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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 000-13663
SCBT FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0799315
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
520 GERVAIS STREET
COLUMBIA, SOUTH CAROLINA 29201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(803) 771-2265
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK - $2.50 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $211,503,000 based on the closing sale price of $30.15 per
share on June 30, 2004. For purposes of the foregoing calculation only, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of common stock outstanding as of March 1, 2005 was
8,054,818.
Documents Incorporated by Reference
Portions of the Registrant's 2004 Annual Report to Shareholders are incorporated
by reference into Part II. Portions of the Registrant's Proxy Statement for its
2005 Annual Meeting of Shareholders are incorporated by reference into Part III.
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Form 10-K Cross-Reference Index
PART I
Item 1. Business ...........................................................1
Item 2. Properties .........................................................7
Item 3. Legal Proceedings ..................................................7
Item 4. Submission of Matters to a Vote of Security Holders ................7
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities (1) ..............8
Item 6. Selected Financial Data (1) ........................................9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..............................................9
Item 7a. Quantitative and Qualitative Disclosure about Market Risk .........28
Item 8. Financial Statements and Supplementary Data .......................28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures .........................................59
Item 9a. Controls and Procedures ...........................................60
Item 9b. Other Information .................................................60
PART III
Item 10. Directors and Executive Officers of the Registrant (2) ............60
Item 11. Executive Compensation (2) ........................................60
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters (2) ...............................61
Item 13. Certain Relationships and Related Transactions (2) ................61
Item 14. Principal Accountant Fees and Services (2) ........................61
PART IV
Item 15. Exhibits and Financial Statement Schedules ........................62
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(1) All or portions of this item are incorporated by reference to the
Registrant's 2004 Annual Report to Shareholders.
(2) All or portions of this item are incorporated by reference to the
Registrant's Proxy Statement for its 2005 Annual Meeting of Shareholders.
FORWARD LOOKING STATEMENTS
Statements included in this report, including in Management's Discussion and
Analysis of Financial Condition and Results of Operations, which are not
historical in nature are intended to be, and are hereby identified as, forward
looking statements for purposes of the safe harbor provided by Section 21E of
the Securities Exchange Act of 1934, as amended. SCBT Financial Corporation
cautions readers that forward looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
forecasted results. Such risk factors include, among others, the following
possibilities: (1) Credit risk associated with an obligor's failure to meet the
terms of any contract with the bank or otherwise fail to perform as agreed; (2)
Interest rate risk involving the effect of a change in interest rates on both
the bank's earnings and the economic value of equity; (3) Liquidity risk
affecting the bank's ability to meet its obligations when they come due; (4)
Price risk focusing on changes in market factors that may affect the value of
traded instruments in mark-to-market portfolios; (5) Transaction risk arising
from problems with service or product delivery; (6) Compliance risk involving
risk to earnings or capital resulting from violations of or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards; (7)
Strategic risk resulting from adverse business decisions or improper
implementation of business decisions; and (8) Reputation risk that adversely
affects earnings or capital arising from negative public opinion.
PART I
ITEM 1. BUSINESS
GENERAL
SCBT Financial Corporation (the "Company"), formerly First National
Corporation, is a bank holding company incorporated under the laws of South
Carolina in 1985. The Company owns 100% of two subsidiaries, namely South
Carolina Bank and Trust, N.A. (formerly First National Bank), a national bank
which opened for business in 1934, and South Carolina Bank and Trust of the
Piedmont, N.A. (formerly National Bank of York County), a national bank which
opened for business in 1996. The names of the Company's banking subsidiaries
were changed in May 2002 in order to bring the group under a common marketing
identity. Similarly, the name of the Company was changed in February 2004,
pursuant to shareholder approval at the 2003 annual meeting. In March 2004,
following the corporate name change, the Company moved its common stock listing
from the American Stock Exchange to The NASDAQ Stock Market and began trading
under the symbol "SCBT".
In December 2002, South Carolina Bank and Trust, N.A., acquired the
majority of the consumer loan portfolio and related assets of CreditSouth
Financial Services Corporation ("CreditSouth"), a former subsidiary of the
Company, and assumed the continuing lending activities of that business.
Thereafter, CreditSouth ceased active lending programs and focused on servicing
a retained portfolio of loans that were delinquent at the time of the
acquisition. In March 2004, the remaining CreditSouth loans totaling $123,000
were donated to South Carolina Bank and Trust, N.A. and CreditSouth was
subsequently dissolved.
In July 2003, South Carolina Bank and Trust of the Pee Dee, N.A., formerly
a wholly-owned subsidiary of the Company, was merged with South Carolina Bank
and Trust, N.A. in order to achieve certain operating efficiencies.
In February 2004, South Carolina Bank and Trust, N.A. purchased the
Denmark, South Carolina branch of Security Federal Bank, including premises and
equipment, certain loans and deposits. At the time of the transaction, South
Carolina Bank and Trust, N.A. vacated its existing leased Denmark office, moving
its operations to the newly acquired banking facility. In March 2004, South
Carolina Bank and Trust, N.A. sold its Cameron, South Carolina branch, including
premises, equipment and certain deposits, to Farmers and Merchants Bank of South
Carolina and recognized a pre-tax gain of $782,000. In September 2004, South
Carolina Bank and Trust, N.A. opened two loan production offices - a Summerville
service facility, just north of Charleston, South Carolina, which was afterward
granted a charter to provide full service banking to its customers, and an
additional Fort Mill, South Carolina office serving the Tega Cay community near
Charlotte, North Carolina. In December 2004, South Carolina Bank and Trust, N.A.
opened a facility in Hilton Head, South Carolina, converting a loan production
office to full service status.
In April 2004, The Mortgage Banc ("TMB") was incorporated as a wholly owned
subsidiary of South Carolina Bank and Trust, N.A. TMB is focusing initially on
providing mortgage products and services to other financial institutions and
mortgage companies throughout the Southeast. TMB's offices and personnel are
located in the Company's headquarters facility in Columbia, South Carolina.
Also in April 2004, the credit card loan portfolios of both of the
Company's banking subsidiaries were sold for a pre-tax gain of $953,000.
In December 2004, the Company entered into an Agreement and Plan of Merger,
by and between the Company and New Commerce BanCorp ("NCB"), pursuant to which,
among other things, NCB will be merged with and into the Company. This agreement
permitted a restructuring and the parties entered into an amendment of the
initial agreement in January 2005 (as so amended, the "Agreement"). The
Agreement provides for the simultaneous acquisition of NCB and New
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Commerce Bank pursuant to (i) the merger (the "First Step Merger") of SCBT
Interim Corporation ("SCBT Interim"), a South Carolina corporation that is a
newly formed, wholly-owned subsidiary of South Carolina Bank and Trust, N.A.,
with and into NCB, (ii) immediately followed by the merger (the "Second Step
Merger") of NCB with and into South Carolina Bank and Trust, N.A., and (iii)
immediately followed by the merger (the "Bank Merger," and collectively with the
First Step Merger and the Second Step Merger, the "Mergers") of New Commerce
Bank with and into South Carolina Bank and Trust, N.A. New Commerce Bank will
cease to exist, and South Carolina Bank and Trust, N.A., will continue to
conduct the business and operations of New Commerce Bank. All of the Mergers
will take place simultaneously and on the same business day. New Commerce Bank
will not operate as a separate subsidiary of SCBT Financial Corporation.
Pursuant to the Agreement, South Carolina Bank and Trust, N.A. will pay an
aggregate purchase price in the merger of approximately $20.2 million in cash.
Consummation of the merger is subject to regulatory approval and the approval of
NCB's shareholders, along with other customary closing conditions. NCB, which
began operations in 1999, is the parent holding company of New Commerce Bank and
is headquartered in Greenville, South Carolina. New Commerce Bank has two branch
offices in the Mauldin and Simpsonville communities of Greenville County. NCB
had total assets of approximately $96 million as of December 31, 2004. The
transaction is anticipated to close in the second quarter of 2005.
In January 2003, the Company moved its principal executive offices to 520
Gervais Street, Columbia, South Carolina 29201. The Company's mailing address at
this facility is P.O. Box 1030, Columbia, South Carolina 29202, and its
telephone number is (800) 277-2175.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and other time deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for businesses, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, correspondent banking services, and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers. The Company considers that it has no
significant portion of its loans concentrated within a single industry or group
of related industries, although based on OCC regulatory criteria, it had credit
concentrations in loans to lessors of nonresidential buildings, loans to
religious organizations, and other activities related to real estate (See
"Concentration of Credit Risk" on page 34.) There are no material seasonal
factors that would have a material adverse effect on the Company. The Company
does not have any foreign loans.
The Company maintains an Internet site at http://www.SCBandT.com. The
information contained in the Company's web site is not incorporated into this
report. The Company's Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to these reports are available
free of charge through the Company's Internet site as soon as reasonably
practicable after they are filed with, or furnished to, the Securities and
Exchange Commission.
TERRITORY SERVED AND COMPETITION
South Carolina Bank and Trust, N.A. conducts its business from twenty-nine
(29) financial centers in eleven (11) South Carolina counties. South Carolina
Bank and Trust of the Piedmont, N.A. conducts its business from five (5)
financial centers in one (1) South Carolina county. In certain of their markets,
the two banks (the "Banks") encounter strong competition from several major
banks that dominate the commercial banking industry in their service areas and
in South Carolina generally.
Several competitors have substantially greater resources and higher lending
limits than the Banks and they offer certain services for their customers that
the Banks do not offer. In addition to commercial banks, savings institutions
and credit unions, the Banks compete for deposits and loans with other financial
intermediaries and investment alternatives, including mortgage companies, credit
card issuers, leasing companies, finance companies, money market mutual funds,
brokerage firms, governmental and corporation bonds and other securities.
Various of these nonbank competitors are not subject to the same regulatory
restrictions as the Company and many have substantially greater resources than
the Company.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial resources
of the consolidated enterprise and thereby maintains financial, operational and
administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends.
EMPLOYEES
The Company does not have any salaried employees. As of December 31, 2004,
the Company's subsidiaries had five hundred thirteen (513) full-time equivalent
employees. The Company considers its relationship with its employees to be
excellent. The employee benefit programs the Company provides include group
life, health and dental insurance, paid vacation, sick leave, educational
opportunities, a cash incentive plan, a stock award program, a stock purchase
plan, stock incentive and deferred compensation plans for officers and key
employees, a defined benefit pension plan, and a 401(k) plan.
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SUPERVISION AND REGULATION
GENERAL
The Company is a "bank holding company" registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and is
subject to the supervision of, and to regular inspection by, the Federal Reserve
Board. Each of the Banks is organized as a national banking association and
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency (the "OCC"). In addition, the Company and each of
the Banks is subject to regulation (and in certain cases examination) by the
Federal Deposit Insurance Corporation (the "FDIC"), other federal regulatory
agencies and the South Carolina State Board of Financial Institutions (the
"State Board"). The following discussion summarizes certain aspects of banking
and other laws and regulations that affect the Company and its subsidiaries.
Under the Bank Holding Company Act (the "BHC Act"), the Company's activities
and those of its subsidiaries are limited to banking, managing or controlling
banks, furnishing services to or performing services for its subsidiaries, or
any other activity which the Federal Reserve Board determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. The BHC Act requires prior Federal Reserve Board approval for, among
other things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. The BHC Act also prohibits a bank
holding company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve Board to be so closely
related to banking as to be a proper incident thereto. Further, under South
Carolina law, it is unlawful without the prior approval of the State Board for
any South Carolina bank holding company (i) to acquire direct or indirect
ownership or control of more than 5% of the voting shares of any bank or any
other bank holding company, (ii) to acquire all or substantially all of the
assets of a bank or any other bank holding company, or (iii) to merge or
consolidate with any other bank holding company.
The Graham-Leach-Bliley Act amended a number of federal banking laws
affecting the Company and the Banks. In particular, the Graham-Leach-Bliley Act
permits a bank holding company to elect to become a "financial holding company,"
provided certain conditions are met. A financial holding company, and the
companies it controls, are permitted to engage in activities considered
"financial in nature" as defined by the Graham-Leach-Bliley Act and Federal
Reserve Board interpretations (including, without limitation, insurance and
securities activities), and therefore may engage in a broader range of
activities than permitted by bank holding companies and their subsidiaries. The
Company has determined to remain a bank holding company but may at some future
date seek to become a financial holding company.
INTERSTATE BANKING
In July 1994, South Carolina enacted legislation which effectively provided
that, after June 30, 1996, out-of-state bank holding companies may acquire other
banks or bank holding companies in South Carolina, subject to certain
conditions. Further, pursuant to the Riegel-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a
bank holding company became able to acquire banks in states other than its home
state, beginning in September 1995, without regard to the permissibility of such
acquisition under state law, subject to certain exceptions. The Interstate
Banking and Branching Act also authorized banks to merge across state lines,
thereby creating interstate branches, unless a state, prior to the July 1, 1997
effective date, determined to "opt out" of coverage under this provision. In
addition, the Interstate Banking and Branching Efficiency Act authorized a bank
to open new branches in a state in which it does not already have banking
operations if such state enacted a law permitting such "de novo" branching.
Effective July 1, 1996, South Carolina law was amended to permit interstate
branching but not de novo branching by an out-of-state bank. The Company
believes that the foregoing legislation has increased takeover activity of South
Carolina financial institutions by out-of-state financial institutions.
OBLIGATIONS OF HOLDING COMPANY TO ITS SUBSIDIARY BANKS
Under the policy of the Federal Reserve Board, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it otherwise might not desire or be able to do so. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" within the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan.
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In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC's claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or other
resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require payment of the
deficiency by assessment upon the bank's shareholders, pro rata, and if any such
assessment is not paid by any shareholder after three months notice, to sell the
stock of such shareholder to make good the deficiency.
CAPITAL ADEQUACY
The various federal bank regulators, including the Federal Reserve Board and
the OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments ("Tier 1 Capital"). Tier 2 capital consists
primarily of the allowance for possible loan losses (subject to certain
limitations) and certain subordinated and other qualifying debt ("Tier 2
Capital"). A minimum ratio of total capital to risk-weighted assets of 8.00% is
required and Tier 1 Capital must be at least 50% of total capital. The Federal
Reserve Board also has adopted a minimum leverage ratio of Tier 1 Capital to
adjusted average total assets (not risk-weighted) of 3%. The 3% Tier 1 Capital
to average total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and is used in conjunction with the riskbased
ratio in determining the overall capital adequacy of banking organizations.
The Federal Reserve Board and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve Board continues to consider a
"tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve Board has not advised the Company of any
specific minimum leverage ratio applicable to it. As of December 31, 2004, the
Company, South Carolina Bank and Trust, N.A., and South Carolina Bank and Trust
of the Piedmont, N.A. had leverage ratios of 8.05%, 7.96%, and 7.87%,
respectively, and total risk adjusted capital of 11.10%, 10.95%, and 10.12%,
respectively.
FDICIA, among other things, identifies five capital categories for insured
depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective Federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA also imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee that bank's compliance with the plan (see
"Obligations of Holding Company to its Subsidiary Banks," above). In addition,
FDICIA requires the various regulatory agencies to prescribe certain non-capital
standards for safety and soundness relating generally to operations and
management, asset quality and executive compensation and permits regulatory
action against a financial institution that does not meet such standards.
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The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10%, a leverage ratio of at least 5% and not be subject to a capital directive
order. An "adequately capitalized" institution must have a Tier 1 capital ratio
of at least 4%, a total capital ratio of a least 8% and a leverage ratio of at
least 4% (or 3% in some cases). Under these guidelines, each of the Banks is
considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentration of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position), and (iii) risks from non-traditional activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. That evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with the amended guidelines, if the
Company and the Banks were to engage in significant trading activity (as defined
in the amendment) they must incorporate a measure for market risk in their
respective regulatory capital calculations effective for reporting periods after
January 1, 1998.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its subsidiaries,
and the Company's funds for cash distributions to its shareholders are derived
primarily from dividends received from the Banks. Each of the Banks is subject
to various general regulatory policies and requirements relating to the payment
of dividends. Any restriction on the ability of the Banks to pay dividends will
indirectly restrict the ability of the Company to pay dividends.
The approval of the OCC is required if the total of all dividends declared
by a national bank in any calendar year will exceed the total of its retained
net profits for that year combined with its retained net profits for the two
preceding years, less any required transfers to surplus. In addition, national
banks can only pay dividends to the extent that retained net profits (including
the portion transferred to surplus) exceed statutory bad debts in excess of the
bank's allowance for loan losses. Further, if in the opinion of the OCC a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), the OCC may require, after notice and a
hearing, that such bank cease and desist from such practice. The OCC has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve Board, the OCC and the FDIC have issued policy statements which provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
In addition to the foregoing, the ability of the Company and the Banks to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under FDICIA, as described
above. The right of the Company, its shareholders and its creditors to
participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors of the Company's subsidiaries.
CERTAIN TRANSACTIONS BY THE COMPANY AND ITS AFFILIATES
Various legal limitations place restrictions on the ability of the Banks to
lend or otherwise supply funds to the Company and its affiliates. The Federal
Reserve Act limits a bank's "covered transactions," which include extensions of
credit, with any affiliate to 10% of such bank's capital and surplus. All
covered transactions with all affiliates cannot in the aggregate exceed 20% of a
bank's capital and surplus. All covered and exempt transactions between a bank
and its affiliates must be on terms and conditions consistent with safe and
sound banking practices, and banks and their subsidiaries are prohibited from
purchasing low-quality assets from the bank's affiliates. Also, the Federal
Reserve Act requires that all of a bank's extensions of credit to an affiliate
be appropriately secured by acceptable collateral, generally United States
government or agency securities. In addition, the Federal Reserve Act limits
covered and other transactions among affiliates to terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to a bank holding company, a bank or a subsidiary of either as
prevailing at the time for transactions with unaffiliated companies.
INSURANCE OF DEPOSITS
As FDIC-insured institutions, the Banks are subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid by
FDIC-insured institutions is as specified in a schedule required to be issued by
the
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FDIC that specifies, at semi-annual intervals, target reserve ratios designed to
increase the FDIC insurance fund's reserve ratio to 1.25% of estimated insured
deposits (or such higher ratio as the FDIC may determine in accordance with the
statute) in fifteen (15) years. Further, the FDIC is authorized to impose one or
more special assessments in any amount deemed necessary to enable repayment of
amounts borrowed by the FDIC from the United States Department of the Treasury.
The actual assessment to be paid by each FDIC-insured institution is based on
the institution's assessment risk classification, which is determined based on
whether the institution is considered "well capitalized," "adequately
capitalized" or "undercapitalized", as such terms have been defined in
applicable federal regulations, and whether such institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns
(see "--Capital Adequacy" above). As a result of the current provisions of
federal law, the assessment rates on deposits could increase over present
levels. Based on the current financial condition and capital levels of the
Banks, the Company does not expect that the current FDIC risk-based assessment
schedule will have a material adverse effect on the Banks' earnings in 2005.
INTERNATIONAL MONEY LAUNDERING ABATEMENT AND FINANCIAL ANTI-TERRORISM ACT OF
2001
On October 26, 2001, the President signed the USA Patriot Act of 2001 into
law. This act contains the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains
anti-money laundering measures affecting insured depository institutions,
broker-dealers and certain other financial institutions. The IMLAFA requires U.
S. financial institutions to adopt new policies and procedures to combat money
laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on financial
institution's operations. The Company has adopted policies and procedures to
comply with the provisions of the IMLAFA.
OTHER LAWS AND REGULATIONS
Interest and certain other charges collected or contracted for by the Banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Banks' operations are also subject to certain federal laws applicable
to credit transactions, such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, the Community Reinvestment
Act requiring financial institutions to meet their obligations to provide for
the total credit needs of the communities they serve (which includes the
investment of assets in loans to low- and moderate-income borrowers), the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide
information to enable the public and public officials to determine whether a
financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Banks also are subject to the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial records
and prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and Regulation E issued
by the Federal Reserve Board to implement that act, which govern automatic
deposits to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
From time to time, bills are pending before the United States Congress and
in the South Carolina state legislature which in certain cases contain
wide-ranging proposals for altering the structure, regulation and competitive
relationships of financial institutions. Among such bills are proposals to
prohibit banks and bank holding companies from conducting certain types of
activities, to subject banks to increased disclosure and reporting requirements,
to alter the statutory separation of commercial and investment banking, and to
further expand the powers of banks, bank holding companies and competitors of
banks. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company and its
subsidiaries may be affected thereby.
FISCAL AND MONETARY POLICY
Banking is a business that depends largely on interest rate differentials.
In general, the difference between the interest paid by a bank on its deposits
and its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitute the major portion of many banks' earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve Board. The Federal Reserve Board regulates the supply of
money through various means, including open-market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve Board, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company cannot be
predicted.
6
ITEM 2. PROPERTIES
In January 2003 the Company relocated its executive headquarters to a new
four-story facility at 520 Gervais Street, Columbia, South Carolina. The lead
branch in the Midlands region of South Carolina Bank and Trust, N.A. also moved
into the 57,000 square foot building. The main offices of South Carolina Bank
and Trust, N.A. are located at 950 John C. Calhoun Drive, S.E., Orangeburg,
South Carolina in a four-story facility that affords 48,000 square feet of space
for operating and administrative purposes. Both of these facilities are owned by
South Carolina Bank and Trust, N.A, which also owns 25 other properties and
leases 11 properties, substantially all of which are used as branch locations or
for housing other operational units.
South Carolina Bank and Trust of the Piedmont, N.A. owns a 12,000 square
foot office building that serves as its main office located at 1127 Ebenezer
Road, Rock Hill, South Carolina. The bank owns one additional property and
leases three others, which are used as branches and a loan production office.
Although the properties leased and owned are generally considered adequate,
there is a continuing program of modernization, expansion, and, as needs
materialize, occasional replacement of facilities.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to, nor is any of
their property the subject of, any material pending legal proceedings, other
than ordinary routine proceedings incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders in the fourth quarter of
2004.
EXECUTIVE OFFICERS OF THE REGISTRANT
Robert R. Horger (Age 54). Mr. Horger was named Chairman of the Company and
South Carolina Bank and Trust, N.A. in January 1998. Mr. Horger became a
director of the Company in April 1991. Mr. Horger is an attorney with Horger,
Barnwell and Reid in Orangeburg, South Carolina.
Dwight W. Frierson (Age 48). Mr. Frierson has served as Vice Chairman of the
Company and South Carolina Bank and Trust, N.A. since January 2000 and has been
a director of the Company since April 1996. Mr. Frierson is Vice President and
General Manager of Coca-Cola Bottling Company of Orangeburg.
Robert R. Hill, Jr. (Age 38). Mr. Hill was named President and Chief
Executive Officer of the Company and South Carolina Bank and Trust, N.A. in
November 2004. Mr. Hill served as President and Chief Operating Officer of South
Carolina Bank and Trust, N.A. from May 2000 to November 2004. He served as
Senior Executive Vice President and Chief Operating Officer of South Carolina
Bank and Trust, N.A. from November 1998 to May 2000.
Richard C. Mathis (Age 54). Mr. Mathis has served as Executive Vice
President and Chief Financial Officer of the Company since May 2000. He was
owner of Carolina MasterCom LLC, an automotive services company, from January
1999 to May 2000.
John C. Pollok (Age 39). Mr. Pollok was named Chief Operating Officer of the
Company and South Carolina Bank and Trust, N.A. in November 2004. He served as
President of The Mortgage Banc, a subsidiary of South Carolina Bank and Trust,
N.A., from May 2004 to November 2004. Mr. Pollok served as Senior Executive Vice
President of the Company from February 2003 to May 2004. He served as Executive
Vice President and Chief Administrative Officer of South Carolina Bank and
Trust, N.A. from May 2000 to May 2004. He served as Executive Vice President of
the South Carolina Bank and Trust, N.A. mortgage division from July 1998 until
May 2000.
Joe E. Burns (Age 50). Mr. Burns has served as Executive Vice President and
Chief Credit Officer of the Company since November 2000. He served as Senior
Vice President and Private Lending Manager for Bank of America from July 1995 to
November 2000.
Thomas S. Camp (Age 53). Mr. Camp has served as President and Chief
Executive Officer of South Carolina Bank and Trust of the Piedmont, N.A. since
November 1998.
7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Certain information required by this item is incorporated herein by
reference to the information under the caption "Stock Performance and
Statistics" on page 24 of the 2004 Annual Report to Shareholders. As of
March 1, 2005, the Company had issued and outstanding 8,054,818 shares of
Common Stock which were held of record by approximately four thousand nine
hundred (4,900) persons. The Company's Common Stock is traded on the NASDAO
Stock Market under the symbol "SCBT".
Dividends are paid by the Company from its assets which are provided
primarily by dividends paid to the Company by its subsidiaries. Certain
restrictions exist regarding the ability of the Company's subsidiaries to
transfer funds to the Company in the form of cash dividends, loans or
advances. The approval of the OCC is required to pay dividends in excess of
the Banks' respective retained net profits for the current year plus
retained net profits (net profits less dividends paid) for the preceding
two years, less any required transfers to surplus. As of December 31, 2004,
approximately $26,508,000 of the Banks' retained earnings were available
for distribution to the Company as dividends without prior regulatory
approval. For the year ended December 31, 2004, the Banks paid dividends of
approximately $5,228,000 to the Company. The Company anticipates that it
will continue to pay comparable cash dividends in the future.
(b) Not Applicable
(c) The table below sets forth information regarding the Company's purchases of
its common stock during each of the twelve months in the year ended
December 31, 2004:
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number
of Shares (d) Maximum Number
(a) Total (b) Purchased as Part of Shares
Number of Average of Publicly that May Yet Be
Shares Price Paid Announced Plans Purchased Under the
Period Purchased per Share or Programs (1) Plans or Programs (1)
January 2004 (2) 14,760 $ 31.7000 -- 250,000
February 2004 -- -- -- 250,000
March 2004 3,075 $ 31.6945 3,075 246,925
April 2004 -- -- -- 246,925
May 2004 39,285 $ 29.2341 39,285 207,640
June 2004 18,300 $ 28.2246 18,300 189,340
July 2004 2,000 $ 28.0750 2,000 187,340
August 2004 27,854 $ 28.7748 27,854 159,486
September 2004 8,214 $ 29.9800 8,214 151,272
October 2004 3,400 $ 31.3154 3,400 147,872
November 2004 (2) 1,079 $ 33.9400 -- 147,872
December 2004 (2) 2,941 $ 36.8797 -- 147,872
Total 120,908 $ 29.6571 102,128 147,872
- --------------------------------------------------------------------------------
(1) On February 19, 2004, the Board of Directors approved a share repurchase
program under which the Company was authorized to acquire up to 250,000
shares of its outstanding common stock during 2004 and 2005. Shares
displayed in columns (c) and (d) reflect shares pursuant to this program.
(2) These shares were repurchased under arrangements, authorized by the
Company's stock-based compensation plans and the Board of Directors,
whereby officers or directors may deliver previously owned Company shares
to the Company in order to pay for the exercise price of stock options.
8
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
the information set forth under the captions "Financial Highlights" and
"Selected Consolidated Financial Data" on page 3 and page 25, respectively, of
the Company's 2004 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This discussion and analysis is intended to assist the reader in
understanding the financial condition and results of operations of SCBT
Financial Corporation and its operating subsidiaries, South Carolina Bank and
Trust, N.A., and South Carolina Bank and Trust of the Piedmont, N.A. The five
year period 2000 through 2004 is discussed with particular emphasis on the years
2002 through 2004. This commentary should be reviewed in conjunction with the
financial statements and related footnotes and the other statistical information
related to SCBT Financial Corporation contained elsewhere herein.
In 1996, the Company sponsored the organization of South Carolina Bank and
Trust of the Piedmont, N.A. (formerly National Bank of York County) in Rock
Hill, South Carolina, and sold shares of the Company's common stock to
capitalize the new bank and pay organizational and pre-opening expenses. South
Carolina Bank and Trust of the Piedmont, N.A. began operations on July 11, 1996,
as a wholly-owned subsidiary of the Company.
In 1998, the Company sponsored the organization of South Carolina Bank and
Trust of the Pee Dee, N.A. (formerly Florence County National Bank) in Florence,
South Carolina, and sold shares of the Company's common stock to capitalize the
new bank and pay organizational and pre-opening expenses. South Carolina Bank
and Trust of the Pee Dee, N.A. began operations on April 1, 1998, as a
wholly-owned subsidiary of the Company. This bank was merged with South Carolina
Bank and Trust, N.A. in July 2003 in order to achieve certain operating
efficiencies.
Also in 1998, the Company sponsored the organization of CreditSouth
Financial Services Corporation ("CreditSouth"), a consumer finance company which
began operations in Orangeburg, South Carolina, in November 1998. As noted in
Part 1, Item 1, in December 2002, South Carolina Bank and Trust, N.A. acquired
the majority of CreditSouth's consumer loan portfolio and related assets, and
CreditSouth ceased operations. In March, 2004, the remaining loans and related
assets of CreditSouth were donated to South Carolina Bank and Trust, N.A. and
CreditSouth was dissolved.
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes to Consolidated Financial Statements for information relating to
recent accounting pronouncements.
EXECUTIVE SUMMARY
The year 2004 was a period in which several factors affected the Company's
performance. This overview should be read in conjunction with detailed financial
data in the following section, "Summary of Operations." Organic growth was
strong, as total loans net of unearned income increased approximately 23% in
2004 while total deposits increased approximately 24%. Early in 2004, the
Company focused on growth in order to increase the balance of earning assets and
thereby increase net interest income. Management anticipated correctly that the
continuing low level of interest rates would negatively impact the Company's
interest rate spread between yields on earning assets and rates on deposits and
other funding sources. The increased interest income from higher levels of loans
and investment securities was expected to mitigate a decline in the net interest
margin. Consequently, the Company increased loans in nearly all sectors except
consumer installment loans. By the third quarter, the growth in assets had begun
to outpace the growth in deposits, and management decided to institute a
deposit-gathering campaign. In order to attract some intermediate-term deposits
at a point in time near the beginning of the Federal Reserve's program of rate
hikes to increase the federal funds target rate, the Company began to offer
approximately 1-1/2-year to 3-year term certificates of deposit at locally
competitive rates. Additionally, in markets where the Company's market
penetration was relatively low, it offered an attractive 3% money market deposit
account product. The intent was to attract new customers and create
opportunities to cross-sell other products. These deposit campaign products had
a moderately dampening effect on net interest margins in the third quarter.
Additional factors that influenced the Company's performance in 2004 were
the sale of a branch in Cameron, SC; the purchase and in-market consolidation of
a branch in Denmark, SC; and the sale of the Company's credit card loan
portfolio. SCBT realized a pre-tax gain of $782,000 in the Cameron transaction;
had expenses of $97,000 in the Denmark transaction; and realized a pre-tax gain
of $953,000 in the credit card portfolio sale. The gain on the credit card
portfolio sale was partially offset by reserves totaling $486,000 before taxes
for certain expected professional fees, personnel relocation, property tax, and
other expenses. The combination of these non-recurring factors served to
increase both noninterest income and non-interest expenses.
9
Another non-interest income factor influencing performance was the decline
in secondary market mortgage market activity in 2004 from 2003. While some
mortgage lenders saw declines of 50%-60% in this activity, the Company's
secondary market fee income declined approximately 44% from the historically
high level in 2003.
Altogether, 2004 was a strong year for fundamental growth accompanied by
increased loan loss provisions (approximately $2 million higher in 2004 compared
to 2003) to track the growth, moderately declining net interest margins in a
continued historically-low interest rate environment, and diminished secondary
market mortgage activity from all-timehigh levels in 2003. These factors were
the primary contributors to a $770,000, or 5.2 percent, decline in net income
from 2003 to 2004's level of $14,016,000. A rising interest rate environment
could be a positive factor for the Company's performance going forward, as the
Company continues to have a moderately asset sensitive posture, as discussed
beginning on page 21 in the section entitled "Asset-Liability Management and
Market Risk Sensitivity".
SUMMARY OF OPERATIONS
In the following analyses, all per share data have been retroactively
adjusted to give effect to a ten percent stock dividend paid to shareholders of
record as of November 22, 2002 and a five percent stock dividend paid to
shareholders of record as of December 20, 2004.
SCBT Financial Corporation reported net income of $14,016,000 in 2004,
compared with $14,786,000 and $13,834,000 in 2003 and 2002, respectively. This
represents an earnings decrease of 5.2 percent in 2004 when compared to 2003,
following an increase of 6.9 percent in 2003 compared with 2002. Basic earnings
per share decreased to $1.74 in 2004 compared with $1.83 in 2003, which was an
increase from $1.72 in 2002. Similarly, diluted earnings per share were $1.72,
$1.82, and $1.71 in 2004, 2003 and 2002, respectively.
The book value of the Company's common stock increased to $14.77 in 2004,
compared to $13.91 in 2003 and $12.85 in 2002. The return on average assets was
1.05 percent in 2004, compared with 1.23 percent in 2003 and 1.28 percent in
2002. The return on average shareholders' equity was 12.20 percent in 2004,
13.72 percent in 2003 and 14.09 percent in 2002.
Total earning assets (reflecting strong loan growth) and total deposits
increased throughout 2004. At December 31, 2004, total earning assets were
$1,351,871,000, an increase of 21.3 percent over $1,114,252,000 at year-end
2003, which was 4.4 percent more than the $1,067,549,000 at the end of 2002. In
2004, average earnings assets were $1,240,369,000, which was $116,792,000, or
10.4 percent, greater than $1,123,037,000 in 2003, which was $101,698,000, or
9.9 percent, over $1,022,339,000 in 2002.
At December 31, 2004, total deposits were $1,171,313,000, an increase of
23.6 percent from $947,399,000 at the end of 2003. The 2003 balance was 5.5
percent greater than $898,163,000 at the end of 2002. Total deposits averaged
$1,059,993,000 in 2004, an increase of 11.9 percent over $946,919,000 in 2003,
which was a 10.7 percent increase over the 2002 average of $855,223,000.
For the year ended December 31, 2004, total interest income was $67,908,000,
an increase of 4.7 percent from $64,854,000 in 2003. This increase was mainly
volume related, primarily the result of strong loan growth. In 2003, total
interest income decreased $2,470,000, or 3.7 percent, compared with $67,324,000
in 2002. This decrease was mainly interest rate related, as the rate earned on
average earning assets declined 82 basis points from 6.59 percent in 2002 to
5.77 percent in 2003.
Total interest expense was $14,643,000 for the year 2004, a slight $21,000
increase over $14,622,000 in 2003. Total interest expense decreased $4,130,000,
or 22.0 percent, in 2003 from $18,752,000 in 2002. This resulted from a 63 basis
point decrease in the rate paid on total interest-bearing liabilities.
In February 2004, the Company's Board of Directors authorized a program with
no formal expiration date to repurchase up to 250,000 of its common shares in
2004 and 2005. Pursuant to this and earlier such programs, during the years
ended December 31, 2004, 2003 and 2002, the Company repurchased 120,908, 2,100
and 12,402 shares, respectively, at a cost of $3,590,000, $53,000 and $265,000,
respectively. During 2004, the Company redeemed 18,780 of its shares from four
officers at an average cost of $32.64 under an approved program designed to
facilitate stock option exercises under the Company's stock option plans. These
shares are included in the 120,908 shares repurchased in 2004.
10
COMPETITION
SCBT Financial Corporation competes with a number of financial institutions
and other firms that engage in activities similar to banking. For example, the
Company competes for deposits with savings and loan associations, credit unions,
brokerage firms and other commercial banks. In its lending activities, the
Company competes with the industries mentioned above as well as consumer finance
companies, leasing companies and other lenders. In today's challenging financial
climate, all lenders are searching for quality borrowers. Competition is strong
for attracting borrowers and originating acceptable grade loans.
A number of financial institution mergers were completed in recent years,
continuing the trend toward consolidation, especially among larger regional and
national financial institutions. Although these mergers reduced the number of
banks and branches, they intensified competition for quality funds and loans.
NET INTEREST INCOME
Net interest income is the difference between interest income and interest
expense. In the analysis of net interest income, two significant factors are net
interest spread and net interest margin. Net interest spread is the difference
between the yield on average earning assets and the rate on average
interest-bearing liabilities. Net interest margin is the difference between the
yield on average earning assets and the rate on all average liabilities,
interest and noninterestbearing, utilized to support earning assets. Net
interest margin is distinguished by the inclusion of the impact of interest free
funds.
Net interest income was $53,265,000 in 2004, an increase of $3,033,000, or
6.0 percent over 2003. This increase was all volume related, as total average
earning assets grew by $116,792,000, or 10.4 percent. A significant offset to
the strong earning assets growth was the continuing low level of interest rates
in general as the net interest spread decreased by 16 basis points, from 4.17
percent in 2003 to 4.01 percent in 2004. Net interest income in 2003 was
$50,232,000, an increase of $1,660,000, or 3.4 percent, from the previous year.
Similar to 2004, this increase was basically volume driven as total average
earning assets grew $100,698,000, or 9.9 percent. A 20 basis point decrease in
the net interest spread from 2002 partially offset the impact of strong earning
asset growth, reflecting a greater decline in rates earned on earning assets as
compared with rates paid on interest-bearing liabilities.
As a result of the continued historically low interest rate environment
throughout most of 2004, the net interest margin (taxable equivalent) decreased
19 basis points to 4.37 percent compared with 2003. Contributing to this decline
was a two basis point decrease in the impact of interest free funds. The taxable
equivalent net interest margin was 4.56 percent in 2003, a decrease of 28 basis
points from 2002. This was basically attributable to the aforementioned low
interest rate environment.
11
Table 1
Volume and Rate
Variance Analysis
2004 Compared to 2003 2003 Compared to 2002
Changes Due to Changes Due to
Increase (Decrease) In Increase (Decrease) In
(DOLLARS IN THOUSANDS) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
- --------------------------------------------------------------------------------------------------------------------------
Interest income on:
Loans (2) $ 7,116 $ (4,132) $ 2,984 $ 9,763 $ (9,436) $ 327
Investments:
Taxable (96) 270 174 (1,522) (802) (2,324)
Tax exempt (3) (224) (50) (274) (54) (406) (460)
Funds sold 207 (151) 56 (31) 6 (25)
Interest -bearing deposits with banks 61 53 114 40 (28) 12
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 7,064 (4,010) 3,054 8,196 (10,666) (2,470)
==========================================================================================================================
Interest expense on:
Deposits:
Interest-bearing transaction accounts
96 (120) (24) 163 (218) (55)
Savings accounts 305 829 1,134 101 (1,199) (1,098)
Certificates of deposit (45) (1,377) (1,422) 490 (3,164) (2,674)
Funds purchased 27 115 142 118 (451) (333)
Notes payable 337 (146) 191 112 (82) 30
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 720 (699) 21 984 (5,114) (4,130)
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 6,344 $ (3,311) $ 3,033 $ 7,212 $ (5,552) $ 1,660
==========================================================================================================================
- --------------------------------------------------------------------------------
(1) The rate/volume variance for each category has been allocated on an equal
basis between rate and volumes.
(2) Nonaccrual loans are included in the above analysis.
(3) Tax exempt income is not presented on a taxable-equivalent basis in the
above analysis.
12
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2004
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 1,057,813 $ 61,267 5.79%
Investment securities:
Taxable
127,370 4,856 3.81
Tax exempt 33,417 1,472 4.40
Funds sold 11,156 138 1.24
Interest-earning deposits with banks 10,613 175 1.65
----------- -----------
Total earning assets 1,240,369 67,908 5.47
----------- -----------
Cash and other assets 101,796
Less allowance for loan losses (13,026)
-----------
Total assets $ 1,329,139
===========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 230,749 $ 739 0.32%
Savings 229,545 2,120 0.92
Certificates of deposit 391,542 8,384 2.14
Funds purchased 90,445 687 0.76
Notes payable 58,630 2,713 4.63
----------- -----------
Total interest-bearing liabilities 1,000,911 14,643 1.46
----------- -----------
Demand deposits 208,157
Other liabilities 5,191
Shareholders' equity 114,880
-----------
Total liabilities and shareholders' equity $ 1,329,139
===========
Net interest spread 4.01
Impact of interest free funds 0.28
-----------
Net interest margin (non-taxable equivalent) 4.29%
Net interest income $ 53,265 ===========
===========
13
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2003
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 942,717 $ 58,283 6.18%
Investment securities:
Taxable
130,048 4,682 3.60
Tax exempt 38,339 1,746 4.55
Funds sold 6,605 82 1.24
Interest-bearing deposits with banks 5,328 61 1.14
----------- -----------
Total earning assets 1,123,037 64,854 5.77
----------- -----------
Cash and other assets 86,455
Less allowance for loan losses (11,214)
-----------
Total assets $ 1,198,278
===========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 205,077 $ 763 0.37%
Savings 175,347 986 0.56
Certificates of deposit 393,365 9,806 2.49
Funds purchased 86,185 545 0.63
Notes payable 51,720 2,522 4.88
----------- -----------
Total interest-bearing liabilities 911,694 14,622 1.60
----------- -----------
Demand deposits 173,130
Other liabilities 5,688
Shareholders' equity 107,766
-----------
Total liabilities and shareholders' equity $ 1,198,278
===========
Net interest spread 4.17
Impact of interest free funds 0.30
-----------
Net interest margin (non-taxable equivalent) 4.47%
Net interest income $ 50,232 ===========
===========
14
TABLE 2
YIELDS ON AVERAGE EARNING ASSETS AND
RATES ON AVERAGE INTEREST-BEARING LIABILITIES
2002
-----------------------------------------------
AVERAGE
YIELD/RATE
AVERAGE INTEREST (NON-TAXABLE
(DOLLARS IN THOUSANDS) BALANCE EARNED/PAID EQUIVALENT)
Assets
Interest earning assets:
Loans, net of unearned income $ 806,801 $ 57,956 7.18%
Investment securities:
Taxable
166,128 7,006 4.22
Tax exempt 39,302 2,206 5.61
Funds sold 7,162 107 1.49
Interest-earning deposits with banks 2,946 49 1.66
----------- -----------
Total earning assets 1,022,339 67,324 6.59
----------- -----------
Cash and other assets 73,018
Less allowance for loan losses (10,171)
-----------
Total assets $ 1,085,186
===========
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing transaction accounts $ 171,052 $ 818 0.48%
Savings 167,268 2,084 1.25
Certificates of deposit 378,443 12,480 3.30
Funds purchased 75,956 878 1.16
Notes payable 49,500 2,492 5.03
----------- -----------
Total interest-bearing liabilities 842,219 18,752 2.23
----------- -----------
Demand deposits 138,460
Other liabilities 6,336
Shareholders' equity 98,171
-----------
Total liabilities and shareholders' equity $ 1,085,186
===========
Net interest spread 4.36
Impact of interest free funds 0.40
-----------
Net interest margin (non-taxable equivalent) 4.76%
Net interest income $ 48,572 ===========
===========
15
INVESTMENT SECURITIES
The second largest category of earning assets is investment securities,
which are used to provide liquidity, employ excess funds, pledge as collateral
for certain public funds deposits and purchased funds, and may be liquidated in
some instances to provide cash to fund earning asset growth or replace deposits.
At December 31, 2004, investment securities were $165,446,000 or 12.3 percent of
earning assets, compared with $152,009,000, or 13.6 percent of earning assets at
the end of 2003. As securities are purchased, they are designated as held to
maturity or available for sale based upon management's intent, which
incorporates liquidity needs, interest rate expectations, asset/liability
management strategies, and capital requirements.
Interest earned on the held to maturity portfolio, consisting mainly of tax
exempt state and municipal securities, was $1,175,000 in 2004, a decrease of
$208,000, or 15.0 percent, from the $1,383,000, earned in 2003. The decrease was
due to an average portfolio balance that was $4,475,000, or 14.6 percent, less
than the balance in 2003. Contributing to a lesser extent was a three basis
point decrease in yield from year to year. In 2003, this portfolio segment
earned $118,000, or 7.9 percent less than 2002 interest of $1,501,000. This
decrease was due primarily to an average portfolio balance that was $2,754,000,
or 8.2 percent less than the balance in 2002. This decrease was slightly offset
by a two basis point increase in the average yield from 2002 to 2003. The
average maturity of the held to maturity portfolio was 1.8 years, 2.4 years and
3.2 years at December 31, 2004, 2003 and 2002, respectively.
Securities available for sale consist mainly of U.S. Government Agency and
mortgage-backed securities. In 2004, interest earned on this portfolio was
$5,154,000, compared with $5,047,000, including $67,000 earned on money market
investments in 2003. The overall increase of $107,000, or 2.1 percent, was the
result of a 16 basis point increase in the average earning rate partially offset
by a $3,125,000, or 2.3 percent average balance decline from year to year.
Average earning rates on available-for-sale securities were 3.83 percent during
2004, as compared to 3.67 percent in 2003. Average outstanding balances were
$137,637,000 in 2004. In 2003, earnings from this segment of the investment
securities portfolio were $2,664,000, or 34.6 percent less than the $7,711,000
earned in 2002. This was the result of both rate and average balance declines
from year to year. Average earning rates on available-for-sale securities were
3.67 percent during 2003, or 82 basis points less than 2002. Average outstanding
balances were $137,637,000 in 2003, a $34,289,000, or 19.9 percent decrease from
the prior year, as funds were redeployed to meet higher yielding loan demand
throughout the period.
At December 31, 2004, the fair value of the investment securities portfolio
was $166,248,000, or 0.5 percent higher than the carrying value, including the
effect of a $802,000 higher market value of held-to-maturity securities,
compared to their amortized cost. The differences between fair and carrying
values at December 31, 2003 and 2002 were also favorable at $1,465,000, or 1.0
percent and $1,833,000, or 1.1 percent, respectively. At December 31, 2004,
investment securities with an amortized cost of $134,842,000 and fair value of
$135,058,000 were classified as available for sale. The positive adjustment of
$216,000 to the carrying value of these securities has been reflected, net of
tax, in the consolidated balance sheets as accumulated other comprehensive
income. At December 31, 2004, investment securities (principally Federal Reserve
Bank stock and Federal Home Loan Bank of Atlanta stock, each with no readily
determinable market value) with an amortized cost and fair value of $5,784,000
were classified as other investments. The Company realized a net gain on the
disposition of investment securities of less than $1,000 in 2004 and no gains or
losses in either 2003 or 2002.
16
Table 3
Book Value of Investment Securities
December 31,
(Dollars in thousands) 2004 2003 2002 2001 2000
Held to Maturity
U.S. Treasury and other U.S. Government agencies -- -- -- -- --
Mortgage-backed -- -- 51 247 --
State and municipal 24,604 29,487 33,160 34,767 38,550
- --------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 24,604 29,487 33,211 35,014 38,550
- --------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury and other U.S. Government agencies 25,185 25,453 45,859 44,265 93,479
Mortgage-backed 94,664 78,560 74,694 101,728 46,726
Corporate bonds 10,300 6,500 -- -- --
Corporate stocks 4,909 6,734 6,414 4,360 289
- --------------------------------------------------------------------------------------------------------------------
Total Available for Sale 135,058 117,247 126,967 150,353 140,494
- --------------------------------------------------------------------------------------------------------------------
Total Other Investments 5,784 5,275 4,773 4,566 4,154
- --------------------------------------------------------------------------------------------------------------------
Total Investment Securities $165,446 $152,009 $164,951 $189,933 $183,198
====================================================================================================================
Table 4
Maturity Distribution and Yields of Investment Securities
Due in Due After Due After Due After
December 31, 2004 1 Yr. or Less 1 Thru 5 Yrs. 5 Thru 10 Yrs. 10 Yrs. Total Par Fair
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value Value
Held to Maturity
State and municipal 5,588 6.80% 16,133 6.48% 2,883 7.57% -- 0.00% 24,604 6.68% 24,535 25,406
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity 5,588 6.80% 16,133 6.48% 2,883 7.57% -- 0.00% 24,604 6.68% 24,535 25,406
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
U.S. Treasury and U.S.
Government agencies 4,981 3.42% 20,204 3.75% -- 0.00% -- 0.00% 25,185 3.69% 25,400 25,185
Mortgage-backed -- 0.00% 76,645 4.14% 18,019 4.24% -- 0.00% 94,664 4.16% 94,034 94,664
Corporate bonds -- 0.00% -- 0.00% -- 0.00% 10,300 3.96% 10,300 3.96% 10,300 10,300
Corporate stocks (1) -- 0.00% 4,000 5.74% -- 0.00% 909 0.97% 4,909 4.86% 4,909 4,909
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale 4,981 3.42% 100,849 4.13% 18,019 4.24% 11,209 3.72% 135,058 4.08% 134,643 135,058
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Investments (1) -- 0.00% -- 0.00% -- 0.00% 5,784 4.14% 5,784 4.14% 5,784 5,784
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10,569 5.20% 116,982 4.45% 20,902 4.70% 16,993 3.86% 165,446 4.47% 164,962 166,248
====================================================================================================================================
Percent of Total 6% 71% 13% 10%
Cumulative Percent of Total 6% 77% 90% 100%
- --------------------------------------------------------------------------------
(1) Federal Reserve Bank and other corporate stocks have no set maturity date
and are classified in "Due after 10 years."
17
LOAN PORTFOLIO
Loans held for investment, net of unearned income, the largest category of
earning assets, were $1,153,230,000 at December 31, 2004, an increase of
$214,470,000, or 22.8 percent, compared to $938,760,000 at the end of 2003.
Average loans outstanding during 2004 were $1,057,813,000, an increase of
$115,096,000, or 12.1 percent, over the 2003 average of $942,717,000.
Real estate mortgage loans continue to comprise the largest segment of the
loan portfolio. All commercial and residential loans secured by real estate,
except real estate construction loans, are included in this category. At
December 31, 2004, real estate mortgage loans were $846,694,000, and comprised
73.4 percent of the total loan portfolio. This was an increase of $168,465,000,
or 24.8 percent, over year-end 2003. Commercial, financial, agricultural and
other loans were $161,442,000, representing 14.0 percent of all loans at
December 31, 2004. This category increased $28,387,000, or 21.3 percent,
compared to the balance at the end of 2003. Consumer installment loans,
comprising $104,179,000, or 9.1 percent of the loan portfolio at December 31,
2004, increased 2.4 percent from the previous year.
Loan interest income, including fees, was $61,267,000 in 2004, an increase
of $2,984,000, or 5.1 percent, over 2003 earnings of $58,283,000. The increase
was mainly the result of the substantial increase in the total average
outstanding loan balance in 2004 compared with 2003, while overall yields were
lower. The average loan portfolio yield in 2004 was 5.79, or 39 basis points
lower than 6.18 percent in 2003. Interest and fee income for 2003 was 0.6
percent above the 2002 income of $57,956,000, as strong loan growth was largely
offset by the continued decline in lending rates, reflecting the historically
low interest rate environment. The average loan yield in 2003 was 100 basis
points below the 2002 yield of 7.18 percent. Table 6 shows the maturity and
interest rate sensitivity of the loan portfolio at December 31, 2004. Loans that
mature in one year or less were $208,265,000, or 17.8 percent of total loans. Of
the loans due after one year, 506,571,000 or 53.6 percent, had fixed interest
rates, compared with variable rate loans of $438,571,000, or 46.4 percent.
The placement of loans on a nonaccrual status is dependent upon the type of
loan, the past due status and the collection activities in progress. Loans that
are well secured and in the process of collection are allowed to remain on an
accrual basis until they become one hundred twenty (120) days past due.
Unsecured commercial loans are charged off on or before the date they become
ninety (90) days past due and, therefore, do not reach nonaccrual status.
Commercial and real estate loans that are partially secured are written down to
the collateral value and placed on nonaccrual status on or before becoming
ninety (90) days past due. Closed end consumer loans are charged off or written
down to the contractual value on or before becoming one hundred twenty (120)
days past due. Open end consumer loans are charged off or written down to the
contractual value on or before becoming one hundred eighty (180) days past due.
All interest accrued in the current year but unpaid at the date a loan is placed
on nonaccrual status is deducted from interest income, while interest accrued
from previous years is charged against the allowance for loan losses. At
December 31, 2004, nonaccrual loans were $2,429,000, compared with $4,669,000 at
year-end 2003. At December 31, 2004, loans that were 90 days or more past due
and still accruing were $840,000 compared to $2,082,000 at the end of 2003.
Interest income that was foregone was an immaterial amount for each of the
three years ended December 31, 2004. The Company does not have any loans that
have been restructured or any foreign loans.
The Company attempts to avoid making loans that, in an aggregate amount,
exceed 10 percent of total loans to a multiple number of borrowers engaged in
similar business activities which could cause these aggregated loans to be
similarly impacted by economic or other conditions. As of December 31, 2004,
there were no such aggregated credit concentrations.
The level of risk elements in the loan portfolio for the past five years is
shown in Table 7.
18
19
TABLE 5
DISTRIBUTION OF NET LOANS
BY TYPE
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Commercial, financial,
agricultural and other $ 161,442 $ 133,055 $ 149,385 $ 118,819 $ 103,468
Real estate - construction 40,915 26,511 40,338 37,709 32,256
Real estate - mortgage 846,694 678,229 562,179 475,110 471,772
Consumer 104,179 100,965 111,520 116,442 120,194
- ------------------------------------------------------------------------------------------------------------------------------
Total loans net of unearned income $ 1,153,230 $ 938,760 $ 863,422 $ 748,080 $ 727,690
==============================================================================================================================
Percent of Total
Commercial, financial,
agricultural and other 14.0% 14.2% 17.3% 15.9% 14.2%
Real estate - construction 3.5 2.8 4.7 5.0 4.4
Real estate - mortgage 73.4 72.2 65.1 63.5 64.8
Consumer 9.1 10.8 12.9 15.6 16.6
- ------------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
==============================================================================================================================
TABLE 6
MATURITY DISTRIBUTION OF LOANS
DECEMBER 31, 2004 MATURITY
1 YEAR 1 - 5 OVER 5
(DOLLARS IN THOUSANDS) TOTAL OR LESS YEARS YEARS
Commercial, financial
agricultural and other $ 161,442 $ 57,627 $ 94,428 $ 9,387
Real estate - construction 40,915 9,456 8,167 23,292
Real estate - mortgage 846,694 130,445 481,798 234,451
Consumer 104,179 10,737 91,662 1,780
- ------------------------------------------------------------------------------------------------------------------
Total $ 1,153,230 $ 208,265 $ 676,055 $ 268,910
==================================================================================================================
Loans due after one year with:
Predetermined interest rates $ 506,394
Floating or adjustable interest rates $ 438,571
ASSET QUALITY
Asset quality is maintained through the management of credit risk. Each
individual earning asset, whether in the investment securities or loan
portfolio, is reviewed by management for credit risk. To facilitate this review,
SCBT Financial Corporation has established credit and investment policies that
include credit limits, documentation, periodic examination and follow-up. In
addition, these portfolios are examined for exposure to concentration in any one
industry, government agency, or geographic location. At December 31, 2004 and
2003, the Company did not have more than ten percent of the loan portfolio in
any one industry and had no foreign loans.
Each category of earning assets has a degree of credit risk. To measure
credit risk, various techniques are used. Credit risk in the investment
portfolio can be measured through bond ratings published by independent
agencies. In the investment securities portfolio, 99.5 percent of the
investments consist of U.S. Government Agency securities and tax-free securities
having a rating of "A" or better by at least one of the major bond rating
agencies. The credit risk of the loan portfolio can be measured by historical
experience. The Company maintains its loan portfolio in accordance with its
established credit policies. Net loan charge-offs as a percentage of net average
loans improved to 0.15 percent in 2004, compared with 0.19 percent in 2003 and
0.25 percent in 2002. See "Loans" for a discussion of the Company's chargeoff
and nonaccrual policies.
19
TABLE 7
NONACCRUAL AND PAST DUE LOANS
DECEMBER 31
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Loans past due 90 days or more $ 840 $ 2,082 $ 1,729 $ 1,561 $ 1,838
Loans on a nonaccruing basis 2,429 4,669 3,010 3,317 1,481
- ----------------------------------------------------------------------------------------------------------------------
Total $ 3,269 $ 6,751 $ 4,739 $ 4,878 $ 3,319
======================================================================================================================
TABLE 8
SUMMARY OF LOAN
LOSS EXPERIENCE
DECEMBER 31
(DOLLARS IN THOUSANDS) 2004 2003 2002 2001 2000
Allowance for loan losses - January 1 $ 11,700 $ 11,065 $ 9,818 $ 8,922 $ 7,886
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (2,008) (2,410) (2,236) (1,808) (1,004)
Total recoveries 446 700 256 400 202
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (1,562) (1,710) (1,980) (1,408) (802)
Provision for loan losses 4,332 2,345 3,227 2,304 1,838
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses - December 31 $ 14,470 $ 11,700 $ 11,065 $ 9,818 $ 8,922
===================================================================================================================================
Average loans - net of unearned income $ 1,043,471 $ 899,421 $ 792,594 $ 732,587 $ 680,217
Ratio of net charge-offs to average
loans - net of unearned income 0.15% 0.19% 0.25% 0.19% 0.12%
LOAN LOSS PROVISION
The Company maintains an allowance for loan losses at a level that
management believes is sufficient to provide for potential losses in the loan
portfolio. Management periodically evaluates the adequacy of the allowance
through its internal risk rating system, outside credit review and regulatory
agency examinations to assess the quality of the loan portfolio and identify
problem loans. The evaluation process also includes management's analysis of
current and future economic conditions, composition of the loan portfolio, past
due and nonaccrual loans, concentrations of credit, lending policies and
procedures and historical loan loss experience. The provision for loan losses is
charged to expense in an amount necessary to maintain the allowance at the
appropriate level.
The provision for loan losses for the year ended December 31, 2004 was
$4,332,000, compared with $2,345,000 in 2003 and $3,227,000 in 2002. The higher
provision in 2004 reflects management's close attention to asset quality and
response to strong loan growth throughout the year. The allowance for loan
losses was $14,470,000 at December 31, 2004, or 1.25 percent of total loans, net
of unearned discount, compared with $11,700,000, or 1.25 percent of total net
loans at the end of 2003. Total charge-offs were $2,008,000 in 2004, a decrease
of $402,000, or 16.7 percent, from 2003. Recoveries of loans previously charged
off were $446,000, a decrease of $254,000, or 36.3 percent from the previous
year.
Other real estate owned includes certain real estate acquired as a result of
foreclosure and deeds in lieu of foreclosure, as well as amounts reclassified as
in-substance foreclosures. At December 31, 2004 and December 31, 2003, other
real estate owned was $1,712,000 and $1,465,000, respectively.
Improvements in the national economy in 2004 enabled the Federal Reserve to
initiate several one-quarter point upward adjustments in short-term interest
rates. Most predictions for 2005 appear similarly disposed toward a continued
gradual upturn. In South Carolina, meanwhile, business activity has been more
restrained, mainly due to job losses in certain sectors and continued concern
over the overall rate of employment. In this environment, management expects
loan charge off levels in the coming months to be similar to those experienced
during 2004. The Office of the Comptroller of the Currency recommends that banks
take a broad view of certain factors in evaluating their allowance for loan
losses. These factors include loan loss experience, specific allocations and
other subjective factors. In its ongoing consideration of such factors,
management considers the Company's allowance for loan losses to be adequate.
20
LIQUIDITY
Liquidity may be defined as the ability of an entity to generate cash to
meet its financial obligations. For a bank, liquidity primarily means the
consistent ability to meet loan and investments demands and deposit withdrawals.
The Company has employed its funds in a manner to provide liquidity in both
assets and liabilities sufficient to meet its cash needs.
Asset liquidity is maintained by the maturity structure of loans, investment
securities and other short-term investments. Management has policies and
procedures governing the length of time to maturity on loans and investments. As
noted in Table 4, six percent of the investment portfolio contractually matures
in one year or less. This segment of the portfolio consists largely of U.S.
Government Agency securities and municipal obligations. Loans and other
investments are generally held for longer terms and not used for day-to-day
operating needs.
Increases in the Company's liabilities provide liquidity on a day-to-day
basis. Daily liquidity needs may be met from deposit growth or from the use of
federal funds purchased, securities sold under agreements to repurchase and
other shortterm borrowings.
The Company regularly obtains borrowed funds in the form of cash management
or "sweep" accounts that are accommodations to corporate and governmental
customers pursuant to sale of securities sold under agreements to repurchase
arrangements. During 2004, the Company maintained a prudent level of liquidity
through growth in interestbearing and non-interest-bearing deposits, cash
management accounts, federal funds purchased, and advances from the Federal Home
Loan Bank of Atlanta.
DERIVATIVES AND SECURITIES HELD FOR TRADING
The Securities and Exchange Commission has adopted rules that require
comprehensive disclosure of accounting policies for derivatives as well as
enhanced quantitative and qualitative disclosures of market risk for derivatives
and other financial instruments. The market risk disclosures are classified into
two categories: financial instruments entered into for trading purposes and all
other instruments (non-trading purposes). The Company does not currently employ
financial derivatives, nor does it maintain a trading portfolio.
ASSET-LIABILITY MANAGEMENT AND MARKET RISK SENSITIVITY
The Company's earnings or the value of its shareholders' equity may vary in
relation to changes in interest rates and in relation to the accompanying
fluctuations in market prices of certain of its financial instruments. The
Company uses a number of methods to measure interest rate risk, including
simulating the effect on earnings of fluctuations in interest rates, monitoring
the present value of asset and liability portfolios under various interest rate
scenarios, and monitoring the difference, or gap, between rate sensitive assets
and liabilities, as discussed below. The earnings simulation model and gap
analysis take into account the Company's contractual agreements with regard to
investments, loans and deposits. Although the Company's simulation model is
subject to the accuracy of the assumptions that underlie the process, the
Company believes that such modeling provides a better illustration of the
interest sensitivity of earnings than does static interest rate sensitivity gap
analysis. The simulation model assists in measuring and achieving growth in net
interest income while managing interest rate risk. The simulations incorporate
interest rate changes as well as projected changes in the mix and volume of
balance sheet assets and liabilities. Accordingly, the simulations are
considered to provide a good indicator of the degree of earnings risk the
Company has, or may incur in future periods, arising from interest rate changes
or other market risk factors.
The Company's policy is to monitor exposure to interest rate increases and
decreases of as much as 200 basis points ratably over a 12-month period. The
Company's policy guideline for the maximum negative impact on net interest
income from a steady ("ramping") change in interest rates of 200 basis points
over 12 months is 8 percent. The Company traditionally has maintained a risk
position within the policy guideline level. As of December 31, 2004, the
earnings simulations indicated that the impact of a 200 basis point decrease in
rates over 12 months would result in an approximate 7.5 percent decrease in net
interest income while a 200 basis point increase in rates over the same period
would result in an approximate 4.6 percent increase in net interest income --
both as compared with a base case unchanged interest rate environment. These
results indicate that the Company's rate sensitivity is essentially moderately
asset sensitive to the indicated change in interest rates over a one-year
horizon. The decrease in net interest income in the declining rate environment
is attributable primarily to the current (base) extremely low level of interest
rates. Certain key interest rates, such as the federal funds rate, would have to
hypothetically move to 0.25 percent in order to drop 200 basis points from
current levels. In such a hypothetical case, the Company would not be able to
lower certain current deposit and liability rates to the same extent. Also, the
model assumes that the Company's residential mortgage loans would quickly prepay
in such an extreme rate environment -- thereby lowering interest income. Actual
results may differ from simulated results due to the timing, magnitude and
frequency of interest rate changes and changes in market conditions or
management strategies, among other factors. The shape of the fixed-income yield
curve can also influence interest rate risk sensitivity, with a "flat" yield
curve having a dampening effect on the Company's asset sensitivity.
As mentioned above, another (though less useful) indicator of interest rate
risk exposure is the interest rate sensitivity gap and cumulative gap. Interest
rate sensitivity gap analysis is based on the concept of comparing financial
assets that
21
reprice with financial liabilities that reprice within a stated time period. The
time period in which a financial instrument is considered to be rate sensitive
is determined by that instrument's first opportunity to reprice to a different
interest rate. For variable rate products the period in which repricing occurs
is contractually determined. For fixed rate products the repricing opportunity
is deemed to occur at the instrument's maturity or call date, if applicable. For
non-interest-bearing funding products, the "maturity" is based solely on a
scheduled decay, or runoff, rate. When more assets than liabilities reprice
within a given time period, a positive interest rate gap (or "asset sensitive"
position) exists. Asset sensitive institutions may benefit in generally rising
rate environments as assets reprice more quickly than liabilities. Conversely,
when more liabilities than assets reprice within a given time period, a negative
interest rate gap (or "liability sensitive" position) exists. Liability
sensitive institutions may benefit in generally falling rate environments as
funding sources reprice more quickly than earning assets. However, another
shortfall of static gap analysis based solely on the timing of repricing
opportunities is its lack of attention to the degree of magnitude of rate
repricings of the various financial instruments.
As shown in the gap analysis in Table 9 below, the Company has a greater
dollar value of financial assets that are subject to repricing within a 12 month
time horizon than its financial liabilities that are subject to repricing.
Cumulatively thereafter through 4 additional 12-month time horizons, there are
generally more financial liabilities than financial assets with repricing
opportunities. However, the Company has a cumulatively positive interest rate
gap for the 5-year aggregate period. The degree of magnitude of rate repricings
of the financial assets and liabilities is, as mentioned above, not accounted
for by a static gap analysis such as that presented in Table 9.
The Company does not currently use interest rate swaps or other derivatives
to modify the interest rate risk of its financial instruments.
The following table provides information as of December 31, 2004 about the
Company's financial instruments that are sensitive to changes in interest rates.
For fixed rate loans, securities, time deposits, federal funds and repurchase
agreements, and notes payable, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates, call dates,
or average-life terminal dates. Variable rate instruments are presented
according to their first repricing opportunities. Non-interest bearing deposits
and interest-bearing savings and checking deposits have no contractual maturity
dates. For purposes of Table 9, projected maturity dates for such deposits were
determined based on decay rate assumptions used internally by the Company to
evaluate such deposits. For further information on the fair value of financial
instruments, see Note 23 to the consolidated financial statements.
22
TABLE 9
FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES
FAIR
THERE VALUE
(DOLLARS IN THOUSANDS) 2005 2006 2007 2008 2009 AFTER TOTAL 12-31-04
Financial assets:
Loans, net of unearned income:
Fixed Rate:
Book Value $169,243 $122,973 $127,267 $ 78,819 $ 60,053 $ 31,081 $589,436 $583,253
Average interest rate 6.14% 5.99% 5.69% 5.96% 5.78% 6.92% 5.99%
Variable Rate:
Book Value $499,023 $ 22,658 $ 12,775 $ 14,959 $ 13,185 $ 511 $563,111 $561,372
Average interest rate 5.27% 4.75% 4.76% 5.41% 5.44% 6.11% 5.24%
Securities held to maturity:
Fixed Rate:
Book Value $ 6,848 $ 8,297 $ 3,760 $ 2,563 $ 2,035 $ 1,101 $ 24,604 $ 25,406
Average interest rate 4.19% 4.92% 4.32% 4.27% 4.20% 5.14% 4.51%
Variable Rate:
Book Value -- -- -- -- -- -- -- --
Average interest rate -- -- -- -- -- -- --
Securities available for sale:
Fixed Rate:
Book Value $ 29,613 $ 24,113 $ 22,989 $ 20,923 $ 18,626 $ 8,334 $124,598 $124,415
Average interest rate 4.27% 4.01% 3.59% 3.35% 4.13% 4.20% 3.91%
Variable Rate:
Book Value $ 10,461 -- -- -- -- $ 10,461 $ 10,461
Average interest rate 3.95% -- -- -- -- -- 3.95%
Other investments:
Fixed Rate:
Book Value $ -- $ -- $ -- $ -- $ 1,046 $ -- $ 1,046 $ 1,046
Average interest rate 0.00% 0.00% 0.00% 0.00% 6.00% 0.00% 6.00%
Variable Rate:
Book Value $ 4,737 -- -- -- -- $ 4,737 $ 4,737
Average interest rate 3.63% -- -- -- -- -- 3.63%
Federal funds sold $ 17,876 -- -- -- -- -- $ 17,876 $ 17,876
Average interest rate 1.98% -- -- -- -- -- 1.98%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $737,801 $178,041 $166,791 $117,264 $ 94,945 $ 41,027 $1,335,869 $1,328,566
====================================================================================================================================
Financial Liabilities:
Non-interest bearing-deposits $ 28,403 $ 28,403 $ 28,403 $ 28,403 $ 28,403 $ 82,742 $224,757 $204,705
Average interest rate N/A N/A N/A N/A N/A N/A N/A
Interest-bearing
savings and checking $177,584 $177,584 $ 59,038 $ 59,038 $ 58,559 $ -- $531,803 $516,575
Average interest rate 1.30% 1.30% 0.30% 0.30% 0.30% -- 0.97% --
Time deposits $285,487 $ 79.991 $ 39,636 $ 3,975 $ 3,405 $ 2,989 $415,483 $415,297
Average interest rate 2.12% 2.83% 3.72% 3.50% 3.55% 3.86% 2.45% --
Federal funds purchased
and securities sold under
agreements to repurchase $ 89,208 -- -- -- -- -- $ 89,208 $ 89,208
Average interest rate 1.42% -- -- -- -- -- 1.42%
Notes payable $ 123 $ 7,125 $ 127 $ 3,128 $ 10,130 $ 31,295 $ 51,928 $ 55,952
Average interest rate 4.94% 4.79% 4.93% 5.49% 4.92% 4.54% 4.71% --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $580,805 $293,103 $127,204 $ 94,544 $100,497 $117,026 $1,313,179 $1,281,737
====================================================================================================================================
Interest rate sensitivity gap $156,996 $(115,062) $ 39,587 $ 22,720 $ (5,552) $(75,999) $ 22,690
Cumulative interest rate
sensitivity gap $156,996 $ 41,934 $ 81,521 $104,241 $ 98,689 $ 22,690
Cumulative interest rate
sensitivity gap as percent
of total financial assets 11.75% 3.14% 6.10% 7.80% 7.39% 1.70%
23
DEPOSITS
Customer deposits provide the Company with its primary source of funds for
the continued growth of its loan and investment securities portfolios. At
December 31, 2004, total deposits were $1,171,313,000, an increase of
$223,914,000 or 23.6 percent, from $947,399,000 at the end of 2003. The 2003
balance was $49,236,000, or 5.2 percent, greater than total deposits at year-end
2002. Noninterest-bearing accounts grew by $53,714,000, or 31.5 percent, for the
year ended December 31, 2004. Interest-bearing deposits were $947,286,000 at end
of 2004, an increase of $170,200,000, or 21.9 percent, from one year earlier.
Contributing to these increases was a corporate-wide free checking deposit
campaign to increase new account activity which resulted in 10,771 new personal
accounts and 2,512 new business checking accounts. This represents a 42%
increase in new checking account activity from 2003.
Average total deposits during 2004 were $1,059,942,000, an increase of
$113,070,000, or 11.9 percent, over 2003. Total average interest-bearing
deposits grew by $78,047,000, or 10.1 percent, led by a $25,679,000, or 12.5
percent, increase in average interest-bearing transaction accounts. Average
noninterest-bearing demand deposits increased $34,976,000, or 20.2 percent. In
2003, total deposits averaged $946,919,000, an increase of $91,696,000, or 10.7
percent, compared with 2002. This increase was also mainly due to growth in
average interest-bearing transaction accounts of $34,025,000, 19.9 percent, and
an increase of $34,670,000, or 25.0 percent, in noninterest-bearing deposits.
At December 31, 2004, the ratio of interest-bearing deposits to total
deposits was 80.4 percent, down slightly from 81.7 percent and 83.8 percent at
the end of 2003 and 2002, respectively.
TABLE 10
MATURITY DISTRIBUTION OF CD'S OF $100,000 OR MORE
DECEMBER 31 2004 2003
(DOLLARS IN THOUSANDS)
Within three months $ 35,032 $ 38,514
After three through six months 21,342 37,853
After six through twelve months 49,774 35,636
After twelve months 50,830 22,299
- --------------------------------------------------------------------------------
Total $ 156,978 $ 134,302
================================================================================
SHORT-TERM BORROWED FUNDS
The distribution of SCBT Financial Corporation's short-term borrowings at
the end of the last three years, the average amounts outstanding during each
such period, the maximum amounts outstanding at any month-end, and the weighted
average interest rates on year-end and average balances in each category are
presented below. Federal funds purchased and securities sold under agreement to
repurchase most typically have maturities within one to three days from the
transaction date. Certain of the borrowings have no defined maturity date.
TABLE 11
DECEMBER 31
(DOLLARS IN THOUSANDS)
2004 2003 2002
AMOUNT RATE AMOUNT RATE AMOUNT RATE
At period-end:
Federal funds purchased
and securities sold under
repurchase agreements $ 89,208 1.43% $ 80,967 0.45% $ 88,616 0.82%
- ----------------------------------------------------------------------------------------------------
Other borrowings 51,928 5.03% 52,050 4.98% 49,500 5.03%
- ----------------------------------------------------------------------------------------------------
Average for the year:
Federal funds purchased
and securities sold under
repurchase agreements and $ 90,445 0.76% $ 86,185 0.63% $ 75,956 1.15%
- ----------------------------------------------------------------------------------------------------
Other borrowings 58,630 4.63% 51,720 4.88% 49,500 5.03%
- ----------------------------------------------------------------------------------------------------
Maximum month-end balance:
Federal funds purchased
and securities sold under
repurchase agreements $111,889 $101,991 $ 88,617
- ----------------------------------------------------------------------------------------------------
Other borrowings 92,000 63,500 49,500
- ----------------------------------------------------------------------------------------------------
24
CAPITAL AND DIVIDENDS
A traditionally 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, 2004, shareholders' equity was $118,798,000 or 8.2
percent of total assets. At year-end 2003 and 2002, shareholders' equity was
$112,349,000, or 9.4 percent, and $103,496,000, or 9.0 percent of total assets,
respectively.
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 fifty 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 9.85 percent
at December 31, 2004, 11.81 percent at December 31, 2003 and 11.67 percent at
the end of 2002. The total capital ratio for the Company was 11.10 percent,
13.06 percent and 12.92 percent for the years ended December 31, 2004, 2003 and
2002, 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 8.05 percent at December
31, 2004, 9.13 percent at December 31, 2003 and 8.70 percent at December 31,
2002. 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,
2004, approximately $26,508,000 of the banks' retained earnings was available
for distribution to the Company as dividends without prior regulatory approval.
In 2004, the Company made shareholder dividend payments of $5,228,000 as
compared with $5,070,000 in 2003 and $4,420,000 in 2002. The dividend pay-out
ratios were 36.66 percent, 33.98 percent and 33.71 percent for the years 2004,
2003 and 2002, respectively. Earnings that are retained continue to be used 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 additional revenues for the Company that are
significant sources of income. This is especially important in periods such as
the financial services industry has experienced in recent years in which
prolonged historically low interest rates have resulted in compression of net
interest margins. For the year ended December 31, 2004, noninterest income was
$22,651,000, or 1.2 percent less than $22,915,000 in 2003. Noninterest income in
2003 was $5,067,000, or 28.4 percent, greater than $17,848,000 in 2002. In 2004,
2003 and 2002, noninterest income comprised 25.0 percent, 26.1 percent and 20.8
percent, respectively, of total interest and noninterest income.
Service charges on deposit accounts were $11,854,000 in 2004, or 52.3
percent of total noninterest income, and representing a $317,000, or 2.8 percent
increase over 2003. This increase was mainly the result of strong deposit growth
during 2004. For the year ended December 31, 2003, service charges on deposit
accounts were $11,537,000, or 50.4 percent of total noninterest income. This was
a $638,000, or 5.9 percent increase over 2002 and also resulted primarily from
deposit growth.
During 2004, other service charges and fees decreased by $2,348,000, or 20.6
percent, to $9,030,000, compared with 2003. For the year 2003, other service
charges and fees were up $4,429,000, or 63.7 percent, to $11,378,000, compared
to the previous year. The year 2003 stands out during this three-year period as
fees earned on the origination of fixed rate home mortgage loans sold into the
secondary market reached peak levels. This was the result of the prolonged low
interest rate environment and attendant surge in loan activities, especially in
the area of mortgage refinancing. Like most lending institutions, the Company
experienced a decrease in mortgage loan originations toward the end of 2003 and
throughout 2004.
The Company initiated two nonrecurring-type transactions during 2004 that
produced significant additions to noninterest income. During the first quarter,
South Carolina Bank and Trust, N.A. recognized a $782,000 pretax gain on the
sale of its Cameron, South Carolina branch to Farmers and Merchants Bank of
South Carolina. In the second quarter of 2004, the Company's banks sold their
credit card loan portfolios to a third party service provider, recognizing a
combined pretax gain of $953,000.
25
Noninterest expense was $51,131,000 in 2004, an increase of $2,416,000, or
5.0 percent, from 2003. In 2003, noninterest expense was $48,715,000, an
increase of $6,148,000, or 14.4 percent, compared with 2002. Salaries and
employee benefits were the largest component of noninterest expense, comprising
54.3 percent, 58.9 percent and 56.7 percent, respectively, of the category
totals for 2004, 2003 and 2002. In 2004, salaries and employee benefits were
$27,762,000, a decrease of $908,000, or 3.2 percent, from 2003. This decrease
resulted from lower commissions paid on lower levels of mortgage loan
originations and from efforts to control personnel-related expenses. In 2003,
salaries and employee benefits were $28,670,000, an increase of $4,534,000, or
18.8 percent, compared with 2002. This increase was the result of planned higher
levels of salary, benefits and incentive costs associated with increased
staffing levels and lending activities, and commissions paid to mortgage loan
originators based on strong loan production. At December 31, 2004, the Company
employed 513 full-time equivalent employees, compared with 514 and 480 at the
end of 2003 and 2002, respectively. Payments under cash incentive plans covering
all employees and based on attainment of certain earnings thresholds were not
paid in 2004, following payments totaling $1,514,255 in 2003 and $1,732,000 in
2002.
Net occupancy expense was $3,309,000, $2,887,000 and $2,319,000 in 2004, 2003
and 2002, respectively. The 14.6 percent increase in 2004 compared with 2003 was
mainly due to increased lease expenses and operating costs of new bank
facilities. In 2003, an expense increase of 24.5 percent from the previous year
was the result of branch openings and the new Columbia, South Carolina corporate
headquarters facility completed and occupied in January 2003.
Furniture and equipment expense was $4,447,000, $4,397,000 and $3,858,000 in
2004, 2003 and 2002, respectively. These expenses were up 1.1 percent from 2003
to 2004 as increased depreciation expense on asset additions and higher service
contract costs were largely offset by decreased expenses associated with
equipment rentals. The 14.0 percent expense increase from 2002 to 2003 was
mainly due to higher depreciation expense and costs of leasing data processing
equipment and other equipment in connection with new facilities.
For the year 2004, other expense was $15,613,000, an increase of $2,852,000,
or 22.4 percent, compared with 2003. This increase resulted from a $629,000
increase in advertising expenses, mainly associated with extended loan and
deposit marketing campaigns; foreclosed property maintenance and disposition
expense increases of $408,000; chief executive officer severance expenses of
$330,000; legal and accounting fee increases of $304,000, mainly due to internal
control and governance initiatives associated with Sarbanes-Oxley Act compliance
issues; increase in customer printed check charges of $100,000 due to free
checking campaign; increase for moving stock listing from American Stock
Exchange to The Nasdaq Stock Market of $100,000; increase in merger and
acquisition expense related to purchase of Denmark branch and sale of Cameron
branch of $103,000; and a $258,000 increase in real property taxes due to
additional facilities and higher tax levies. In 2003, other expense was
$12,761,000, an increase of $507,000, or 4.1 percent, from 2002. Variations in
expense from 2002 to 2003 included increases in facilities operating expenses of
$232,000; real property tax increases of $203,000; increased legal fees of
$118,000; public relations expense increase of $116,000; and a $293,000 decrease
in consulting fees.
TABLE 12
QUARTERLY RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
2004 QUARTERS 2003 QUARTERS
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
Interest income $ 18,525 $ 17,442 $ 16,382 $ 15,559 $ 15,487 $ 16,411 $ 16,536 $ 16,420
Interest expense 4,570 3,862 3,104 3,107 3,052 3,511 3,986 4,073
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 13,955 13,580 13,278 12,452 12,435 12,900 12,550 12,347
- -------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,163 787 1,594 788 445 831 230 839
Noninterest income 5,417 5,208 6,310 5,716 5,510 6,432 5,639 5,334
Noninterest expense 13,265 12,278 13,102 12,486 12,062 12,828 12,196 11,629
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,944 5,723 4,892 4,894 5,438 5,673 5,763 5,213
Income taxes 1,520 1,821 1,568 1,528 1,770 1,787 1,952 1,792
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,424 $ 3,902 $ 3,324 $ 3,366 $ 3,668 $ 3,886 $ 3,811 $ 3,421
===============================================================================================================================
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
26
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.
Core deposit premium costs, included in other assets in the consolidated
balance sheets, consist of costs that resulted from the acquisition of branches
from other commercial banks. Core deposit premium costs represent the estimated
value of longterm 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 signifycant effect on a fynancial
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 signifycant 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 banks' customers and 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, 2004. Long-term debt obligations
totaling $51,928,000 include advance agreements (borrowings) with the Federal
Home Loan Bank (FHLB) of Atlanta. These advances are collateralized by stock in
the FHLB of Atlanta and qualifying fyrst mortgage residential 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 $15,083,000 pertain to banking facilities and
equipment. Certain lease agreements include payment of properry taxes and
insurance and contain various renewal options. Additional information regarding
leases is contained in Note 19 to the consolidated financial statements.
(DOLLARS IN THOUSANDS)
Payment Due by Period
Less Than 1-3 3-5 More Than
Total 1 Year Years Years 5 Years
Long-term debt obligations(1) $ 51,928 $ 123 $ 7,252 $ 13,258 $ 31,295
Operating lease obligations 15,083 2,640 4,669 4,437 3,337
----------------------------------------------------------------
Total $ 67,011 $ 2,763 $ 11,921 $ 17,695 $ 34,632
================================================================
- --------------------------------------------------------------------------------
(1) Represents principal maturities
27
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.
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 the standards of the Public Company Accounting Oversight
Board (United States), 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 10, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit 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, 2004 and 2003, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
J. W. Hunt and Company, LLP
Columbia, South Carolina
February 10, 2005
28
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
DECEMBER 31,
2004 2003
---- ----
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 39,261 $ 38,541
Interest-bearing deposits with banks 14,876 6,637
Federal funds sold 3,000 4,500
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 57,137 49,678
- ---------------------------------------------------------------------------------------------------------------------
Investment securities:
Securities held to maturity (fair value of $25,406 in 2004 and $30,952 in 2003) 24,604 29,487
Securities available for sale, at fair value 135,058 117,247
Other investments 5,784 5,275
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 165,446 152,009
- ---------------------------------------------------------------------------------------------------------------------
Loans held for sale 13,837 12,346
- ---------------------------------------------------------------------------------------------------------------------
Loans 1,153,407 939,538
Less unearned income (177) (778)
Less allowance for loan losses (14,470) (11,700)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net 1,138,760 927,060
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 33,667 32,647
- ---------------------------------------------------------------------------------------------------------------------
Goodwill 3,717 2,363
- ---------------------------------------------------------------------------------------------------------------------
Other assets 24,413 21,589
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,436,977 $ 1,197,692
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 224,027 $ 170,313
Interest-bearing 947,286 777,086
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 1,171,313 947,399
Federal funds purchased and securities
sold under agreements to repurchase 89,208 80,967
FHLB advances 51,928 52,050
Other liabilities 5,730 4,927
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 1,318,179 1,085,343
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 19, 20, and 22)
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock - $2.50 par value, authorized 40,000,000 shares 7,657,094 and
7,690,186 shares issued and outstanding
Stock dividend distributable 19,143 19,225
Surplus 955 --
Retained earnings 72,079 62,722
Accumulated other comprehensive income 26,486 29,787
135 615
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 118,798 112,349
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,436,977 $ 1,197,692
=====================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
29
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Interest income:
Loans, including fees $ 61,267 $ 58,283 $ 57,956
Investment securities:
Taxable 4,856 4,682 7,006
Tax-exempt 1,461 1,679 1,802
Money market funds 11 67 404
Federal funds sold 138 82 107
Deposits with banks 175 61 49
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 67,908 64,854 67,324
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 11,243 11,555 15,382
Federal funds purchased and securities
sold under agreements to repurchase 687 545 878
FHLB advances 2,713 2,522 2,492
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 14,643 14,622 18,752
- ---------------------------------------------------------------------------------------------------------------------
Net interest income:
Net interest income 53,265 50,232 48,572
Provision for loan losses 4,332 2,345 3,227
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 48,933 47,887 45,345
- ---------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 11,854 11,537 10,899
Other service charges and fees 9,030 11,378 6,949
Gain on sale of assets 1,766 -- --
Realized gain on securities available for sale 1 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest income 22,651 22,915 17,848
- ---------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 27,762 28,670 24,136
Net occupancy expense 3,309 2,887 2,319
Furniture and equipment expense 4,447 4,397 3,858
Other expense 15,613 12,761 12,254
- ---------------------------------------------------------------------------------------------------------------------
Total noninterest expense 51,131 48,715 42,567
- ---------------------------------------------------------------------------------------------------------------------
Earnings:
Income before provision for income taxes 20,453 22,087 20,626
Provision for income taxes 6,437 7,301 6,792
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 14,016 $ 14,786 $ 13,834
=====================================================================================================================
Earnings per share:
Basic $ 1.74 $ 1.83 $ 1.72
=====================================================================================================================
Diluted $ 1.72 $ 1.82 $ 1.71
=====================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
30
Accumulated
Common Stock Stock Other
------------ Dividend Retained Comprehensive
Shares Amount Distributable Surplus Earnings Income Total
------ ------ ------------- ------- -------- ------ -----
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 $.63
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
----------
Comprehensive income:
Net income -- -- -- -- 14,016 -- 14,016
Change in net unrealized gain on
securities available for sale,
net of tax effects -- -- -- -- -- (480) (480)
----------
Total comprehensive income 13,536
----------
Cash dividends declared at $.68
per share -- -- -- -- (5,228) -- (5,228)
----------
Stock options exercised 71,617 179 1,125 -- -- 1,304
----------
Employee stock purchases 11,199 28 -- 253 -- -- 281
----------
Restricted stock awards 5,000 13 -- 133 -- -- 146
----------
Common stock repurchased (120,908) (302) -- (3,288) -- -- (3,590)
----------
Common stock dividend of 5%;
record date, December 20, 2004 -- -- 955 11,134 (12,089) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 7,657,094 $ 19,143 $ 955 $ 72,079 $ 26,486 $ 135 $ 118,798
====================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Cash flows from operating activities:
Net income $ 14,016 $ 14,786 $ 13,834
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization
2,698 2,498 2,005
Provision for loan losses 4,332 2,345 3,227
Deferred income taxes (651) 186 (109)
Gain on sale of securities available for sale (1) -- --
(Gain) loss on sale of assets (1,766) (7) 4
Net amortization of investment securities 531 1,054 962
Net change in:
Loans held for sale (1,491) 26,795 (18,363)
Accrued interest receivable (1,120) 362 667
Prepaid assets 256 (1) (771)
Miscellaneous other assets (2,856) (4,916) (3,978)
Accrued interest payable 429 (739) (687)
Accrued income taxes 36 (502) 95
Miscellaneous other liabilities 356 2,115 690
- -----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 14,769 43,976 (2,424)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 4,223 -- --
Proceeds from maturities of investment securities held to maturity 2,595 3,666 2,807
Proceeds from maturities of investment securities available for sale 54,367 118,467 277,106
Proceeds from sales of other investment securities 832 -- --
Purchases of investment securities held to maturity -- -- (1,073)
Purchases of investment securities available for sale (75,415) (111,662) (253,492)
Purchases of other investment securities (1,341) (526) (252)
Net increase in customer loans (225,341) (77,747) (117,572)
Recoveries on loans previously charged off 446 700 256
Purchases of premises and equipment (3,337) (6,022) (10,773)
Proceeds from sale of premises and equipment 277 23 187
Proceeds from sale of credit card portfolio 9,814 -- --
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (232,880) (73,101) (102,806)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits 236,753 48,116 86,640
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 8,240 (7,648) 21,999
Proceeds from FHLB advances 96,000 46,550 --
Repayment of FHLB advances (96,122) (44,000) --
Payment in connection with sale of branch (12,214) -- --
Common stock issuance 427 294 537
Common stock repurchase (3,590) (53) (265)
Dividends paid (5,228) (5,070) (4,420)
Stock options exercised 1,304 100 78
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 225,570 38,289 104,569
- -----------------------------------------------------------------------------------------------------------------
32
Net increase (decrease) in cash and cash equivalents 7,459 9,164 (661)
Cash and cash equivalents at beginning of year 49,678 40,514 41,175
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 57,137 $ 49,678 $ 40,514
==================================================================================================================
Supplemental Disclosures:
Cash Flow Information:
Cash paid for:
Interest $ 14,231 $ 15,361 $ 18,282
==================================================================================================================
Income taxes $ 7,110 $ 7,761 $ 6,705
==================================================================================================================
Schedule of Noncash Investing Transactions:
Real estate acquired in full or in partial settlement of loans: $ 1,911 $ 1,465 $ 1,051
==================================================================================================================
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. and South Carolina Bank and
Trust of the Piedmont, N.A., (the "Banks"). 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.
In December 2002, South Carolina Bank and Trust, N.A. acquired the majority of
the consumer loan portfolio and related assets of CreditSouth Financial Services
Corporation ("CreditSouth"), a former subsidiary of the Company, and assumed the
continuing lending activities of that 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 March 2004, the
remaining CreditSouth loans totalling approximately $123,000 were donated to
South Carolina Bank and Trust, N.A. and CreditSouth was dissolved.
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.
In April 2004, The Mortgage Banc ("TMB") was incorporated as a wholly owned
subsidiary of South Carolina Bank and Trust, N.A. TMB is focusing initially on
providing mortgage products and services to other financial institutions and
mortgage companies throughout the Southeast. TMB's offices and personnel are
located in the Company's headquarters facility in Columbia, South Carolina.
Also in April 2004, the credit card loan portfolios of the Banks were sold for a
pre-tax gain of $953,000.
In December 2004, the Company entered into an Agreement and Plan of Merger by
and between the Company and New Commerce BanCorp ("NCB"), pursuant to which,
among other things, NCB will be merged with and into the Company. This agreement
was amended in January 2005 to provide for the acquisition and merger of NCB and
New Commerce Bank into South Carolina Bank and Trust, N.A. A more detailed
explanation of this transaction is provided in Item 1., "Business," on pages 1
and 2. Pursuant to the agreement, South Carolina Bank and Trust, N.A. will pay
an aggregate purchase price in the merger of approximately $20.2 million in
cash. Consummation of the merger is subject to regulatory approval and the
approval of NCB's shareholders, along with other customary closing conditions.
NCB, which began operations in 1999, is the parent holding company of New
Commerce Bank and is headquartered in Greenville, South Carolina. New Commerce
Bank has two branch offices in the Mauldin and Simpsonville communities of
Greenville County. NCB had total assets of $96 million as of December 31, 2004.
The transaction is anticipated to close in the second quarter of 2005.
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.
33
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 consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated 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
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 $27,865,000 at December 31, 2004. Based on this criteria, the
Company had three such credit concentrations at the end of 2004, including
$67,274,000 of loans to lessors of nonresidential buildings, $43,505,000 of
loans to religious organizations, and $40,325,000 of loans to borrowers engaged
in other activities related to real estate.
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.
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-than-temporary 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.
Other investments include stock acquired for regulatory purposes, such as
Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock. These
securities do not have a readily determinable fair value because their ownership
is restricted and they lack a market for trading. As a result, these securities
are carried at cost and are periodically evaluated for impairment.
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. Estimated fair value
is determined on the basis of existing forward commitments or the current market
value of similar loans. Net unrealized losses, if any, are recognized through a
valuation allowance by charges to income.
34
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.
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.
RATE LOCK COMMITMENTS:
The Company enters into rate lock commitments to originate mortgage loans
whereby the interest rate on the loan is determined prior to funding. Rate lock
commitments on mortgage loans that are originated for resale are considered to
be derivatives. The period of time between issuance of a loan commitment and
closing and sale of the loan generally ranges from 10 to 60 days. For such rate
lock commitments, the Company is protected from changes in interest rates
through the use of best efforts forward delivery commitments, whereby an
investor commits to buy the loan at the time the borrower commits to an interest
rate with the intent that the investor has assumed the interest rate risk on the
loan. As a result, the Company is not exposed to losses nor will it realize
gains or losses related to its rate lock commitments due to changes in interest
rates. The market values of rate lock commitments and best efforts contracts are
not readily ascertainable with precision because rate lock commitments and best
efforts contracts are not actively traded.
35
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
that may result from the acquisition of other companies or branches from other
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 method that reasonably
approximates the anticipated benefit stream from the accounts. Beginning January
1, 2002, goodwill is no longer amortized, but it 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
based principally, among other considerations, on contributing an 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 6% of annual base compensation as a before tax contribution. The Company
matches 50% of these contributions. Employer contributions may be made from
current or accumulated net profits. Participants may elect to contribute an
additional 1% to 6% (or higher, in certain cases) 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, 2004, 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.
36
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, but may from time to time have longer terms.
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, deferred compensation,
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. The
Company may establish accruals for anticipated advertising expenses within the
course of a current year.
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 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:
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 December 2003, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position No. 03-3, ACCOUNTING FOR CERTAIN LOANS OR DEBT
SECURITIES ACQUIRED IN A TRANSFER (SOP 03-3). SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. SOP 03-3 requires
acquired loans to be recorded at fair value and prohibits carrying over
valuation allowances in the initial accounting for all loans acquired in a
transfer that have evidence of deterioration in credit quality since
origination, when it is probable that the investor will be unable to collect all
contractual cash flows. Loans carried at fair value, mortgage loans held for
sale, and loans to borrowers in good standing under revolving credit agreements
are excluded from the scope of SOP 03-3. SOP 03-3 is not expected to have a
material impact on the Company's results of operations or financial condition.
37
In March 2004, the Securities and Exchange Commission (SEC) staff issued Staff
Accounting Bulletin No. 105, APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN
COMMITMENTS (SAB 105). SAB 105 summarizes the views of the staff of the SEC
regarding the application of generally accepted accounting principles to loan
commitments accounted for as derivative instruments. SAB 105 provides that the
fair value of recorded loan commitments that are accounted for as derivatives
under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, should not incorporate the expected future cash flows related to the
associated servicing of the future loan. In addition, SAB 105 requires
registrants to disclose their accounting policy for loan commitments. The
provisions of SAB 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. Refer above to the
Company's policy for accounting for rate lock commitments for further detail.
The adoption of SAB 105 had no material impact on the Company's results of
operations or financial condition.
In March 2004, the Emerging Issues Task Force (EITF) issued EITF 03-1, THE
MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN
INVESTMENTS (EITF 03-1). EITF 03-1 provides recognition and measurement guidance
regarding when impairments of equity and debt securities are considered
other-than-temporary thereby requiring a charge to earnings, and also requires
additional annual disclosures for investments in unrealized loss positions. The
additional annual disclosure requirements were previously issued by the EITF in
November 2003 and were effective for the Corporation for the year ended December
31, 2003. In September 2004, the FASB issued FASB Staff Position (FSP) EITF
03-1-1, which delays the recognition and measurement provisions of EITF 03-1
pending the issuance of further implementation guidance. The Company is
currently evaluating the effect of the recognition and measurement provisions of
EITF 03-1.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), SHARE-BASED
PAYMENT (SFAS 123R) which eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25, and generally requires that
such transactions be accounted for using a fair value-based method with the
resulting compensation cost recognized over the period that the employee is
required to provide service in order to receive their compensation. SFAS 123R
also amends SFAS No. 95, STATEMENT OF CASH FLOWS, requiring the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as currently
required. The Company plans to adopt SFAS 123R beginning July 1, 2005, and does
not expect it to have a material impact on its financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS
- - an amendment of APB Opinion No. 29 (SFAS 153). SFAS 153 addresses the
measurement of nonmonetary exchanges and eliminates the exception from fair
value measurement for nonmonetary exchanges of similar productive assets in APB
Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. The Company does not expect the adoption of SFAS 153 to have a
material impact on its financial position or results of operations.
OTHER:
Certain amounts previously reported have been restated only for the purpose of
conforming with the current year's 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, 2004 and 2003 was approximately $16,544,000 and
$11,413,000, respectively.
At December 31, 2004, the Company and its subsidiaries had due from bank
balances in excess of federally insured limits of approximately $4,378,000. The
risk associated with this excess is limited due to the soundness of the
financial institutions with which the funds are deposited.
38
NOTE 3 - INVESTMENT SECURITIES:
The following is the amortized cost and fair value of investment securities held
to maturity at December 31, 2004 and 2003:
2004
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
State and municipal $ 24,604 $ 802 $ -- $ 25,406
- ----------------------------------------------------------------------------------------
Total $ 24,604 $ 802 $ -- $ 25,406
========================================================================================
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
State and municipal $ 29,487 $ 1,465 $ -- $ 30,952
- ----------------------------------------------------------------------------------------
Total $ 29,487 $ 1,465 $ -- $ 30,952
========================================================================================
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.
The following is the amortized cost and fair value of securities available for
sale at December 31, 2004 and 2003:
2004
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
U. S. Treasury and other
Government agencies $ 25,365 $ 38 $ (218) $ 25,185
Mortgage-backed 94,664 776 (776) 94,664
Corporate bonds 10,300 -- -- 10,300
Corporate stocks 4,513 396 -- 4,909
- ----------------------------------------------------------------------------------------
Total $ 134,842 $ 1,210 $ (994) $ 135,058
========================================================================================
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(DOLLARS IN THOUSANDS)
U. S. Treasury and other
Government agencies $ 25,448 $ 44 $ (39) $ 25,453
Mortgage-backed 77,906 1,177 (523) 78,560
Corporate bonds 6,500 -- -- 6,500
Corporate stocks 6,402 332 -- 6,734
- ----------------------------------------------------------------------------------------
Total $ 116,256 $ 1,553 $ (562) $ 117,247
========================================================================================
The amortized cost and fair value of debt securities at December 31, 2004 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 prepayment penalties.
39
SECURITIES SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(DOLLARS IN THOUSANDS)
Due in one year or less $ 5,588 $ 5,624 $ 5,001 $ 4,981
Due after one year through
five years 16,133 16,668 100,869 100,849
Due after five years through
ten years 2,883 3,114 18,160 18,019
Due after 10 ten years -- -- 10,300 10,300
- ------------------------------------------------------------------------------------------
Subtotal 24,604 25,406 134,330 134,149
No contractual maturity -- -- 512 909
- ------------------------------------------------------------------------------------------
Total $ 24,604 $ 25,406 $ 134,842 $ 135,058
==========================================================================================
There were no sales or transfers of held-to-maturity securities during 2004,
2003 or 2002. The following table summarizes information with respect to sale of
available-for-sale securities:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Sales Proceeds $ 4,223 $ -- $ --
- ------------------------------------------------------------------------------------------
Gross realized gains 5 -- --
Gross realized losses (4) -- --
- ------------------------------------------------------------------------------------------
Net realized gain 1 -- --
==========================================================================================
The Company had thirty-two (32) securities with gross unrealized losses at
December 31, 2004. Information pertaining to securities with gross unrealized
losses at December 31, 2004, aggregated by investment category and length of
time that individual securities have been in a continuous loss position,
follows:
LESS THAN TWELVE MONTHS TWELVE MONTHS OR LONGER
----------------------- -----------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Securities Available for Sale
- -----------------------------
U.S. Treasury and
Government agencies
$ 218 $ 15,274 $ -- $ --
Mortgage-backed 414 43,926 362 21,072
- ------------------------------------------------------------------------------------------
Total Available for Sale $ 632 $ 59,200 $ 362 $ 21,072
==========================================================================================
At December 31, 2004, debt securities with unrealized losses have depreciated
only 1.2% 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 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.
40
At December 31, 2004 and 2003, investment securities with a carrying value of
$68,453,000 and $56,014,000, respectively, were pledged to secure public
deposits, FHLB advances and for other purposes required and permitted by law. At
December 31, 2004 and 2003, the carrying amount of securities pledged to secure
repurchase agreements was $67,248,000 and $73,207,000, respectively.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES:
The following is a summary of loans by category at December 31, 2004 and 2003:
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Commercial, financial and agricultural $ 161,442 $ 133,055
Real estate - construction 40,915 26,511
Real estate - mortgage 846,694 678,229
Consumer 104,356 101,743
- -------------------------------------------------------------------------------------------------------------------------
Total loans 1,153,407 939,538
Less, unearned income 177 778
Less, allowance for loan losses 14,470 11,700
- -------------------------------------------------------------------------------------------------------------------------
Loans, net $ 1,138,760 $ 927,060
=========================================================================================================================
Changes in the allowance for loan losses for the three years ended December 31,
2004, were as follows:
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance at beginning of year $ 11,700 $ 11,065 $ 9,818
Loans charged-off (2,008) (2,410) (2,236)
Recoveries of loans previously charged-off 446 700 256
- -------------------------------------------------------------------------------------------------------------------------
Balance before provision for loan losses 10,138 9,355 7,838
Provision for loan losses 4,332 2,345 3,227
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 14,470 $ 11,700 $ 11,065
=========================================================================================================================
The following is a summary of information pertaining to impaired and nonaccrual
loans:
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Impaired loans without a valuation allowance $ -- $ --
Impaired loans with a valuation allowance 693 2,871
- -------------------------------------------------------------------------------------------------------------------------
Total impaired loans 693 $ 2,871
=========================================================================================================================
Valuation allowance related to impaired loans: $ 323 $ 971
Average of impaired loans during the year: $ 1,629 $ 2,335
Total nonaccrual loans $ 2,429 $ 4,669
Total loans past-due ninety days or more and still accruing $ 840 $ 2,082
Interest income which was foregone was an immaterial amount for each of the
years in the three-year period ended December 31, 2004. There were no
restructured loans at December 31, 2004 and 2003.
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 owned totaled $1,712,000 and $1,465,000 at
December 31, 2004 and 2003, respectively.
41
NOTE 5 - PREMISES AND EQUIPMENT:
Premises and equipment at December 31 consisted of the following:
USEFUL LIFE 2004 2003
----------- ---- ----
(DOLLARS IN THOUSANDS)
Land $ 6,861 $ 6,051
Buildings and leasehold improvements 15-40 years 28,890 27,886
Equipment and furnishings 5-10 years 15,535 15,147
- --------------------------------------------------------------------------------------------------------------
Total 51,286 49,084
Less, accumulated depreciation 17,619 16,437
- --------------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 33,667 $ 32,647
==============================================================================================================
Depreciation expense charged to operations was $2,210,000, $2,012,000, and
$1,467,000 in 2004, 2003, and 2002, respectively.
Computer software with an original cost of $2,800,000 is being amortized using
the straight-line method over thirty-six months. Amortization expense totaled
$302,000, $285,000, $333,000 for the years ended December 31, 2004, 2003, and
2002 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 analysis through December 31,
2004. An additional $1,354,000 was added to goodwill as a result of the purchase
of the Denmark branch in February, 2004.
The following is a summary of gross carrying amounts and accumulated
amortization of core deposit premium costs at December 31, 2004 and 2003:
2004 2003
---- ----
(DOLLARS IN THOUSANDS)
Gross carrying amount $ 4,536 $ 5,538
Accumulated amortization (3,668) (4,608)
Amortization expense totaled $186,000 and 201,000 for the years ended December
31, 2004 and 2003, respectively. Estimated amortization expense for core deposit
premium costs for each of the next five years is as follows:
Year ending December 31: (DOLLARS IN THOUSANDS)
2005 $ 171
2006 153
2007 135
2008 117
2009 99
42
NOTE 7 - DEPOSITS:
The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $156,978,000 and $134,302,000, respectively. At
December 31, 2004, the scheduled maturities of time deposits of all
denominations are as follows:
(DOLLARS IN THOUSANDS)
2005 $ 288,489
2006 71,991
2007 39,636
2008 3,949
2009 3,409
Thereafter 3,010
-----------
$ 410,484
===========
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.
NOTE 9 - FHLB ADVANCES:
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, qualifying first mortgage residential loans and commercial real
estate loans under a blanket floating lien.
Advances have various maturity dates, terms and repayment schedules with fixed
rates of interest. At December 31, 2004, FHLB advances had remaining scheduled
maturities from two (2) to nineteen (19) years. However, of the total advances
outstanding, $29,500,000 are convertible to a floating interest rate. These
advances may convert to a floating interest rate indexed to LIBOR only if LIBOR
equals or exceeds 7.50%. At December 31, 2004, there were no advances at
variable rates.
Net eligible loans of the Banks pledged to the FHLB for advances and letters of
credit at December 31, 2004, were approximately $240,355,000. With the haircut
reduction, total borrowing capacity at FHLB was $136,058,000. After accounting
for outstanding advances totaling $51,928,000 and letters of credit totaling
$15,000,000, the Banks had unused net credit availability of $69,130,000 at
December 31, 2004.
A summary of advances during the years ended December 31, 2004 and 2003:
(DOLLARS IN THOUSANDS)
2004 2003
---- ----
Advances outstanding at December 31 $ 51,928 $ 52,050
Maximum amount outstanding at any month-end 92,000 63,500
Average amount outstanding during the year 58,630 51,720
Weighted-average interest rate (actual/actual basis) at December 31 5.03% 4.98%
Weighted-average interest rate (actual/actual basis) during the year 4.63% 4.88%
43
Scheduled principal maturities of FHLB advances are summarized below:
Year Ending December 31:
2005 $ 123
2006 7,125
2007 127
2008 3,128
2009 10,130
Thereafter 31,295
----------
$ 51,928
==========
NOTE 10 - INCOME TAXES:
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Current:
Federal $ 6,454 $ 6,506 $ 6,308
State 634 609 593
- ----------------------------------------------------------------------------------------------------
Total current tax expense 7,088 7,115 6,901
- ----------------------------------------------------------------------------------------------------
Deferred:
Federal (510) 141 (67)
State (141) 45 (42)
- ----------------------------------------------------------------------------------------------------
Total deferred tax expense (benefit) (651) 186 (109)
- ----------------------------------------------------------------------------------------------------
Provision for income taxes $ 6,437 $ 7,301 $ 6,792
====================================================================================================
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,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Provision for loan losses $ (1,049) $ (262) $ (611)
Pension cost and post-retirement benefits 307 (6) 35
Deferred compensation (250) -- --
Depreciation 221 393 399
Other 120 61 68
- ----------------------------------------------------------------------------------------------------
Total $ (651) $ 186 $ (109)
====================================================================================================
44
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,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Income taxes at federal statutory rate $ 7,159 $ 7,730 $ 7,219
Increase (reduction) of taxes resulting from:
State income taxes, net of federal
tax benefit 430 415 401
Tax-exempt interest income (525) (550) (589)
Income tax credits (194) (49) --
Dividends received deduction (158) (40) (48)
Other, net (275) (205) (191)
- ----------------------------------------------------------------------------------------------------
Provision for income taxes $ 6,437 $ 7,301 $ 6,792
====================================================================================================
The components of the net deferred tax asset, included in other assets, are as
follows:
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Allowance for loan losses $ 5,278 $ 4,229
Post-retirement benefits 113 104
Intangible assets 152 287
Deferred compensation 250 --
State net operating loss carry forward 145 87
- ----------------------------------------------------------------------------------------------------
Total deferred tax assets 5,938 4,707
- ----------------------------------------------------------------------------------------------------
Depreciation 1,703 1,483
Unrealized gains on investment securities available for sale 83 377
Consumer loan income 198 220
Bond accretion and amortization 13 7
Pension plan 711 395
Passive losses 1 2
- ----------------------------------------------------------------------------------------------------
Total deferred tax liabilities 2,709 2,484
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset before valuation allowance 3,229 2,223
Less valuation allowance (150) (90)
- ----------------------------------------------------------------------------------------------------
Net deferred tax asset $ 3,079 $ 2,133
====================================================================================================
At December 31, 2004, the Company had net operating loss carryforwards for state
income tax purposes of approximately $2,901,000 available to offset future state
taxable income. The carryforwards expire in the years 2010 to 2019. The
valuation allowance is based on management's estimate of the ultimate
realization of the deferred tax asset.
45
NOTE 11 - OTHER EXPENSE:
The following is a summary of the components of other noninterest expense:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Telephone and postage $ 1,462 $ 1,480 $ 1,389
Professional fees 1,987 1,399 1,727
Office supplies 1,077 1,021 969
Advertising 1,881 1,286 1,519
Amortization 488 486 562
Regulatory fees 731 743 701
Insurance 251 197 204
Data and computer services 1,040 852 412
OREO, repossession, and other loan expenses 1,050 573 675
Business development and staff related 680 625 630
Property and sales tax 889 625 446
Other 4,077 3,474 3,020
- ----------------------------------------------------------------------------------------------------
Total $ 15,613 $ 12,761 $ 12,254
====================================================================================================
NOTE 12 - EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted earnings per
share
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
YEAR ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Numerator:
Net income - numerator for basic
and diluted earnings per share $ 14,016 $ 14,786 $ 13,834
- ----------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -
weighted-average shares outstanding 8,063 8,065 8,048
Effect of dilutive securities:
Employee stock options 80 81 62
- ----------------------------------------------------------------------------------------------------
Dilutive potential shares:
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 8,143 8,146 8,110
- ----------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.74 $ 1.83 $ 1.72
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share $ 1.72 $ 1.82 $ 1.71
====================================================================================================
The earnings per share data above has been retroactively adjusted to give effect
to a 5% common stock dividend paid to shareholders of record as of December 20,
2004, and a 10% common stock dividend paid to shareholders of record as of
November 22, 2002.
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. The number of shares in this options category was 16,600 with a range of
exercise prices of $28.15 to $30.96 at December 31, 2003. There were no options
in this category at December 31, 2004 or 2002.
46
NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS):
The components of other comprehensive income (loss) and related tax effects are
as follows:
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
2004 2003 2002
---- ---- ----
Change in unrealized holding gains (losses) on available-for-sale securities $ (775) $ (1,942) $ 1,130
Tax effect 295 738 (463)
- -----------------------------------------------------------------------------------------------------------------------------
Net-of-tax amount $ (480) $ (1,204) $ 667
=============================================================================================================================
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, 2004, approximately $26,508,000 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. The maximum amount available for transfer from the
Banks to the Company in the form of loans or advances was approximately
$23,127,000 at December 31, 2004.
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, 2004 and 2003:
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 11,511 $ 9,628
Service cost 665 653
Interest cost 716 677
Plan amendment (338) --
Actuarial loss 1,785 781
Benefits paid (280) (228)
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 14,059 11,511
- -------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year
9,253 8,041
Actual return on plan assets 548 843
Employer contribution 1,758 597
Benefits paid (280) (228)
- -------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 11,279 9,253
- -------------------------------------------------------------------------------------------------------------------------
Funded status (2,780) (2,258)
Unrecognized net actuarial loss 5,021 3,173
Unrecognized prior service cost (benefit) (300) 4
Employer contributions between measurement date and year end -- 162
- -------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $ 1,941 $ 1,081
=========================================================================================================================
47
The components of net periodic pension cost are as follows:
Year Ended December 31,
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
Service cost $ 665 $ 653 $ 472
Interest cost 716 677 579
Expected return on plan assets (792) (714) (650)
Amortization of prior service cost (38) 1 1
Recoqnized net actuarial loss 186 176 39
- ----------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 737 $ 793 $ 441
====================================================================================================
2004 2003
---- ----
Information as of the measurement date:
Projected benefit obligation $ 14,059 $ 11,511
Accumulated benefit obligation 11,176 9,041
Fair value of plan assets 11,279 9,253
Measurement date (1) October 31 October 31
Weighted-average assumptions used to determine benefit obligations at
measurement date:
Discount rate 6.00% 6.50%
Rate of compensation increase 5.00% 5.00%
For the years ended December 31, 2004, 2003 and 2002, the assumptions used to
determine net periodic pension cost are as follows:
2004 2003 2002
---- ---- ----
Discount rate 6.50% 6.75% 7.25%
Expected long-term return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.00% 5.00% 5.00%
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 asset allocation of the Company's pension plan is targeted at
45% in U.S. equities, 5% in international equities, and 50% in fixed income. In
June 2004, the Pension Committee moved a portion of the Plan's fixed income
assets to two shorter-term investment vehicles in anticipation of a rising
interest rate environment. This allocation to shorter-term securities is
expected to be a short-term deviation from long-term policy asset allocation.
In developing the 8% long-term rate of return assumption for the pension plan,
the Company utilized the following longterm rate of return and standard
deviation assumptions:
Asset Rate of Return Standard Deviation
Class Assumption Assumption
Fixed income 6.0% 6.5%
Domestic equity 10.0% 16.0%
Foreign equity 10.5% 20.0%
Inflation 3.0% --
(1) All values are derived for years ending on December 31. As allowed under the
applicable accounting rules, values are actually measured two (2) months
earlier, at October 31, for efficiency and to be able to determine values in
advance to aid in planning.
48
The portFolio's equity weighting is consistent with the long-term nature of the
Plan's benefit obligation, and the expected annual return on the portFolio of
8%.
The policy, as established by the Pension Committee, seeks to maximize return
within reasonable and prudent levels of risk. The overall long-term objective of
the Plan is to achieve a rate of return that exceeds the actuarially assumed
rate of return of 8%. The investment policy will be reviewed on a regular basis
and revised when appropriate based on the legal or regulatory environment,
market trends, or other fundamental factors.
Below is a summary of the Plan's year-end asset allocation: (1)
(DOLLARS IN THOUSANDS)
Asset Class 2004 2003
------------------------------ ----------------------------
Fair Value Percentage Fair Value Percentage
Cash or cash equivalent $ 282 2.5% $ 755 8.1 %
Guaranteed investment account 1,868 16.6% -- --
Short-term fixed income 1,735 15.4% -- --
Broad market fixed income 1,737 15.4% 3,738 40.4%
Domestic equity 5,095 45.1 % 4,281 46.3%
Foreign equity 562 5.0% 479 5.2%
- --------------------------------------------------------------------------------------------------------
Totals 11,279 100.0% $ 9,253 100.0%
========================================================================================================
Domestic equity securities include the Company's common stock in the amounts of
$575,000 (17,469 shares representing 5.3% of plan assets) and $503,000 (17,469
shares representing 5.4% of plan assets) at year-end 2004 and 2003,
respectively. During 2004, the plan made no purchases of the Company's common
stock. Dividends on the Company's common stock received by the plan totaled
$12,000 for 2004.
Estimated future benefit payments (including expected future service as
appropriate):
(DOLLARS IN THOUSANDS)
2005 $ 329
2006 365
2007 408
2008 483
2009 590
2010 - 2014 3,828
Expenses incurred and charged against operations with regard to all of the
Company's retirement plans were as follows:
Year Ended December 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Pension $ 737 $ 793 $ 441
Profit-sharing 460 352 265
- --------------------------------------------------------------------------------------------------
Total $ 1,197 $ 1,145 $ 706
==================================================================================================
The Company expects to contribute approximately $670,000 to the pension plan in
2005, but reserves the right to contribute between the minimum required and
maximum deductible amounts as determined under applicable Federal laws.
- --------------------------------------------------------------------------------
(1) Measured at 10/31, for the fiscal year ending 12/31.
49
NOTE 16 - POST RETIREMENT BENEFITS:
The following sets forth the plans funded status and amounts recognized in the
Company's accompanyyng consolidated fynancial statements at December 31 2004 and
2003:
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 582 $ 560
Interest cost 36 38
Actuarial (gain) loss (19) 31
Benefits paid (52) (47)
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 547 582
- -------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contribution 52 47
Benefits paid (52) (47)
- -------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year -- --
- -------------------------------------------------------------------------------------------------------------------------
Funded status at at end of year (547) (582)
Unrecognized net actuarial (gain) loss (1) 18
Unrecognized transition obligation 252 284
- -------------------------------------------------------------------------------------------------------------------------
Accrued benefit cost $ (296) $ (280)
=========================================================================================================================
2004 2003
---- ----
Measurement date (1) October 31 October 31
Weighted-average assumption used to determine benefit
obligations at measurement date:
Discount rate 6.00% 6.50%
Weighted-average assumptions used to determine net
periodic benefit cost for years ended December 31:
Discount rate 6.50% 6.75%
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 2004 2003
Year Ended December 31,
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
Components of net periodic benefit cost:
Interest cost $ 36 $ 38 $ 38
Amortization of transition obliqation 31 31 31
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 67 $ 69 $ 69
===========================================================================================================================
- --------------------------------------------------------------------------------
(1) All values are derived for fiscal years ending on December 31. As allowed
under the applicable accounting rules, values are actually measured two months
earlier, at October 31, for efficiency and to be able to determine values in
advance to aid in planning.
50
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
2004:
1-PERCENTAGE- 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $ 3,461 $ (3,045)
Effect on post-retirement benefit obligation 47,641 (42,212)
Estimated future benefit payments (including expected future service as
appropriate):
(DOLLARS IN THOUSANDS)
2005 $ 50
2006 50
2007 50
2008 50
2009 50
2010 - 2014 234
The Company expects to contribute approximately $50,000 to the post-retirement
benefit plan in 2005.
NOTE 17 - STOCK-BASED COMPENSATION PLANS:
During 1996, 1999, and 2004, the 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 were granted under the 1999 plan after January 2, 2004, and the plan is
closed other than for any options still unexercised and outstanding. The 2004
plan is the only plan from which new stock-based compensation grants may be
issued.
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.
2004 2003 2002
---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding, January 1 316,247 $ 19.12 236,526 $ 16.91 180,443 $ 16.96
Granted 73,080 $ 28.57 101,063 $ 24.08 81,774 $ 20.21
Exercised (75,030) $ 17.36 (6,009) $ 16.74 (4,969) $ 15.58
Expired/Forfeited (15,549) $ 23.16 (15,333) $ 18.72 (20,722) $ 19.20
-------- -------- --------
Outstanding, December 31 298,748 $ 21.66 316,247 $ 19.12 236,526 $ 16.89
======== ======== ========
Exercisable, December 31 117,457 $ 18.97 138,296 $ 18.63 86,623 $ 18.02
======== ======== ========
Weighted-average fair value
of options granted during
the year $ 8.76 $ 8.01 $ 5.59
======== ======== ========
51
Information pertaining to options outstanding at December 31, 2004, 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
$ 11.96 - $ 16.71 101,548 6.5 years $ 15.26 57,864 $ 15.07
$ 18.97 - $ 23.24 103,430 7.2 years $ 21.88 43,943 $ 20.56
$ 24.68 - $ 29.49 93,770 9.0 years $ 28.45 15,650 $ 28.90
----------- -----------
298,748 7.5 years 117,457
=========== ===========
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,
2004 2003 2002
---- ---- ----
Dividend yield 2.47% 2.49% 2.63%
Expected life 10 YEARS 10 years 10 years
Expected volatility 25.00% 29.00% 30.00%
Risk-free interest rate 4.37% 3.99% 3.82%
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,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2002
---- ---- ----
Net income, as reported $ 14,016 $ 14,786 $ 13,834
Less, total stock-based employee compensation expense
determined under the fair value based method, net of related tax effects 237 280 231
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 13,779 $ 14,506 $ 13,603
====================================================================================================================================
Earnings per share:
Basic - as reported $ 1.74 $ 1.83 $ 1.72
Basic - pro forma $ 1.71 $ 1.80 $ 1.69
Diluted - as reported $ 1.72 $ 1.82 $ 1.71
Diluted - pro forma $ 1.69 $ 1.78 $ 1.68
As of December 2004, the Company had entered into Restricted Stock Agreements
with several of its senior 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.
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.
In June, 2004 and August, 2004, one senior officer received grants,
respectively, of 2,000 shares and 1,000 shares with a weighted average fair
value of $ 7.21. These shares vest free of restrictions as follows: 25% in 2007,
25% in 2009 and 50% in 2011. These shares have the same accelerated vesting as
described above in the event of change of control or death of the officer.
However, these 3,000 shares would additionally be subject to early vesting in
the event the Company, on or before June 1, 2007, ceased continuation of
business operations in the Trust and Asset Management lines of business. In that
event, any and all unvested shares would vest free of restrictions at the date
of such business cessation prior to June 1, 2007.
52
In October, 2004, one senior officer received a grant of 2,000 shares with a
fair value of $5.96. These shares vest free of restrictions as follows: 25% in
2006, 25% in 2007, 25% in 2008 and 25% in 2009.
NOTE 18 - STOCK REPURCHASE PROGRAM:
In February 2004, the Company's Board of Directors authorized a repurchase
program to acquire up to 250,000 shares of its outstanding common stock. This
program superseded any previously announced programs that may have had remaining
available shares for repurchase. Under announced stock repurchase programs,
during the years ended December 31, 2004, 2003 and 2002, the Company repurchased
102,128; 2,100; and 12,402 shares at a cost of $2,977,000, $53,000, and
$265,000, respectively. Under other arrangements where directors or officers
sold currentlyowned shares to the Company to acquire proceeds for exercising
stock options, the Company repurchased 18,780 shares at a cost of $613,000 in
2004.
NOTE 19 - LEASE COMMITMENTS:
The Company's subsidiaries were obligated at December 31, 2004, 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. 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:
(DOLLARS IN THOUSANDS) YEAR ENDING DECEMBER 31,
2005 $ 2,640
2006 2,364
2007 2,305
2008 2,249
2009 2,188
Later years 3,337
------------
Total $ 15,083
============
Total rental expense for the years ended December 31, 2004, 2003, and 2002 was
$3,003,000, $3,002,000, and $2,678,000, 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 2004 and 2003, the Company's banking subsidiaries had loan and deposit
relationships with certain related partiesprincipally, 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 $17,016,000
and $17,245,000 at December 31, 2004 and 2003, respectively. During 2004,
$4,032,000 of new loans were made to this group while repayments of $5,299,000
were received during the year. Other changes resulted in an increase of
$1,038,000. Related party deposits totaled approximately $18,702,000 and
$12,712,000 at December 31, 2004 and 2003, respectively.
53
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, 2004 and 2003, the following
financial instruments were outstanding whose contract amounts represent credit
risk:
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Commitments to extend credit $ 277,996 $ 246,847
============================================================================================
Standby letters of credit and
financial guarantees $ 2,668 $ 2,447
============================================================================================
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 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.
54
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
bearing 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.
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.
55
The estimated fair values and related carrying amounts of
the Company's financial instruments at December 31, 2004 and
2003, are as follows:
2004 2003
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
Financial assets:
Cash and cash
equivalents $ 57,137 $ 57,137 $ 49,678 $ 49,678
Investment securities 165,446 166,248 152,009 153,474
Loans:
Loans and loans held for sale 1,167,067 1,159,145 951,106 953,107
Less, allowance for loan
losses (14,470) (14,470) (11,700) (11,700)
Net loans 1,152,597 1,144,675 939,406 941,407
Financial liabilities:
Deposits 1,171,313 1,135,801 947,399 942,083
Federal funds purchased
and securities sold under
agreements to repurchase 89,208 89,208 80,967 80,967
FHLB Advances 51,928 55,952 52,050 60,041
Unrecognized financial
instruments:
Commitments to extend credit 277,996 276,101 246,847 247,366
Standby letters of credit 2,668 2,668 2,447 2,447
56
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,
2004 and 2003, that the Company and its subsidiaries met all capital adequacy
requirements to which they are subject.
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
ACTUAL REQUIREMENT ACTION PROVISIONS
(DOLLARS IN THOUSANDS) ---------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
At December 31, 2004:
Total capital (to risk-weighted assets):
Consolidated $128,547 11.10% $ 92,613 8.00% $115,767 10.00%
South Carolina Bank and Trust, N.A 111,608 10.95% 81,551 8.00% 101,938 10.00%
South Carolina Bank and Trust
of the Piedmont, N.A 13,913 10.12% 10,995 8.00% 13,744 10.00%
Tier I capital (to risk-weighted assets):
Consolidated $114,077 9.85% $ 46,307 4.00% $ 69,460 6.00%
South Carolina Bank and Trust, N.A 98,966 9.71% 40,775 4.00% 61,163 6.00%
South Carolina Bank and Trust
of the Piedmont, N.A 12,194 8.87% 5,497 4.00% 8,246 6.00%
Tier I capital (to average assets):
Consolidated $114,077 8.05% $ 56,664 4.00% $ 70,830 5.00%
South Carolina Bank and Trust, N.A 98,966 7.96% 49,740 4.00% 62,175 5.00%
South Carolina Bank and Trust
of the Piedmont, N.A 12,194 7.87% 6,198 4.00% 7,747 5.00%
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%
57
NOTE 25 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY:
Financial information pertaining only to SCBT Financial Corporation is as
follows:
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Balance Sheets
Assets:
Cash $ 603 $ 2,994
Investment securities available for sale 773 1,114
Investment in subsidiaries 115,746 106,573
Loans -- 755
Less allowance for loan losses (30) --
Premises and equipment 701 26
Other assets 1,137 1,030
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 118,930 $ 112,492
=========================================================================================================================
DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003
---- ----
Liabilities $ 132 $ 143
Shareholders' equity 118,798 112,349
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 118,930 $ 112,492
=========================================================================================================================
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Statements of Income
Income:
Dividends from subsidiaries $ 5,728 $ 5,069 $ 6,891
Interest and dividends 14 7 52
- -------------------------------------------------------------------------------------------------------------------------
Total income 5,742 5,076 6,943
Operating expenses 572 310 258
- -------------------------------------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 5,170 4,766 6,685
Applicable income tax benefit 191 103 75
Equity in undistributed earnings of
subsidiaries 8,655 9,917 7,074
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 14,016 $ 14,786 $ 13,834
=========================================================================================================================
58
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS) 2004 2003 2002
---- ---- ----
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 14,016 $ 14,786 $ 13,834
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11 12 14
Premium amortization -- -- 39
Gain on sale of premises and equipment -- (2) --
Decrease (increase) in other assets 110 17 56
Increase (decrease) in other liabilities (7) (161) (379)
Undistributed earnings of subsidiaries (8,655) (9,917) (7,074)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,475 4,735 6,490
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment
securities available for sale -- -- 8,000
Purchases of investment securities
available for sale (110) -- (6,034)
Loan to subsidiary -- -- (1,004)
Repayment of loan to subsidiary -- 299 --
Recoveries on loans previously charged off 16 -- --
Purchases of premises and equipment (685) (15) --
Proceeds from sale of premises and equipment -- 18 304
Other, net -- -- (1,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (779) 302 266
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (5,228) (5,070) (4,420)
Common stock issuance 427 294 537
Common stock redeemed (3,590) (53) (265)
Stock options exercised 1,304 100 78
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (7,087) (4,729) (4,070)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,391) 308 2,686
Cash and cash equivalents at beginning
of year 2,994 2,686 --
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 603 $ 2,994 $ 2,686
===================================================================================================================================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
59
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2004 (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 to provide reasonable
assurance regarding management's control objectives.
EVALUATION OF INTERNAL CONTROLS OVER FINANCIAL REPORTING
Pursuant to Release No. 50754 issued by the Securities and Exchange
Commission on November 30, 2004, the Company has not provided in this Annual
Report on Form 10-K a report by the Company's management on the Company's
internal control over financial reporting (as required by Item 308(a) of SEC
Regulation S-K) or the related attestation report of the Company's public
accounting firm on management's assessment of the Company's internal control
over financial reporting (as required by Item 308(b) of SEC Regulation S-K). As
permitted by Release No. 50754, the Company intends to provide these reports in
an amendment to this Annual Report on Form 10-K filed by the Company not later
than April 30, 2005.
CHANGES IN INTERNAL CONTROLS
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.
ITEM 9B. OTHER INFORMATION
The Company adopted a new Executive Incentive Plan, referred to as the
"South Carolina Bank & Trust 2005 Corporate Plan," in December 2004. A copy of
the plan is filed as Exhibit 10.28. Targeted cash incentive awards for the
executive officers named in the 2004 Proxy Statement range from 30% to 36% of
their base salary in effect at the end of 2005, and the actual amount of the
bonus can be more or less than the target depending on how the Company does in
relation to an officer's performance and other goals.
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 2005 Annual Meeting of Shareholders under the
caption "Election of Directors", in the fourth paragraph under the caption "The
Board of Directors and Committees", in the subsection titled "Audit Committee"
under the caption "The Board of Directors and Committees", in the second
paragraph of the subsection titled "Governance Committee" under the caption "The
Board of Directors and Committees," and under the caption "Section 16 (a)
Beneficial Ownership Reporting Compliance".
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 2005 Annual Meeting of Shareholders under the
caption "Compensation of Directors", in the sections titled "Summary
Compensation Table," "Employment Agreements," "Stock Options," "Aggregate Option
Exercises During 2004 and Year End 2004 Option Values," and "Option Grants in
2004" under the caption "Executive Compensation", under the caption "Defined
Benefit Pension Plan," and under the caption "Compensation Committee Interlocks
and Insider Participation."
60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table contains certain information as of December 31, 2004,
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 298,748 $21.66 916,112
security holders
Equity compensation
plans not approved None -- --
by security holders
Included within the 916,112 number of securities available for future
issuance in the table above is a total of 292,412 shares remaining from the
authorized total of 315,000 under the Company's Employee Stock Purchase Plan.
All securities totals for the outstanding and remaining available for future
issuance amounts described in this Item 12 have been adjusted to give effect to
the 5% stock dividend paid on January 1, 2005 to shareholders of record as of
December 20, 2004.
Other information required by this item is incorporated herein by reference
to the information under the caption "Principal Shareholders" in the definitive
proxy statement of the Company to be filed in connection with the Company's 2005
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" in the definitive proxy statement of the Company to be filed in
connection with the Company's 2005 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" in the definitive proxy
statement of the Company to be filed in connection with the Company's 2005
Annual Meeting of Shareholders.
61
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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
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 3.1
filed with the Registrant's Form 10-Q for the quarter
ended March 31, 2004)
3.2 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 filed with the Registrant's
Form 10-Q for the quarter ended March 31, 2004)
10.1 First National Corporation Dividend Reinvestment Plan
(incorporated by reference to exhibits filed with
Registration Statement on Form S-8, Registration No.
33-58692)
10.2* 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)
10.3* 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)
10.4* 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)
10.5* Employment Agreement between the Registrant and
Robert R. Hill, Jr., effective as of September 30,
1999 (incorporated by reference to Exhibit 10.2 to
the Registrant's Form 10-Q for the quarter ended
March 31, 2003)
10.6* Employment Agreement between the Registrant and
Thomas S. Camp, effective as of November 10, 1998
(incorporated by reference to Exhibit 10.3 to the
Registrant's Form 10-Q for the quarter ended March
31, 2003)
10.7* Employment Agreement Amendment between the Registrant
and Thomas S. Camp, effective as of December 5, 2001
(incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q for the quarter ended March
31, 2003)
62
10.8* Employment Agreement between the Registrant and John
C. Pollok, effective as of October 23, 2002
(incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-Q for the quarter ended March
31, 2003)
10.9* Employment Agreement between the Registrant and
Richard C. Mathis, effective as of October 23, 2002
(incorporated by reference to Exhibit 10.6 to the
Registrant's Form 10-Q for the quarter ended March
31, 2003)
10.10* Employment Agreement between the Registrant and Joe
E. Burns, effective as of October 23, 2002
(incorporated by reference to Exhibit 10.7 to the
Registrant's Form 10-Q for the quarter ended March
31, 2003)
10.11* 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 the Registrant's Form
10-Q for the quarter ended March 31, 2003)
10.12* 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 the
Registrant's 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 Thomas S.
Camp, effective as of January 1, 2003 (incorporated
by reference to Exhibit 10.10 to the Registrant's
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 John C.
Pollok, effective as of January 1, 2003 (incorporated
by reference to Exhibit 10.11 to the Registrant's
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 Richard C.
Mathis, effective as of January 1, 2003 (incorporated
by reference to Exhibit 10.12 to the Registrant's
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 Joe E. Burns,
effective as of January 1, 2003 (incorporated by
reference to Exhibit 10.13 to the Registrant's Form
10-Q for the quarter ended March 31, 2003)
10.17* 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
Registrant's Registration Statement on Form S-8 (File
No. 333-86922))
10.18* 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
Registrant's Registration Statement on Form S-8 (File
No. 333-86922))
10.19* 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
Registrant's 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 Richard C.
Mathis (incorporated by reference to Exhibit 4.4 to
the Registrant's 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 A. Loran Adams
(incorporated by reference to Exhibit 4.5 to the
Registrant's 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 Joseph E. Burns
(incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (File
No. 333-86922))
63
10.23* First National Corporation 2002 Employee Stock
Purchase Plan (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on
Form S-8 (File No. 333-9014))
10.24* 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
Registrant's Registration Statement on Form S-8 (File
No. 333-103707))
10.25* SCBT Financial Corporation Stock Incentive Plan
(incorporated by reference to Appendix A to the
Registrant's Definitive Proxy Statement filed in
connection with its 2004 Annual Meeting of
Shareholders)
10.26* Settlement Agreement and Mutual Release of Claims,
dated November 5, 2004, between SCBT Financial
Corporation and C. John Hipp, III (incorporated by
reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K filed on December 23, 2005)
10.27* Agreement and Plan of Merger, dated as of December
16, 2004, between SCBT Financial Corporation and New
Commerce BanCorp (incorporated by reference to
Exhibit 2.1 to the Registrant's Current Report on
Form 8-K filed on January 23, 2004)
10.28* Executive Incentive Plan
10.29* South Carolina Bank and Trust Deferred Income Plan
dated January 1, 2004
10.30* Compensation of Directors
13 2004 Annual Report to Shareholders
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) See 1a Exhibit Index following the Annual Report on Form 10-K for a listing
of 1a exhibits filed herewith.
(c) Not Applicable.
64
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 14th day of March, 2005.
SCBT Financial Corporation
By /S/ Robert R. Hill, Jr.
-------------------------------------
Robert R. Hill, Jr.
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 17, 2005.
/S/ Robert R. Hill, Jr.
-------------------------------------
Robert R. Hill, Jr.
President and Chief Executive Officer
/S/ Richard C. Mathis
-------------------------------------
Richard C. Mathis
Executive Vice President and Chief
Financial Officer
/S/ Veronica H. Bailey
-------------------------------------
Veronica H. Bailey
Senior Vice President and Manager of
Corporate Accounting
/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
65
/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/ James W. Roquemore
-------------------------------------
James W. Roquemore
Director
/S/ Thomas E. Suggs
-------------------------------------
Thomas E. Suggs
Director
/S/ Susie H. VanHuss
-------------------------------------
Susie H. VanHuss
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
66
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
10.28 Executive Incentive Plan
10.29 South Carolina Band & Trust Deferred Incentive Plan
10.30 Compensation of Directors
13 2004 Annual Report to Shareholders
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