- -----
$ 12.10 - $ 17.55 127,400 7.2 years $ 15.66 57,252 $ 15.37
$ 19.92 - $ 23.86 77,280 5.1 years $ 20.66 56,083 $ 20.66
$ 24.40 - $ 30.96 95,150 8.7 years $ 25.60 18,375 $ 29.24
------- -------
299,830 7.1 years 131,710
======= =======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
YEAR ENDED DECEMBER 31,
2003 2002 2001
--------------------------------------------
Dividend yield 2.49% 2.63% 3.00%
Expected life 10 YEARS 10 years 10 years
Expected volatility 29.00% 30.00% 29.00%
Risk-free interest rate 3.99% 3.82% 5.03%
48
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock-based compensation plans. Accordingly, no compensation cost has
been recognized. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the plans
consistent with the method prescribed by SFAS No. 123, the Company's net income
and earnings per share would have been adjusted to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 2003 2002 2001
---- ---- ----
Net income, as reported $ 14,786 $ 13,834 $ 12,257
Less, total stock-based employee compensation expense
determined under the fair value based method, net of related tax effects 280 231 402
- ----------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 14,506 $ 13,603 $ 11,855
==================================================================================================================================
Earnings per share:
Basic - as reported $ 1.93 $ 1.80 $ 1.59
Basic - pro forma $ 1.89 $ 1.77 $ 1.54
Diluted - as reported $ 1.91 $ 1.79 $ 1.59
Diluted - pro forma $ 1.87 $ 1.76 $ 1.53
The Company has entered into Restricted Stock Agreements with several of its
senior executive officers. All agreements are conditioned upon continued
employment. Termination of employment prior to a vesting date, as described
below, would terminate any interest in non-vested shares. Prior to vesting of
the shares, as long as employed by the Company, the officers will have the right
to vote such shares and to receive dividends paid with respect to such shares.
All restricted shares will fully vest in the event of change in control of the
Company or upon the death of the officer. Under these arrangements, the chief
executive officer was granted 13,175 restricted shares in a prior year with a
weighted average fair value of $5.76 per share at the date of grant. The shares
granted vest free of restrictions as follows: 25% in 1999, 25% in 2001 and 50%
in 2003. During 2002, six executive officers were granted 18,700 shares with a
weighted average fair value of $6.84 per share at the date of grant. These
shares vest free of restrictions as follows: 25% in 2005, 25% in 2007 and 50% in
2009. In January 2003, one executive officer received a grant of 2,000 shares
with a weighted average fair value of $6.18 per share. These shares vest free of
restrictions as follows: 25% in 2006, 25% in 2008 and 50% in 2010.
NOTE 18 - STOCK REPURCHASE PROGRAM:
In March 2003, the Company's Board of Directors authorized the renewal and
extension of a repurchase program to acquire up to 250,000 shares of its
outstanding common stock. During the years ended December 31, 2003, 2002 and
2001, the Company repurchased 2,100, 12,402, and 138,253 shares at a cost of
$53,000, $265,000, and $2,518,000, respectively.
NOTE 19 - LEASE COMMITMENTS:
The Company's subsidiaries were obligated at December 31, 2003, under certain
noncancelable operating leases extending to the year 2025 pertaining to banking
premises and equipment. Some of the leases provide for the payment of property
taxes and insurance and contain various renewal options. The exercise of renewal
options is, of course, dependent upon future events.
49
Accordingly, the following summary does not reflect possible additional payments
due if renewal options are exercised. Future minimum lease payments, by year and
in the aggregate, under noncancelable operating leases with initial or remaining
terms in excess of one year are as follows:
(IN THOUSANDS OF DOLLARS) YEAR ENDING DECEMBER 31,
2004 $ 598
2005 507
2006 329
2007 279
2008 268
Later years 1,055
-------
Total $ 3,036
=======
Total rental expense for the years ended December 31, 2003, 2002, and 2001 was
$3,002,000, $2,678,000, and $2,344,000, respectively.
NOTE 20 - CONTINGENT LIABILITIES:
The Company and its subsidiaries are involved at times in various litigation
arising in the normal course of business. In the opinion of management, there is
no pending or threatened litigation that will have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 21 - RELATED PARTY TRANSACTIONS:
During 2003 and 2002, the Company's banking subsidiaries had loan and deposit
relationships with certain related parties; principally, directors and executive
officers, their immediate families and their business interests. All of these
relationships were in the ordinary course of business. Loans outstanding to this
group (including immediate families and business interests) totaled $17,245,000
and $17,705,000 at December 31, 2003 and 2002, respectively. During 2003,
$12,808,000 of new loans were made to this group while repayments of $13,268,000
were received during the year. Related party deposits totaled approximately
$12,712,000 and $16,927,000 at December 31, 2003 and 2002, respectively.
NOTE 22 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
The Company's subsidiaries are parties to credit related financial instruments
with off-balance sheet risks in the normal course of business to meet the
financing needs of their customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. Such commitments involve, to varying degrees, elements of credit,
interest rate, or liquidity risk in excess of the amounts recognized in the
consolidated balance sheets. The contract amounts of these instruments express
the extent of involvement the subsidiaries have in particular classes of
financial instruments.
The subsidiaries' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees is represented by the
contractual amount of those instruments. The subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments. At December 31, 2003 and 2002, the following
financial instruments were outstanding whose contract amounts represent credit
risk:
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Commitments to extend credit $ 246,847 $ 208,193
================================================================================
Standby letters of credit and
financial guarantees $ 2,447 $ 4,232
================================================================================
COMMITMENTS TO EXTEND CREDIT:
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future liquidity requirements. The banking subsidiaries evaluate each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the subsidiaries upon extension of credit, is
based on management's credit evaluation of the customer. Collateral held
50
varies but may include accounts receivable, inventory, property, plant and
equipment, and personal guarantees. Unfunded commitments under commercial
lines-of-credit, revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing customers.
These lines-of-credit are uncollateralized and usually do not contain a
specified maturity date and may not be drawn to the extent to which the banking
subsidiaries are committed.
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES:
Standby letters of credit and financial guarantees are conditional commitments
issued by the banking subsidiaries to guarantee the performance of a customer to
a third party. Those letters of credit and guarantees are primarily issued to
support public and private borrowing arrangements. Essentially all standby
letters of credit have expiration dates within one year. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The amount of collateral obtained, if
deemed necessary, is based on management's credit evaluation of the customer.
NOTE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates may not be realized in an immediate settlement of the instrument. SFAS
No. 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of the
Company. The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS:
The carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES:
Securities available-for-sale, excluding Federal Reserve Bank and Federal Home
Loan Bank Stock, are valued at quoted market prices where available. If quoted
market prices are not available, fair values are based on quoted market prices
of comparable securities. Securities held-to-maturity are valued at quoted
market prices or dealer quotes. The carrying value of Federal Reserve Bank and
Federal Home Loan Bank stock approximates fair value based on their redemption
provisions.
LOANS:
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. Fair values for
certain mortgage loans (e.g., one-to-four family residential), credit card
loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans (e.g.,
commercial real estate and investment property mortgage loans, commercial and
industrial loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
DEPOSIT LIABILITIES:
The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
51
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
The fair value of federal funds purchased and securities sold under agreements
to repurchase is estimated based on the current rates offered for borrowings of
the same remaining maturities.
NOTES PAYABLE:
The carrying amount of short-term borrowings is a reasonable estimate of fair
value. The fair value of long-term borrowings is estimated using discounted cash
flow analysis and the Company's current incremental borrowing rates for similar
types of instruments.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
GUARANTEES:
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
The estimated fair values and related carrying amounts of the Company's
financial instruments at December 31, 2003 and 2002, are as follows:
2003 2002
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(IN THOUSANDS OF DOLLARS) ------ ----- ------ -----
Financial assets:
Cash and cash
equivalents $ 47,124 $ 47,124 $ 40,514 $ 40,514
Investment securities 152,009 153,474 164,951 166,784
Loans:
Loans and loans held for sale 951,106 953,107 902,563 928,756
Less, allowance for loan
losses (11,700) (11,700) (11,065) (11,065)
Net loans 939,406 941,407 891,498 917,691
Financial liabilities:
Deposits 946,278 940,962 898,163 890,950
Federal funds purchased
and securities sold under
agreements to repurchase 80,967 80,967 88,616 88,616
Notes payable 52,050 60,041 49,500 53,029
Unrecognized financial
instruments:
Commitments to extend credit 246,847 247,366 208,198 214,235
Standby letters of credit 2,447 2,447 4,232 4,232
NOTE 24 - REGULATORY MATTERS:
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and its subsidiaries must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain
off-balance-sheet-items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiaries to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, at December 31,
2003 and 2002, that the Company and its subsidiaries met all capital adequacy
requirements to which they are subject.
52
As of their most recent regulatory examinations, the Company and its
subsidiaries were considered well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following tables. There are no conditions or events
since that notification that management believes have changed the institutions'
category.
Actual capital amounts and ratios are also presented in the table.
MINIMUM TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
(IN THOUSANDS OF DOLLARS) ACTUAL REQUIREMENT ACTION PROVISIONS
------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
At December 31, 2003:
Total capital (to risk weighted assets):
Consolidated $119,922 13.06% $ 73,459 8.00% $ 91,824 10.00%
South Carolina Bank and Trust, N.A 102,801 12.57% 65,426 8.00% 81,783 10.00%
South Carolina Bank and Trust
of the Piedmont, N.A 12,341 12.59% 7,842 8.00% 9.802 10.00%
Tier I capital (to risk weighted assets):
Consolidated $108,441 11.81% $ 36,729 4.00% $ 55,093 6.00%
South Carolina Bank and Trust, N.A 92,576 11.32% 32,712 4.00% 49,069 6.00%
South Carolina Bank and Trust
of the Piedmont, N.A 11,114 11.34% 3,920 4.00% 5,880 6.00%
Tier I capital (to average assets):
Consolidated $108,441 9.13% $ 47,510 4.00% $ 59,387 5.00%
South Carolina Bank and Trust, N.A 92,576 8.77% 42,224 4.00% 52,780 5.00%
South Carolina Bank and Trust, N.A
of the Piedmont, N.A 11,114 8.41% 5,286 4.00% 6,608 5.00%
At December 31, 2002:
Total capital (to risk weighted assets):
Consolidated $108,593 12.92% $ 64,843 8.00% $ 84,053 10.00%
South Carolina Bank and Trust, N.A 87,282 12.12% 57,627 8.00% 72,034 10.00%
South Carolina Bank and Trust
of the Piedmont, N.A 11,014 12.57% 7,012 8.00% 8,766 10.00%
South Carolina Bank and Trust
of the PeeDee, N.A 5,669 13.8% 3,275 8.00% 4,094 10.00%
Tier I capital (to risk weighted assets):
Consolidated $ 98,079 11.67% $ 33,621 4.00% $ 50,426 6.00%
South Carolina Bank and Trust, N.A 78,276 10.87% 28,814 4.00% 42,221 6.00%
South Carolina Bank and Trust
of the Piedmont, N.A 9,917 11.31% 3,506 4.00% 5,259 6.00%
South Carolina Bank and Trust
of the PeeDee, N.A 5,157 12.60% 1,620 4.00% 2,429 6.00%
Tier I capital (to average assets):
Consolidated $ 98,079 8.70% $ 45,098 4.00% $ 56,372 5.00%
South Carolina Bank and Trust, N.A 78,276 8.23% 38,041 4.00% 47,552 5.00%
South Carolina Bank and Trust
of the Piedmont, N.A 9,917 8.15% 4,866 4.00% 6,082 5.00%
South Carolina Bank and Trust
of the PeeDee, N.A 5,157 10.43% 1,978 4.00% 2,473 5.00%
53
NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY:
Financial information pertaining only to SCBT Financial Corporation is as
follows:
DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Balance Sheets
Assets:
Cash $ 2,994 $ 2,686
Investment securities available-for-sale 700 414
Investment in subsidiaries 106,987 98,453
Loans 755 1,054
Premises and equipment 26 39
Other assets 1,030 922
- -------------------------------------------------------------------------------------------------------------
Total assets $ 112,492 $ 103,568
=============================================================================================================
DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002
---- ----
Liabilities $ 143 $ 72
Shareholders' equity 112,349 103,496
- -------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 112,492 $ 103,568
=============================================================================================================
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Statements of Income
Income:
Dividends from subsidiaries $ 5,069 $ 6,891 $ 4,001
Gain on sale of securities available-for-sale -- -- 569
Interest and dividends 7 52 102
- -----------------------------------------------------------------------------------------------------------------------
Total income 5,076 6,943 4,672
Operating expenses 310 258 692
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 4,766 6,685 3,980
Applicable income tax benefit 103 75 8
Equity in undistributed earnings of
subsidiaries 9,917 7,074 8,269
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 14,786 $ 13,834 $ 12,257
=======================================================================================================================
54
YEAR ENDED DECEMBER 31,
(IN THOUSANDS OF DOLLARS) 2003 2002 2001
---- ---- ----
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 14,786 $ 13,834 $ 12,257
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12 14 14
Premium amortization (discount accretion) -- 39 (72)
Gain on sale of securities available-for-sale -- -- (569)
Loss on sale of premises ad equipment (2) -- --
Decrease (increase) in other assets 17 56 (3)
Increase (decrease) in other liabilities (161) (379) 246
Undistributed earnings of subsidiaries (9,917) (7,074) (8,269)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,735 6,490 3,604
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment
securities available-for-sale -- -- 583
Proceeds from maturities of investment
securities available-for-sale -- 8,000 7,234
Purchases of investment securities
available-for-sale -- (6,034) (6,147)
Loan to subsidiary -- (1,004) --
Repayment of loan to subsidiary 298 -- --
Purchases of premises and equipment (15) -- --
Proceeds from sale of premises and equipment 18 304 --
Investment in subsidiaries -- (1,000) --
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 301 266 1,670
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (5,070) (4,420) (4,000)
Common stock issuance -- 537 --
Common stock redeemed (53) (265) (2,518)
Stock options exercised 395 78 891
- -------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (4,728) (4,070) (5,627)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 308 2,686 (353)
Cash and cash equivalents at beginning
of year 2,686 -- 353
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,994 $ 2,686 $ --
=========================================================================================================================
NOTE 26 - SUBSEQUENT EVENTS
In February 2004, the name of the Company was changed from First National
Corporation to SCBT Financial Corporation. This action was taken in order that
the Company would be more readily identified with its banking subsidiaries,
which had changed their names to South Carolina Bank and Trust (often referred
to as "SCBT") in 2002. In March 2004, following the corporate name change, the
Company switched its common stock listing from the American Stock Exchange to
The NASDAQ Stock Market, trading under the symbol "SCBT".
55
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 acquisition, the bank
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
approximately $760,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
ITEM 9 A. CONTROLS AND PROCEDURES
As of December 31, 2003 (the "Evaluation Date"), the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
its Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15. Management necessarily applied its judgment in the process of reviewing
these controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives. Based upon this
evaluation, the Company's President and Chief Executive Officer and its Chief
Financial Officer concluded that the Company's disclosure controls and
procedures as of the Evaluation Date were effective.
There were no changes in the Company's internal controls over financial
reporting that occurred during our most recent fiscal quarter that materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the information in the definitive proxy statement of the Company to be filed in
connection with the Company's 2004 Annual Meeting of Shareholders under the
caption "Election of Directors" on page 4, in the fourth paragraph under the
caption "The Board of Directors and Committees" on page 5, in the paragraph
titled "Audit Committee" under the caption "The Board of Directors and
Committees" on page 6, and under caption and "Section 16 (a) Beneficial
Ownership Reporting Compliance" on page 19.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the information in the definitive proxy statement of the Company to be filed in
connection with the Company's 2004 Annual Meeting of Shareholders under the
caption "Compensation of Directors" on page 5, in the sections titled "Summary
Compensation Table," "Employment Agreements," "Restricted Stock Awards," "Stock
Options," and "Option Grants in 2003" under the caption "Executive Compensation"
on pages 13 through 16, under the caption "Defined Benefit Pension Plan" on page
17, and under the caption "Compensation Committee Interlocks and Insider
Participation" on page 21.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table contains certain information as of December 31, 2003,
relating to securities authorized for issuance under the Company's equity
compensation plans:
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted-average compensation plans
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column
Plan category warrants and rights warrants and rights (a))
- ------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by 292,515 $19.95 452,157
security holders
Equity compensation
plans not approved None -- --
by security holders
Included within the 452,157 number of securities available for future
issuance in the table above is a total of 285,000 shares remaining from the
authorized total of 300,000 under the Company's Employee Stock Purchase Plan.
Other information required by this item is incorporated herein by reference
to the information under the caption "Principal Shareholders" on page 3 of the
definitive proxy statement of the Company to be filed in connection with the
Company's 2004 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the information under the caption "Certain Relationships and Related
Transactions" on page 19 of the definitive proxy statement of the Company to be
filed in connection with the Company's 2004 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
information under the caption "Audit and Other Fees" on page 21of the definitive
proxy statement of the Company to be filed in connection with the Company's 2004
Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Filed:
SCBT Financial Corporation and Subsidiaries
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Schedules Filed: None
57
3. Exhibits
In most cases, documents incorporated by reference to exhibits that have
been filed with the Company's reports or proxy statements under the Securities
Exchange Act of 1934 are available to the public over the Internet from the
SEC's web site at http://www.sec.gov. You may also read and copy any such
document at the SEC's pubic reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549 under the Company's SEC file number (000-13663).
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to Exhibit 3 filed with the
Registrant's Form 10-Q for the quarter ended June 30,
1996 and Exhibits 3.1 and 3.2 filed with the
Registrant's Form 8-K filed on May 23, 1997)
3.2 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 filed with the Registrant's
Form 10-K for the year ended December 31, 1995)
10.1* First National Corporation Executive Incentive
Compensation Plan (incorporated by reference to
exhibits filed with Registration Statement on Form S-4,
Registration No. 33-52052)
10.2 First National Corporation Dividend Reinvestment Plan
(incorporated by reference to exhibits filed with
Registration Statement on Form S-8, Registration No.
33-58692)
10.3* First National Corporation Incentive Stock Option Plan
of 1996 (incorporated by reference to Registrant's
Definitive Proxy Statement filed in connection with its
1996 Annual Meeting of Shareholders)
10.4* First National Corporation 1999 Stock Option Plan
(incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-8, Registration No.
333-33092)
10.5* Employment Agreement between the Registrant and C. John
Hipp, III, dated May 1, 1994 (incorporated by reference
to Registrant's Form 10-K for the year ended December
31, 1995)
10.6* Employment Agreement between the Registrant and Robert
R. Hill, Jr., effective as of September 30, 1999
(incorporated by reference to Exhibit 10.2 to Form 10-Q
for the quarter ended March 31, 2003)
10.7* Employment Agreement between the Registrant and Thomas
S. Camp, effective as of November 10, 1998
(incorporated by reference to Exhibit 10.3 to Form 10-Q
for the quarter ended March 31, 2003)
10.8* Employment Agreement Amendment between the Registrant
and Thomas S. Camp, effective as of December 5, 2001
(incorporated by reference to Exhibit 10.4 to Form 10-Q
for the quarter ended March 31, 2003)
10.9* Employment Agreement between the Registrant and John C.
Pollok, effective as of October 23, 2002 (incorporated
by reference to Exhibit 10.5 to Form 10-Q for the
quarter ended March 31, 2003)
10.10* Employment Agreement between the Registrant and Richard
C. Mathis, effective as of October 23, 2002
(incorporated by reference to Exhibit 10.6 to Form 10-Q
for the quarter ended March 31, 2003)
10.11* Employment Agreement between the Registrant and Joe E.
Burns, effective as of October 23, 2002 (incorporated
by reference to Exhibit 10.7 to Form 10-Q for the
quarter ended March 31, 2003)
58
10.12* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and C. John Hipp,
III, effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.8 to Form 10-Q for the quarter
ended March 31, 2003)
10.13* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and Robert R. Hill,
Jr., effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.9 to Form 10-Q for the quarter
ended March 31, 2003)
10.14* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and Thomas S. Camp,
effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.10 to Form 10-Q for the quarter
ended March 31, 2003)
10.15* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and John C. Pollok,
effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.11 to Form 10-Q for the quarter
ended March 31, 2003)
10.16* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and Richard C.
Mathis, effective as of January 1, 2003 (incorporated
by reference to Exhibit 10.12 to Form 10-Q for the
quarter ended March 31, 2003)
10.17* Supplemental Executive Retirement Agreement between
South Carolina Bank and Trust, N.A. and Joe E. Burns,
effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.13 to Form 10-Q for the quarter
ended March 31, 2003)
10.18* First National Corporation 1999 Stock Option Plan
(incorporated by reference to Registrant's Registration
Statement From S-8, Registration No. 333-33092)
10.19* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and Robert R. Hill, Jr.
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.20* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and Thomas S. Camp
(incorporated by reference to Exhibit 4.2 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.21* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and John C. Pollock
(incorporated by reference to Exhibit 4.3 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.22* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and Richard C. Mathis
(incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.23* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and A. Loran Adams
(incorporated by reference to Exhibit 4.5 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.24* Restricted Stock Agreement, effective as of January 17,
2002, between the Registrant and Joseph E. Burns
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 (File No.
333-86922))
10.25* First National Corporation 2002 Employee Stock Purchase
Plan (incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 (File No. 333-9014))
10.26* Restricted Stock Agreement, effective as of January 2,
2003, between the Registrant and Joseph E. Burns
(incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 (File No.
333-103707))
59
13 2003 Annual Report to Shareholders
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of J. W. Hunt and Company, LLP
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
* Denotes a management compensatory plan or arrangement.
(b) Reports on Form 8-K:
Current report on Form 8-K, Item 12, dated October 16, 2003 and furnished
to the Securities and Exchange Commission on October 16, 2003.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Columbia
and State of South Carolina, on the 11th day of March, 2004.
SCBT Financial Corporation
By /S/ C. John Hipp, III
---------------------------------------
C. John Hipp, III President and Chief
Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons in the
capacities indicated on March 11, 2004.
/S/ C. John Hipp, III
---------------------------------------
C. John Hipp, III
President and Chief Executive Officer
/S/ Richard C. Mathis
---------------------------------------
Richard C. Mathis
Executive Vice President and
Chief Financial Officer
/S/ John L. Phillips
---------------------------------------
John L. Phillips
Senior Vice President
/S/ Robert R. Horger
---------------------------------------
Robert R. Horger
Chairman of the Board of Directors
/S/ Colden R. Battey, Jr.
---------------------------------------
Colden R. Battey, Jr.
Director
/S/ Luther J. Battiste, III
---------------------------------------
Luther J. Battiste, III
Director
/S/ Charles W. Clark
---------------------------------------
Charles W. Clark
Director
/S/ M. Oswald Fogle
---------------------------------------
M. Oswald Fogle
Director
/S/ Dwight W. Frierson
---------------------------------------
Dwight W. Frierson
Director
61
/S/ John L. Gramling, Jr.
---------------------------------------
John L. Gramling, Jr.
Director
/S/ Robert R. Hill, Jr.
---------------------------------------
Robert R. Hill, Jr.
Director
/S/ Harry M. Mims, Jr.
---------------------------------------
Harry M. Mims, Jr.
Director
/S/ Ralph W. Norman
---------------------------------------
Ralph W. Norman
Director
/S/ Anne H. Oswald
---------------------------------------
Anne H. Oswald
Director
/S/ Samuel A. Rodgers
---------------------------------------
Samuel A. Rodgers
Director
/S/ James W. Roquemore
---------------------------------------
James W. Roquemore
Director
/S/ Thomas E. Suggs
---------------------------------------
Thomas E. Suggs
Director
/S/ A. Dewall Waters
---------------------------------------
A. Dewall Waters
Director
/S/ John W. Williamson, III
---------------------------------------
John W. Williamson, III
Director
/S/ Cathy Cox Yeadon
---------------------------------------
Cathy Cox Yeadon
Director
62
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
13 2003 Annual Report to Shareholders
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of J. W. Hunt and Company, LLP
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certification