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, 2006
Commission
file number 001-12669
SCBT
FINANCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
|
South
Carolina
(State
or other jurisdiction of incorporation)
|
57-0799315
(IRS
Employer Identification No.)
|
|
520
Gervais Street
Columbia,
South Carolina
(Address
of principal executive offices)
|
29201
(Zip
Code)
|
(800)
277-2175
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12 (b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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|
Common
stock, $2.50 par value per share
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The
NASDAQ Global Select MarketSM
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Securities
registered pursuant to Section 12 (g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
[ ] No
[X].
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
[ ] No
[X].
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
|
Large
Accelerated Filer [ ]
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Accelerated
Filer [X]
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Non-Accelerated
Filer [ ]
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X].
The
aggregate market value of the voting stock of the registrant held by
non-affiliates was $291,781,000 based on the closing sale price of $35.65 per
share on June 30, 2006. 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 6, 2007 was
8,741,929.
Documents
Incorporated by Reference
Portions
of the Registrant’s
Proxy
Statement for its 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III, Items 10-14.
SCBT
Financial Corporation
Index
to Form 10-K
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36
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(1)
All or
portions of this item are incorporated by reference to the Registrant’s Proxy
Statement for its 2007 Annual Meeting of Shareholders.
Forward-Looking
Statements
This
Report contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the
Securities Exchange Act of 1934. These statements are based on many assumptions
and estimates and are not guarantees of future performance. Our actual results
may differ materially from those anticipated in any forward-looking statements,
as they will depend on many factors about which we are unsure, including many
factors about which are beyond our control. The words “may,” “would,” “could,”
“will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as
well as similar expressions, are meant to identify such forward-looking
statements. Potential risks and uncertainties include, but are not limited
to
those described below under “Risk Factors.”
SCBT
Financial Corporation, headquartered in Columbia, South Carolina, is a bank
holding company incorporated in 1985 under the laws of South Carolina. We were
formerly named First National Corporation until February 2004. We provide a
wide
range of banking services and products to our customers through our wholly-owned
subsidiaries: South Carolina Bank and Trust, N.A. and South Carolina Bank and
Trust of the Piedmont, N.A., both national banks that opened for business in
1932 and 1996, respectively. The Mortgage Banc, Inc., organized in 2004, is
a
wholly-owned subsidiary of South Carolina Bank and Trust. Our common stock
trades on The NASDAQ Global Select MarketSM
under the
ticker symbol “SCBT.”
SCBT
Financial Corporation is a legal entity separate and distinct from our
subsidiaries. We coordinate the financial resources of the consolidated
enterprise and thereby maintain financial, operation and administrative systems
that allow centralized evaluation of subsidiary operations and coordination
of
selected policies and activities. SCBT Financial Corporation’s operating
revenues and net income are derived primarily from cash dividends received
from
our bank subsidiaries.
Our
subsidiaries provide a full range of retail and commercial banking services,
mortgage lending services, trust and investment services, and consumer finance
loans through 45 financial centers in 16 South Carolina counties, and have
served South Carolinians for seventy-three years. At December 31, 2006, the
Corporation had $2.2 billion in assets, $1.8 billion in loans, $1.7 billion
in
deposits, $161.9 million in shareholders’ equity, and a market capitalization of
$363.8 million.
We
began
operating in 1934 in Orangeburg, South Carolina and have maintained our ability
to provide superior local service while also leveraging our size to offer many
products more common to super-regional banks. We have pursued a growth strategy
that relies primarily on organic growth, supplemented by the acquisition of
select financial institutions or branches in certain market areas.
We
have
continued to expand our business in South Carolina. We have outlined highlights
below:
| · |
November
2006—purchased a banking location from Beach First National Bank in Myrtle
Beach. We have plans to open the site as a full-service South Carolina
Bank and Trust branch in the second quarter of
2007.
|
| · |
October
2006—opened a limited-service branch in Irmo, South
Carolina.
|
| · |
June
2006—opened our Indian Land full-service branch in Fort Mill, South
Carolina as part of South Carolina Bank and Trust of the Piedmont.
The
branch was converted from a loan production office. We also opened
a
limited-service branch in Lexington, South Carolina. To replace the
location, we are building a full-service branch scheduled to open
in
2007.
|
| · |
April
2006—opened a loan production office in Daniel Island, South Carolina.
Also in April, we converted our Devine Mortgage location to a full-service
branch on Forest Drive in Columbia, South
Carolina.
|
| · |
March
2006—merged SunBank, N.A. into our lead bank subsidiary, South Carolina
Bank and Trust.
|
| · |
February
2006—opened a loan production office in Charleston, South Carolina as
part
of South Carolina Bank and Trust and converted the location to a
limited-service branch in 2006. We have plans to move the branch
to a
full-service location in early 2007. We moved the South Carolina
Bank and
Trust of the Piedmont loan production office in Fort Mill, South
Carolina
to a full-service branch location.
|
| · |
November
2005—expanded our footprint farther up the South Carolina coast with the
acquisition of Sun Bancshares, Inc. and its subsidiary, SunBank.
The
acquisition provided us with two additional branches in Murrells
Inlet and
Georgetown, South Carolina. SunBank’s third property is a loan production
office located in Myrtle Beach, South Carolina.
|
| · |
May
2005—purchased Devine Mortgage, a small South Carolina mortgage
originator.
|
1
| · |
July
2005—formed SCBT Capital Trust III for the purpose of issuing an aggregate
of $20 million of trust preferred
securities.
|
| · |
April
2005—formed SCBT Capital Trust I and SCBT Capital Trust II for the purpose
of issuing an aggregate of $20 million of trust preferred securities.
|
| · |
April
2005—continued to expand in the western portion of South Carolina with
our
acquisition of New Commerce BanCorp and we merged its subsidiary,
New
Commerce Bank, into our lead subsidiary bank. The acquisition provided
us
with two new branches in Simpsonville and Greenville, South Carolina.
Both
branches are located in one of the fastest growing markets in the
State.
|
| · |
December
2004—opened a loan production office in Hilton Head, South Carolina, and
moved to a full-service branch.
|
| · |
September
2004—opened two loan production offices, a Summerville service facility,
just north of Charleston, South Carolina, which was later granted
a branch
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.
|
| · |
April
2004—incorporated The Mortgage Banc, Inc. (“TMB”) as a wholly-owned
subsidiary of South Carolina Bank and Trust. TMB focuses on providing
mortgage products and services to other financial institutions
and
mortgage companies in South Carolina and some out-of-state markets.
TMB’s
offices and personnel are located at our headquarters in Columbia,
South
Carolina.
|
| · |
February
2004—purchased the Denmark, South Carolina branch of Security Federal
Bank, including premises and equipment, performing loans, and deposits.
At
the time of the transaction, we vacated the existing leased Denmark
office
and relocated its operations to a newly acquired banking facility.
|
Our
principal executive offices are located at 520 Gervais Street, Columbia, South
Carolina 29201. Our mailing address at this facility is Post Office Box 1030,
Columbia, South Carolina 29202 and telephone number is (800)
277-2175.
Available
Information
We
provide
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 on our website
at
www.scbtonline.com. These filings are made accessible as soon as reasonably
practicable after they have been filed electronically with the SEC. These
filings are also accessible on the SEC’s website at www.sec.gov. In addition, we
make available on our website the following: (i) Corporate Governance
Guidelines, (ii) Code of Conduct & Ethics, which applies to our directors
and all employees, and (iii) the charters of the Audit, Management Resources
& Compensation, and Corporate Governance & Nominating Committees of our
Board of Directors. These materials are available in a printed format free
of
charge to shareholders who request them in writing. Please address your request
to: Financial Management Division, SCBT Financial Corporation, 520 Gervais
Street, Columbia, South Carolina 29201. Statements of beneficial ownership
of
equity securities filed by directors, officers, and 10% or greater shareholders
under Section 16 of the Securities Exchange Act of 1934 are also available
through our website. The information on our website is not incorporated by
reference into this report.
Territory
Served and Competition
We
serve
customers through our subsidiary banks located in the state of South Carolina.
Through our lead bank, South Carolina Bank and Trust, we conduct our business
from thirty-nine financial centers in fourteen South Carolina counties. We
conduct our Piedmont business from six financial centers in two South Carolina
counties.
We
compete
in a highly competitive banking and financial services industry. Our
profitability depends principally on our ability to effectively compete in
the
markets in which we conduct business. We expect competition in the industry
to
continue to increase as a result of consolidation among banking and financial
services firms. Competition may further intensify as additional companies enter
the markets where we conduct business and we enter mature markets in accordance
with our expansion strategy.
We
experience strong competition from both bank and non-bank competitors in certain
markets. Broadly speaking, we compete with super-regional, smaller community
banks, and non-traditional internet based banks. We compete for deposits and
loans with commercial banks, savings institutions, and credit unions. In
addition, we compete with other financial intermediaries and investment
alternatives such as mortgage companies, credit card issuers, leasing companies,
finance companies, money market mutual funds, brokerage firms, governmental
and
corporation bonds, and other securities. Many of these non-bank competitors
are
not subject to the same regulatory oversight, which provides a competitive
advantage in some instances. In many cases, our competitors have substantially
greater resources, can provide higher lending limits, and offer certain services
that we are unable to provide to our customers.
2
We
encounter strong competition in making loans and attracting deposits. We compete
with other financial institutions to offer customers the highest interest rates
on deposit accounts, the lowest interest rates charged on loans and other
credit, and reasonable service charges. Our customers also consider the quality
and scope of the services provided, the convenience of banking facilities,
and
relative lending limits in the case of loans to commercial borrowers. Our
customers may also take into account the fact that other banks offer different
services other than those that we provide. The large national and super-regional
banks may have significantly greater lending limits and may offer additional
products. However, we believe that SCBT has been able to compete successfully
with our competitors, regardless of their size. We do this by emphasizing
customer service and by providing a wide variety of services.
Employees
As
of
December 31, 2006, our subsidiaries had 634 full-time equivalent employees
compared to 590 as of the same date in 2005. We consider our relationship with
our employees instrumental to the success of our business. We provide our
employees with a comprehensive employee benefit program which includes the
following: group life, health and dental insurance, paid vacation, sick leave,
educational opportunities, a cash incentive plan, a stock purchase plan, stock
incentive, deferred compensation plans for officers and key employees, a defined
benefit pension plan for employees hired on or before December 31, 2005, and
a
401(k) plan with company match.
Regulation
and Supervision
As
a
financial institution, we operate under a regulatory framework. The framework
outlines a regulatory environment applicable to financial holding companies,
bank holding companies, and their subsidiaries. Below, we have provided some
specific information relevant to SCBT. The regulatory framework under which
we
operate is intended primarily for the protection of depositors and the Deposit
Insurance Fund and not for the protection of our security holders and creditors.
To the extent that the following information describes statutory and regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions.
General
The
current regulatory environment for financial institutions includes substantial
enforcement activity by the federal banking agencies, the U.S. Department of
Justice, the Securities and Exchange Commission, and other state and federal
law
enforcement agencies, reflecting an increase in activity over prior years.
This
environment entails significant potential increases in compliance requirements
and associated costs.
We
are a
bank holding company registered with the Board of Governors of the Federal
Reserve System and are subject to the supervision of, and to regular inspection
by, the Federal Reserve Board. Our banks are organized as national banking
associations. They are subject to regulation, supervision, and examination
by
the Office of the Comptroller of the Currency (the "OCC"). In addition, SCBT
and
our banks are 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 SCBT and its
subsidiaries.
Under
the
Bank Holding Company Act (the "BHC Act"), our activities and those of our
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for our 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-Bailey Act amended a number of federal banking laws affecting
SCBT
and our banks. In particular, the Graham-Leach-Bailey 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-Bailey 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. We remain a bank holding company,
but
may at some time in the future elect to become a financial holding company.
3
Interstate
Banking
National
banks are required by the National Bank Act to adhere to branch office banking
laws applicable to state banks in the states in which they are located. 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 through
acquisitions but not de novo branching by an out-of-state bank. We believe
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.
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 shareholders 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 shareholder. This provision would
give depositors a preference over general and subordinated creditors and
shareholders 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 risk based
ratio in determining the overall capital adequacy of banking
organizations.
4
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 us of any specific
minimum leverage ratio applicable to SCBT. As of December 31, 2006 and 2005,
our
subsidiary banks had the following leverage ratios and total risk-based
capital:
|
December
31,
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|||||||
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(In
percent)
|
2006
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|
2005
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||||
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Tier
1 Leverage Ratios
|
|||||||
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SCBT
Financial Corporation
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8.11
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8.58
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|||||
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South
Carolina Bank and Trust
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8.02
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7.88
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|||||
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South
Carolina Bank and Trust of the Piedmont
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7.56
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8.16
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|||||
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SunBank
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n/a
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12.96
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|||||
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Total
Risk-Based Capital
|
|||||||
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SCBT
Financial Corporation
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11.36
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11.45
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|||||
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South
Carolina Bank and Trust
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11.18
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10.90
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|||||
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South
Carolina Bank and Trust of the Piedmont
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11.12
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11.86
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|||||
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SunBank
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n/a
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15.96
|
|||||
The
FDICIA, among other items, 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. The 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,
the 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. The FDICIA permits
regulatory action against a financial institution that does not meet such
standards.
The
various regulatory agencies have adopted substantially similar regulations
that
define the five capital categories identified by the FDICIA, using the total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage 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 risk-based capital ratio
of
at least 10%, a Tier 1 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 risk-based capital ratio of a
least
8%, and a Tier 1 leverage ratio of at least 4% (or 3% in some cases). Under
these guidelines, each Bank 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 we were to engage in significant
trading activity (as defined in the amendment) we must incorporate a measure
for
market risk in our respective regulatory capital calculations effective for
reporting periods after January 1, 1998.
Payment
of Dividends
SCBT
is a
legal entity separate and distinct from its subsidiaries. Funds for cash
distributions to our shareholders are derived primarily from dividends received
from our bank subsidiaries. Each of our banks is subject to various general
regulatory policies and requirements relating to the payment of dividends.
Any
restriction on the ability of our banks to pay dividends will indirectly
restrict the ability of SCBT to pay dividends.
5
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 SCBT and its banks to pay dividends
may be affected by the various minimum capital requirements and the capital
and
non-capital standards established under the FDICIA, as described above. The
right of SCBT, 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 SCBT’s subsidiaries.
Certain
Transactions by SCBT and its Affiliates
Various
legal limitations place restrictions on the ability of the Banks to lend or
otherwise supply funds to SCBT 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
Deposits
at the bank are insured by the Deposit Insurance Fund as administered by the
FDIC, up to the applicable limits established by law - generally $100,000 per
accountholder and $250,000 for certain retirement accountholders. As
FDIC-insured institutions, our banks are subject to insurance assessments
imposed by the FDIC. Under current law, the insurance assessment to be paid
by
FDIC-insured institutions is as specified in a schedule required to be issued
by
the FDIC that specifies, at semi-annual intervals, target reserve ratios
designed to increase the FDIC insurance fund's reserve ratio to 1.25% of
estimated insured deposits (or such higher ratio as the FDIC may determine
in
accordance with the statute) in 15 years. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United States Department
of
the Treasury. The actual assessment to be paid by each FDIC-insured institution
is based on the institution's assessment risk classification, which is
determined based on whether the institution is considered "well capitalized,"
"adequately capitalized" or "undercapitalized," as such terms have been defined
in applicable federal regulations, and whether such institution is considered
by
its supervisory agency to be financially sound or to have supervisory concerns
(see "Capital Adequacy" above). As a result of the current provisions of federal
law, the assessment rates on deposits could increase over present levels. Based
on the current financial condition and capital levels of our banks, we do not
expect that the current FDIC risk-based assessment schedule will have a material
adverse effect on the earnings of our banks in 2007.
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.
Further, the Act grants the Secretary of the Treasury broad authority to
establish regulations and to impose requirements and restrictions on financial
institution's operations. We have 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 our banks are subject
to state usury laws and certain federal laws concerning interest rates. Our
banks’ operations are also subject to certain federal laws applicable to credit
transactions, such as the following:
| · |
Federal
Truth-In-Lending Act, which governs disclosures of credit terms to
consumer borrowers,
|
| · |
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),
|
6
| · |
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,
|
| · |
Equal
Credit Opportunity Act prohibiting discrimination on the basis of
race,
creed or other prohibited factors in extending credit,
|
| · |
Fair
Credit Reporting Act of 1978 governing the use and provision of
information to credit reporting
agencies,
|
| · |
Fair
Debt Collection Act governing the manner in which consumer debts
may be
collected by collection agencies, and
|
| · |
rules
and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
|
The
deposit operations of our banks are also 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. We cannot
predict whether or in what form any of these proposals will be adopted or the
extent to which our business may be affected.
Fiscal
and Monetary Policy
Banking
is
a business that depends largely on interest rate differentials. In general,
the
difference between the interest we pay on our deposits and other borrowings,
and
the interest we receive on our loans and securities holdings, constitutes the
major portion of our banks’ earnings. Thus, our earnings and growth 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. We cannot predict the nature and timing of any changes in such
policies and their impact on our business.
Our
business operations may be adversely affected by certain risk factors outside
of
our control. We believe the risk factors listed could materially and adversely
affect our business, financial condition or results of operations. We may also
be adversely affected by additional risks and uncertainties or those that we
believe are currently immaterial to our business operations. In such cases,
you
could lose part or all of your investment.
General
Business Risks
Our
net interest income may decline based on the interest rate
environment.
We
depend
on our net interest income to drive profitability. Differences in volume yields
or interest rates and differences in income earning products such as
interest-earning assets and interest-bearing liabilities determine our net
interest income. We are exposed to changes in general interest rate levels
and
other economic factors beyond our control. Net interest income may decline
if:
| · |
In
a
declining interest rate environment, more interest-earning assets
than
interest-bearing liabilities re-price or mature,
or
|
| · |
In
a
rising interest rate environment, more interest-bearing liabilities
than
interest-earning assets re-price or
mature.
|
Our
net
interest income may decline based on our exposure to a difference in short-term
and long-term interest rates. If the difference between the interest rates
shrink or disappear, the difference between rates paid on deposits and received
on loans could narrow significantly resulting in a decrease in net interest
income. In addition to these factors, if market interest rates rise rapidly,
interest rate adjustment caps may limit increases in the interest rates on
adjustable rate loans, thus reducing our net interest income. Also, certain
adjustable rate loans re-price based on lagging interest rate indices. This
lagging effect may also negatively affect our net interest income when general
interest rates continue to rise periodically.
7
We
are exposed to the possibility that more prepayments may be made by customers
to
pay down loan balances, which could reduce our interest income and
profitability.
Prepayment
rates stem from consumer behavior, conditions in the housing and financial
markets, general United States economic conditions, and the relative interest
rates on fixed-rate and adjustable-rate mortgage loans. Therefore, changes
in
prepayment rates are difficult to predict. Recognition of deferred loan
origination costs and premiums paid in originating these loans are normally
recognized over the contractual life of each loan. As prepayments occur, the
rate at which net deferred loan origination costs and premiums are expensed
will
accelerate. The effect of the acceleration of deferred costs and premium
amortization may be mitigated by prepayment penalties paid by the borrower
when
the loan is paid in full within a certain period of time, which varies between
loans. If prepayment occurs after the period of time when the loan is subject
to
a prepayment penalty, the effect of the acceleration of premium and deferred
cost amortization is no longer mitigated. We recognize premiums paid on
mortgage-backed securities as an adjustment from interest income over the life
of the security based on the rate of repayment of the securities. Acceleration
of prepayments on the loans underlying a mortgage-backed security shortens
the
life of the security, increases the rate at which premiums are expensed and
further reduces interest income. We may not be able to reinvest loan and
security prepayments at rates comparable to the prepaid instrument particularly
in a period of declining interest rates.
We
may not be able to adequately anticipate and respond to changes in market
interest rates.
We
may be
unable to anticipate changes in market interest rates, which are affected by
many factors beyond our control including but not limited to inflation,
recession, unemployment, money supply, monetary policy, and other changes that
affect financial markets both domestic and foreign. Our net interest income
is
affected not only by the level and direction of interest rates, but also by
the
shape of the yield curve and relationships between interest sensitive
instruments and key driver rates, as well as balance sheet growth, customer
loan
and deposit preferences, and the timing of changes in these variables. In the
event rates increase, our interest costs on liabilities may increase more
rapidly than our income on interest earning assets, thus a deterioration of
net
interest margins. As such, fluctuations in interest rates could have significant
adverse effects on our financial condition and results of operations, for
example a decrease in value of mortgage servicing rights. The initial and
ongoing valuation and amortization of mortgage servicing rights is significantly
impacted by interest rates, prepayment experience, and the credit performance
of
such items.
Our
estimated allowance for loan losses may be inadequate and an increase in the
allowance would reduce earnings.
We
are
exposed to the risk that our customers will be unable to repay their loans
according to their terms and that any collateral securing the payment of their
loans will not be sufficient to assure full repayment. Credit losses are
inherent in the lending business and could have a material adverse effect on
our
operating results and ability to meet obligations. The volatility and
deterioration in foreign and domestic markets may also increase our risk for
credit losses. The composition of our loan portfolio, primarily secured by
real
estate, reduces loss exposure. We evaluate the collectibility of our loan
portfolio and provide an allowance for loan losses that we believe to be
adequate based on a variety of factors including but not limited to: the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans that have loss potential, delinquency trends,
estimated fair market value of the collateral, current economic conditions,
the
views of our regulators, and geographic and industry loan concentrations. If
our
evaluation is incorrect and borrower defaults cause losses that exceed our
allowance for loan losses, our earnings could be significantly and adversely
affected. No assurance can be given that the allowance will be adequate to
cover
loan losses inherent in our portfolio. We may experience losses in our loan
portfolios or perceive adverse conditions and trends that may require us to
significantly increase our allowance for loan losses in the future, a decision
that would reduce earnings.
We
are exposed to higher credit risk by commercial real estate, commercial
business, and construction lending.
Commercial
real estate, commercial business and construction lending usually involves
higher credit risks than that of single-family residential lending. These types
of loans involve larger loan balances to a single borrower or groups of related
borrowers. Commercial real estate loans may be affected to a greater extent
than
residential loans by adverse conditions in real estate markets or the economy
because commercial real estate borrowers’ ability to repay their loans depends
on successful development of their properties, as well as the factors affecting
residential real estate borrowers. These loans also involve greater risk because
they generally are not fully amortizing over the loan period, but have a balloon
payment due at maturity. A borrower’s ability to make a balloon payment
typically will depend on being able to either refinance the loan or sell the
underlying property in a timely manner.
Risk
of
loss on a construction loan depends largely upon whether our initial estimate
of
the property’s value at completion of construction equals or exceeds the cost of
the property construction (including interest) and the availability of permanent
take-out financing. During the construction phase, a number of factors can
result in delays and cost overruns. If estimates of value are inaccurate or
if
actual construction costs exceed estimates, the value of the property securing
the loan may be insufficient to ensure full repayment when completed through
a
permanent loan or by seizure of collateral.
Commercial
business loans are typically based on the borrowers’ ability to repay the loans
from the cash flow of their businesses. These loans may involve greater risk
because the availability of funds to repay each loan depends substantially
on
the success of the business itself. In addition, the collateral securing the
loans have the following characteristics: (i) depreciate over time, (ii)
difficult to appraise and liquidate, and (iii) fluctuate in value based on
the
success of the business.
Commercial
real estate, commercial business, and construction loans are more susceptible
to
a risk of loss during a downturn in the business cycle. Our underwriting,
review, and monitoring cannot eliminate all of the risks related to these loans.
8
A
significant portion of our loan portfolio is secured by real estate, and events
that negatively impact the real estate market could hurt our business.
A
significant portion of our loan portfolio is secured by real estate. As of
December 31, 2006, approximately 81.7% of our loans had real estate as a primary
or secondary component of collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended.
A
weakening of the real estate market in our primary market area could result
in
an increase in the number of borrowers who default on their loans and a
reduction in the value of the collateral securing their loans, which in turn
could have an adverse effect on our profitability and asset quality. If we
are
required to liquidate the collateral securing a loan to satisfy the debt during
a period of reduced real estate values, our earnings and capital could be
adversely affected. Acts of nature, including hurricanes, tornados, earthquakes,
fires and floods, which may cause uninsured damage and other loss of value
to
real estate that secures these loans, may also negatively impact our financial
condition.
Our
business is predominately focused in one state, South Carolina, and adverse
economic conditions in South Carolina could negatively impact results from
operations and financial condition.
Because
of
our concentration of business in the same geographical region, adverse economic
conditions in that particular region could make it more difficult to attract
deposits and could cause higher rates of loss and delinquency on our loans
than
if the loans were more geographically diversified.
We
could experience a loss due to competition with other financial
institutions.
The
banking and financial services industry is very competitive. Legal and
regulatory developments have made it easier for new and sometimes unregulated
competitors to compete with us. The financial services industry has and is
experiencing an ongoing trend towards consolidation in which fewer large
national and regional banks and firms are replacing many smaller and more local
banks and firms. These larger firms hold a large accumulation of assets. These
larger institutions have significantly greater resources and a wider geographic
presence or greater accessibility. In some instances, these banks operate
without the traditional brick and mortar facilities that restrict geographic
presence. Some competitors are able to offer more services, more favorable
pricing or greater customer convenience than SCBT. In addition, competition
has
grown from new banks and other financial services providers that target our
existing or potential customers. As consolidation continues among large banks,
we expect other smaller institutions to try to compete in the markets we serve.
Technological
developments have allowed competitors, including some non-depository
institutions, to compete more effectively in local markets and have expanded
the
range of financial products, services and capital available to our target
customers. If we are unable to implement, maintain and use such technologies
effectively, we may not be able to offer products or achieve cost-efficiencies
necessary to compete in the industry. In addition, some of these competitors
have fewer regulatory constraints and lower cost structures.
We
are exposed to the possibility of technology failure.
We
rely on
our computer systems and the technology of outside service providers. Our daily
operations depend on the operational effectiveness of their technology. We
rely
on our systems to accurately track and record our assets and liabilities. If
our
computer systems or outside technology sources become unreliable, fail, or
experience a breach of security, our ability to maintain accurate financial
records may be impaired, which could materially affect our business operations
and financial condition.
We
are exposed to a possible loss of our employees and critical management team.
We
are
dependent on the ability and experience of a number of key management personnel
who have substantial experience with our operations, the financial services
industry, and the markets in which we offer products and services. The loss
of
one or more senior executives or key managers may have an adverse effect on
our
operations. Also, as we continue to grow operations, our success depends on
our
ability to continue to attract, manage, and retain other qualified middle
management personnel. We cannot guarantee that we will continue to attract
or
retain such personnel.
We
are exposed to a need for additional capital resources for the future and the
fact that these capital resources may not be available when needed or at all.
We
may
need to incur additional debt or equity financing in the future to make
strategic acquisitions or investments. We cannot provide assurance that such
financing will be available to us on acceptable terms or at all.
9
Legal
and Regulatory Risks
We
are subject to extensive regulation that could restrict our activities and
impose financial requirements or limitations on the conduct of our business
and
limit our ability to receive dividends from our bank subsidiaries.
We
are
subject to Federal Reserve Board regulation. Our Banks are subject to extensive
regulation, supervision, and examination by their primary federal regulator,
the
Office of the Comptroller of the Currency (“OCC”), and by the Federal Deposit
Insurance Corporation (“FDIC”), the regulating authority that insures customer
deposits. Also, as a member of the Federal Home Loan Bank (“FHLB”), our Banks
must comply with applicable regulations of the Federal Housing Finance Board
and
the FHLB. Regulation by these agencies is intended primarily for the protection
of our depositors and the deposit insurance fund and not for the benefit of
our
shareholders. Our Banks’ activities are also regulated under consumer protection
laws applicable to our lending, deposit, and other activities. A sufficient
claim against our subsidiaries under these laws could have a material adverse
effect on our results of operations.
We
are exposed to changes in the regulation of financial services companies.
Proposals
for further regulation of the financial services industry are continually being
introduced in the Congress of the United States of America and the General
Assembly of the State of South Carolina. The agencies regulating the financial
services industry also periodically adopt changes to their regulations. For
example, regulation of government-sponsored entities has been receiving a great
deal of attention recently. It is possible that one or more legislative
proposals may be adopted or regulatory changes may be made that would have
an
adverse effect on our business.
We
are exposed to declines in the value of qualified pension plan assets or
unfavorable changes in laws or regulations that govern pension plan funding,
which could require us to provide significant amounts of funding for our
qualified pension plan.
We
expect
to make material cash contributions to our qualified defined benefit pension
plan in the near and long term. A significant decline in the value of qualified
pension plan assets in the future or unfavorable changes in laws or regulations
that govern pension plan funding could materially change the timing and amount
of required pension funding. As a result, we may be required to fund our
qualified defined benefit pension plan with a greater amount of cash from
operations, perhaps by an additional material amount.
Other
Risk Factors
We
may decide to make future acquisitions, which could dilute current shareholders’
stock ownership and we may become more susceptible to adverse economic
events.
In
accordance with our strategic plan, we continually evaluate opportunities to
acquire other banks and/or branch locations to grow SCBT. As a result, we may
be
involved in negotiations or discussions that, if they were to result in a
transaction, could have a material effect on our operating results and financial
condition, including short and long-term liquidity.
Our
acquisition activities could be material to SCBT. For example, we could issue
additional shares of common stock in a purchase transaction, which could dilute
current shareholders’ ownership interest in SCBT. These activities could require
us to use a substantial amount of cash, other liquid assets, and/or incur debt.
In those events, we could become more susceptible to economic downturns and
competitive pressures.
We
may be exposed to difficulties in combining the operations of acquired entities
into our own operations, which may prevent us from achieving the expected
benefits from our acquisition activities.
We
may not
be able to fully achieve the strategic objectives and operating efficiencies
in
our acquisition activities. Inherent uncertainties exist in integrating the
operations of an acquired entity. In addition, the markets and industries in
which SCBT and our potential acquisition targets operate are highly competitive.
We may lose customers or the customers of acquired entities as a result of
an
acquisition. We also may lose key personnel from the acquired entity as a result
of an acquisition. We may not discover all known and unknown factors when
examining a company for acquisition during the due diligence period. These
factors could produce unintended and unexpected consequences for us.
Undiscovered factors as a result of acquisition, pursued by non-related third
party entities, could bring civil, criminal, and financial liabilities against
us, our management, and the management of those entities acquired. These factors
could contribute to SCBT not achieving the expected benefits from its
acquisitions within desired time frames, if at all.
Our
stock price may be volatile.
Our
stock
price has been volatile in the past and several factors could cause the price
to
fluctuate substantially in the future. These factors include but are not limited
to: actual or anticipated variations in earnings, changes in analysts’
recommendations or projections, our announcement of developments related to
our
businesses, operations and stock performance of other companies deemed to be
peers, new technology used or services offered by traditional and
non-traditional competitors, news reports of trends, concerns, irrational
exuberance on the part of investors, and other issues related to the financial
services industry. Our stock price may fluctuate significantly in the future,
and these fluctuations may be unrelated to our performance. General market
declines or market volatility in the future could adversely affect the price
of
SCBT’s common stock, and the current market price may not be indicative of
future market prices.
10
The
accuracy of our financial statements and related disclosures could be affected
because we are exposed to conditions or assumptions different from the
judgments, assumptions or estimates used in our critical accounting
policies.
The
preparation of financial statements and related disclosure in conformity with
accounting principles generally accepted in the United States of America (“US
GAAP”), requires us to make judgments, assumptions, and estimates that affect
the amounts reported in our consolidated financial statements and accompanying
notes. Our critical accounting policies, included in this document, describe
those significant accounting policies and methods used in the preparation of
our
consolidated financial statements that are considered “critical” by us because
they require judgments, assumptions and estimates that materially impact our
consolidated financial statements and related disclosures. As a result, if
future events differ significantly from the judgments, assumptions and estimates
in our critical accounting policies, such events or assumptions could have
a
material impact on our audited consolidated financial statements and related
disclosures.
None.
Our
corporate headquarters are located in a four-story facility, located at 520
Gervais Street, Columbia, South Carolina. The Midlands region lead branch of
South Carolina Bank and Trust is also located in this 57,000 square-foot
building. The main offices of South Carolina Bank and Trust are in a four-story
facility with approximately 48,000 square feet of space for operating and
administrative purposes, located at 950 John C. Calhoun Drive, S.E., Orangeburg,
South Carolina. South Carolina Bank and Trust also owns twenty-seven other
properties and leases twenty properties, all of which are used, substantially,
as branch locations or for housing other operational units.
South
Carolina Bank and Trust of the Piedmont 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 three additional properties and leases
three
others, which are used as branches and loan production offices.
Although
the properties owned and leased are generally considered adequate, we have
a
continuing program of modernization, expansion, and when necessary, occasional
replacement of facilities.
We
are not
a party to, nor is any of our property the subject of, any pending material
proceeding other than those that may occur in our ordinary course of business
as
of December 31, 2006 and the date of this Form 10-K.
No
matters
were submitted to a vote of shareholders in the fourth quarter of 2006.
11
(a)
The
table below describes historical information regarding our common equity
securities:
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
||||
|
Stock
Performance
|
||||||||||||||||
|
Dividends
per share
|
$
|
0.68
|
$
|
0.68
|
$
|
0.65
|
$
|
0.63
|
$
|
0.54
|
||||||
|
Dividend
payout ratio
|
30.88
|
%
|
34.29
|
%
|
36.66
|
%
|
33.98
|
%
|
33.71
|
%
|
||||||
|
Dividend
yield (based on the average
|
||||||||||||||||
|
of
the high and low for the year)
|
1.81
|
%
|
2.14
|
%
|
2.06
|
%
|
2.47
|
%
|
2.42
|
%
|
||||||
|
Price/earnings
ratio (based on year-end
|
||||||||||||||||
|
stock
price and diluted earnings per share)
|
18.46x
|
16.46x
|
19.52x
|
15.70x
|
13.45x
|
|||||||||||
|
Price/book
ratio (end of year)
|
2.25x
|
1.95x
|
2.27x
|
2.05x
|
1.78x
|
|||||||||||
|
Common
Stock Statistics
|
||||||||||||||||
|
Stock
price ranges:
|
||||||||||||||||
|
High
|
$
|
42.93
|
$
|
34.94
|
$
|
37.61
|
$
|
30.71
|
$
|
27.96
|
||||||
|
Low
|
32.38
|
28.50
|
25.57
|
20.38
|
16.73
|
|||||||||||
|
Close
|
41.73
|
33.42
|
33.57
|
28.58
|
22.86
|
|||||||||||
|
Volume
traded on exchanges
|
2,510,900
|
2,202,700
|
1,711,500
|
1,436,000
|
2,049,200
|
|||||||||||
|
As
a
percentage of average shares outstanding
|
28.89
|
%
|
27.09
|
%
|
21.23
|
%
|
17.81
|
%
|
25.46
|
%
|
||||||
|
Earnings
per share, basic
|
$
|
2.17
|
$
|
1.95
|
$
|
1.66
|
$
|
1.74
|
$
|
1.64
|
||||||
|
Earnings
per share, diluted
|
2.15
|
1.93
|
1.64
|
1.73
|
1.63
|
|||||||||||
|
Book
value per share
|
18.57
|
17.17
|
14.77
|
13.91
|
12.85
|
In
reference to the table above, per share data have been retroactively adjusted
to
give effect to a 10% common stock dividend paid to shareholders of record on
November 22, 2002, a 5% common stock dividend paid to shareholders of record
on
December 20, 2004, and a 5% common stock dividend paid to shareholders of record
on March 9, 2007.
Quarterly
Common Stock Price Ranges and Dividends
|
2006
|
2005
|
|||||
|
Quarter
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|
1st
|
$
36.08
|
$
33.00
|
$
0.17
|
$
33.70
|
$
28.53
|
$
0.17
|
|
2nd
|
35.70
|
32.38
|
0.17
|
32.01
|
28.50
|
0.17
|
|
3rd
|
39.94
|
32.50
|
0.17
|
34.94
|
30.75
|
0.17
|
|
4th
|
42.93
|
36.20
|
0.17
|
34.93
|
30.81
|
0.17
|
As
of
March 6, 2007, we had issued and outstanding 8,741,929 shares of Common Stock
which were held by approximately 5,400 shareholders of record. Our common stock
trades on The NASDAQ Global Select MarketSM
under the
symbol “SCBT.”
We
pay
cash dividends to SCBT shareholders from our assets, which are provided
primarily by dividends paid to SCBT by our bank subsidiaries. Certain
restrictions exist regarding the ability of our subsidiaries to transfer funds
to SCBT in the form of cash dividends, loans or advances. The approval of the
OCC is required to pay dividends in excess of our 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, 2006, approximately $37.3 million of our Banks’
retained earnings were available for distribution to SCBT as dividends without
prior regulatory approval. For the year ended December 31, 2006, our Banks
paid
dividends of approximately $5.9 million to SCBT. We anticipate that we will
continue to pay comparable cash dividends in the future.
(b)
Not
applicable.
12
(c)
Issuer
Purchases of Equity Securities:
In
February 2004, we announced a program with no formal expiration date to
repurchase up to 250,000 of our common shares. The following table reflects
share repurchase activity during the fourth quarter of 2006:
|
Period
|
(a)
Total
Number
of
Shares
(or Units)
Purchased
|
|
|
(b)
Average
Price
Paid per
Share
(or Unit)
|
|
|
(c)
Total
Number
of
Shares
(or Units)
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
|
(d)
Maximum
Number
(or
Approximate
Dollar
Value) of
Shares
(or Units)
that
May Yet Be
Purchased
Under
the Plans
or
Programs
|
|||
|
October
1 - October 31
|
2,988
|
* |
$
|
38.22
|
--
|
147,872
|
|||||||
|
November
1 - November 30
|
--
|
--
|
--
|
147,872
|
|||||||||
|
December
1 - December 31
|
--
|
--
|
--
|
147,872
|
|||||||||
|
Total
|
2,988
|
--
|
147,872
|
*
These
shares were repurchased under arrangements, authorized by our stock-based
compensation plans and Board of Directors, whereby officers or directors may
sell previously owned shares to SCBT in order to pay for the exercises of stock
options or for income taxes owed on vesting shares of restricted stock. These
shares were not repurchased under the plan to repurchase 250,000 shares
announced in February 2004.
The
following table presents selected financial data for the five years at December
31:
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Financial
Data
|
||||||||||||||||
|
Assets
|
$
|
2,178,413
|
$
|
1,925,856
|
$
|
1,436,977
|
$
|
1,197,692
|
$
|
1,144,948
|
||||||
|
Loans,
net of unearned income *
|
1,760,830
|
1,535,901
|
1,153,230
|
938,760
|
863,422
|
|||||||||||
|
Investment
securities
|
210,391
|
182,744
|
165,446
|
152,009
|
164,951
|
|||||||||||
|
Deposits
|
1,706,715
|
1,473,289
|
1,171,313
|
947,399
|
898,163
|
|||||||||||
|
Nondeposit
borrowings
|
293,521
|
294,420
|
141,136
|
133,017
|
138,116
|
|||||||||||
|
Shareholders'
equity
|
161,888
|
148,403
|
118,798
|
112,349
|
103,495
|
|||||||||||
|
Number
of locations
|
45
|
41
|
34
|
32
|
32
|
|||||||||||
|
Full-time
equivalent employees
|
634
|
590
|
513
|
514
|
480
|
|||||||||||
|
Number
of common shares outstanding
|
8,719,146
|
8,644,883
|
7,657,094
|
7,690,186
|
7,673,339
|
|||||||||||
|
Selected
Ratios
|
||||||||||||||||
|
Return
on average equity
|
12.72
|
%
|
13.19
|
%
|
12.20
|
%
|
13.72
|
%
|
14.09
|
%
|
||||||
|
Return
on average assets
|
0.97
|
1.00
|
1.05
|
1.23
|
1.28
|
|||||||||||
|
Average
equity as a percentage of average assets
|
7.59
|
7.56
|
8.65
|
9.00
|
9.05
|
|||||||||||
|
Asset
Quality Ratios
|
||||||||||||||||
|
Allowance
for loan losses to period end loans
|
1.29
|
%
|
1.30
|
%
|
1.25
|
%
|
1.25
|
%
|
1.28
|
%
|
||||||
|
Allowance
for loan losses to period end
|
||||||||||||||||
|
nonperforming
loans
|
492.14
|
468.74
|
442.64
|
173.30
|
233.47
|
|||||||||||
|
Nonperforming
assets to period end
|
||||||||||||||||
|
loans
and OREO
|
0.30
|
0.32
|
0.43
|
0.87
|
0.67
|
|||||||||||
|
Nonperforming
assets to period end total assets
|
0.24
|
0.24
|
0.35
|
0.88
|
0.51
|
|||||||||||
|
Net
charge-offs to average loans
|
0.16
|
0.11
|
0.15
|
0.19
|
0.25
|
*
-
Excludes loans held for sale.
13
The
following table presents selected financial data for the five years ended
December 31:
|
(Dollars
in thousands, except per share)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Summary
of Operations
|
||||||||||||||||
|
Interest
income
|
$
|
131,647
|
$
|
94,293
|
$
|
67,913
|
$
|
64,854
|
$
|
67,324
|
||||||
|
Interest
expense
|
54,281
|
28,710
|
14,643
|
14,622
|
18,752
|
|||||||||||
|
Net
interest income
|
77,366
|
65,583
|
53,270
|
50,232
|
48,572
|
|||||||||||
|
Provision
for loan losses
|
5,268
|
4,907
|
4,332
|
2,345
|
3,227
|
|||||||||||
|
Net
interest income after provision for loan losses
|
72,098
|
60,676
|
48,938
|
47,887
|
45,345
|
|||||||||||
|
Noninterest
income
|
26,709
|
23,855
|
22,650
|
22,915
|
17,848
|
|||||||||||
|
Noninterest
expense
|
68,718
|
60,053
|
51,135
|
48,715
|
42,567
|
|||||||||||
|
Income
before provision for income taxes
|
30,089
|
24,478
|
20,453
|
22,087
|
20,626
|
|||||||||||
|
Provision
for income taxes
|
10,284
|
7,823
|
6,437
|
7,301
|
6,792
|
|||||||||||
|
Net
income
|
$
|
19,805
|
$
|
16,655
|
$
|
14,016
|
$
|
14,786
|
$
|
13,834
|
||||||
|
Per
Common Share
|
||||||||||||||||
|
Net
income, basic
|
$
|
2.17
|
$
|
1.95
|
$
|
1.66
|
$
|
1.74
|
$
|
1.64
|
||||||
|
Net
income, diluted
|
2.15
|
1.93
|
1.64
|
1.73
|
1.63
|
|||||||||||
|
Book
value
|
18.57
|
17.17
|
14.77
|
13.91
|
12.85
|
|||||||||||
|
Cash
dividends
|
0.68
|
0.68
|
0.65
|
0.63
|
0.54
|
|||||||||||
|
Dividend
payout ratio
|
30.88
|
%
|
34.29
|
%
|
36.66
|
%
|
33.98
|
%
|
33.71
|
%
|
In
reference to the table above, net income per share data have been retroactively
adjusted to give effect to a 10% common stock dividend paid to shareholders
of
record on November 22, 2002, a 5% common stock dividend paid to shareholders
of
record on December 20, 2004, and a 5% common stock dividend paid to shareholders
of record on March 9, 2007.
14
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) describes SCBT Financial Corporation and its
subsidiaries’ results of operations for the year ended December 31, 2006 as
compared to the year ended December 31, 2005 and also analyzes our financial
condition as of December 31, 2006 as compared to December 31, 2005. Like most
financial institutions, we derive most of our income from interest we receive
on
our loans and investments. Our primary source of funds for making these loans
and investments is our deposits, on which we pay interest. Consequently, one
of
the key measures of our success is the amount of net interest income, or the
difference between the income on our interest-earning assets, such as loans
and
investments, and the expense on our interest-bearing liabilities, such as
deposits. Another key measure is the spread between the yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing
liabilities.
Of
course,
there are risks inherent in all loans, so we maintain an allowance for loan
losses to absorb our estimate of probable losses on existing loans that may
become uncollectible. We establish and maintain this allowance by charging
a
provision for loan losses against our operating earnings. In the following
section, we have included a detailed discussion of this process.
In
addition to earning interest on our loans and investments, we earn income
through fees and other expenses we charge to our customers. We describe the
various components of this noninterest income, as well as our noninterest
expense, in the following discussion.
The
following section also identifies significant factors that have affected our
financial position and operating results during the periods included in the
accompanying financial statements. We encourage you to read this discussion
and
analysis in conjunction with the financial statements and the related notes
and
the other statistical information also included in this report.
Overview
We
continued to achieve outstanding results during 2006 despite a more difficult
banking climate. We grew consolidated net income to $19.8 million and continued
to have strong asset growth throughout our bank subsidiaries. Diluted earnings
per share grew 11.4% during 2006. Our balance sheet growth in 2006 reflected
purely organic growth, as we paused in acquisitions during the year. We
experienced a 14.6% increase in total loans net of unearned income and a 15.8%
increase in total deposits. We increased total assets by 13.1% during
2006.
As
net
interest margins continued to fall during 2006, growth in loan balances
compensated for the decline and we ended the year with $77.4 million in net
interest income, an 18.0% increase from the comparable year in 2005. The
increase in our provision for loan losses to $5.3 million from $4.9 million
in
the comparable year ended December 31, 2005, reflects strong loan growth during
the year and inclusion of automated overdraft protection (“AOP”) net
charge-offs. We experienced our strongest loan growth during the year in the
fourth quarter of 2006. Our credit quality remained very sound despite a change
to include AOP net charge-offs in our allowance for loan losses. For the year
ended December 31, 2006, the ratio of net charge-offs to average loans was
0.16%
(including 0.04% resulting from AOP), a slight increase from 0.11% in the
comparable year of 2005. Net charge-offs for AOP was not included in the ratio
for the comparable year of 2005. Other real estate owned, or OREO, increased
slightly but remained low at $597,000.
Our
noninterest income increased during 2006, resulting from higher service charges,
secondary market mortgage fees, bankcard fees, and investment services. We
were
extremely successful in opening 19,312 new checking accounts in 2006. Higher
salaries and employee benefits contributed to higher noninterest expense during
2006, a by-product of our expanded footprint in South Carolina. Even with the
investment to expand into the Charleston market, we were able to decrease our
efficiency ratio to 65.22% from the comparable year of 2005. This reflects
the
continued success of our existing offices and support staff to adequately
control costs. We are focused to continue lowering our efficiency
ratio.
Our
banks,
South Carolina Bank and Trust and South Carolina Bank and Trust of the Piedmont,
continue to be well capitalized.
At
December 31, 2006, we had $2.2 billion in assets and approximately 634 full-time
equivalent employees. Through our banking subsidiaries we provide our customers
with checking accounts, NOW accounts, savings and time deposits of various
types, brokerage services and alternative investment products such as annuities
and mutual funds, trust and asset management services, 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, correspondent banking services, and use
of
ATM facilities.
Critical
Accounting Policies and Estimates
We
have
established various accounting policies that govern the application of
accounting principles generally accepted in the United States of America in
the
preparation of our financial statements. Significant accounting policies are
described in Note 1 to the audited consolidated financial statements. These
policies may involve significant judgments and estimates that have a material
impact on the carrying value of certain assets and liabilities. Different
assumptions made in the application of these policies could result in material
changes in our financial position and results of operations.
15
The
allowance for loan losses reflects the estimated losses that will result from
the inability of our subsidiary banks’ borrowers to make required loan payments.
In determining an appropriate level for the allowance, we identify 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 our estimate of the allowance
to
increase or decrease and result in adjustments to the provision for loan losses.
See “Loan Loss Provision” in this MD&A and “Allowance for Loan Losses” in
Note 1 to the audited consolidated financial statements for further detailed
descriptions of our 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 deposits from
other commercial banks. Core deposit premium costs represent the estimated
value
of long-term deposit relationships acquired in these transactions. These costs
are amortized over the estimated useful lives of the deposit accounts acquired
on a method that we believe 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.
Goodwill is not amortized, but is evaluated annually for
impairment.
Recent
Accounting Standards and Pronouncements
For
information relating to recent accounting standards and pronouncements, see
Note
1 to our audited Consolidated Financial Statements entitled “Summary of
Significant Accounting Policies.”
Results
of Operations
We
grew
consolidated net income by $3.2 million for the year ended December 31, 2006
compared to the year ended December 31, 2005. Below are key highlights of our
results of operations during 2006:
| · |
Consolidated
net income increased 18.9% to $19.8 million in 2006 compared with
$16.7
million in 2005 and $14.0 million in 2004, which reflects an increase
of
18.8% in 2005 compared to 2004.
|
| · |
Basic
earnings per share increased 11.3% to $2.17 in 2006 compared with
$1.95 in
2005 and $1.66 in 2004.
|
| · |
Diluted
earnings per share increased 11.4% to $2.15 in 2006 compared with
$1.93 in
2005 and $1.64 in 2004.
|
| · |
Book
value per common share of $18.57 at the end of 2006, an increase
from
$17.17 at the end of 2005 and $14.77 at the end of 2004.
|
| · |
Return
on average assets decreased slightly to 0.97% in 2006, compared with
1.00%
in 2005 and 1.05% in 2004. Our return on average assets was affected
by a
large increase in total assets and rate increases on our interest-bearing
liabilities for the year ended December 31,
2006.
|
| · |
Return
on average shareholders' equity decreased somewhat to 12.72% in 2006,
compared with 13.19% in 2005 and 12.20% in
2004.
|
Per
share
data above have been retroactively adjusted to give effect to a 5% stock
dividend paid to shareholders of record on March 9, 2007 and December 20,
2004.
Growth
in
interest-earning assets drove total interest income to increase by $37.3
million, or 39.6%, during 2006. For the year ended December 31, 2006, total
interest income was $131.6 million compared to $94.3 million in 2005, which
reflects an increase of 38.8% in 2005 from $67.9 million in 2004. The increase
was volume driven related to strong loan growth, mainly in commercial real
estate loans.
Higher
volume and rates on interest-bearing liabilities drove total interest expense
higher by $25.6 million, or 89.1%, during 2006. For the year ended December
31,
2006, total interest expense was $54.3 million compared to $28.7 million in
2005
and $14.6 million in 2004. The increase resulted primarily from the rising
interest rate environment and growth in certificate of deposit
products.
In
February 2004, SCBT’s Board of Directors authorized a program with no formal
expiration date to repurchase up to 250,000 of its common shares. We did not
repurchase any shares under this program during 2006 and 2005. During the year
ended December 31, 2004, we repurchased 120,908 shares at a cost of $3.6
million. During 2006 and 2005, we redeemed 13,149 and 8,467 of SCBT shares
from
officers at an average cost of $37.23 and $30.28, respectively, under an
approved program designed to facilitate stock option exercises under SCBT's
stock option plans.
16
In
the
table below, we have reported our results of operations by quarter for the
years
ended December 31, 2006 and 2005.
Table
1 - Quarterly Results of Operations (unaudited)
|
|
2006
Quarters
|
2005
Quarters
|
|||||||||||||||||||||||
|
(Dollars
in thousands)
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|||
|
Interest
income
|
$
|
35,323
|
$
|
34,085
|
$
|
32,389
|
$
|
29,850
|
$
|
27,379
|
$
|
24,532
|
$
|
22,615
|
$
|
19,767
|
|||||||||
|
Interest
expense
|
15,678
|
14,307
|
12,829
|
11,467
|
9,519
|
7,667
|
6,415
|
5,109
|
|||||||||||||||||
|
Net
interest income
|
19,645
|
19,778
|
19,560
|
18,383
|
17,860
|
16,865
|
16,200
|
14,658
|
|||||||||||||||||
|
Provision
for loan losses
|
1,552
|
1,048
|
1,522
|
1,146
|
1,446
|
1,674
|
1,064
|
723
|
|||||||||||||||||
|
Noninterest
income
|
7,044
|
6,968
|
6,662
|
6,035
|
6,238
|
6,549
|
5,788
|
5,280
|
|||||||||||||||||
|
Noninterest
expense
|
17,844
|
17,752
|
16,753
|
16,369
|
16,735
|
15,495
|
14,680
|
13,143
|
|||||||||||||||||
|
Income
before income taxes
|
7,293
|
7,946
|
7,947
|
6,903
|
5,917
|
6,245
|
6,244
|
6,072
|
|||||||||||||||||
|
Income
taxes
|
2,535
|
2,686
|
2,946
|
2,117
|
1,832
|
1,850
|
2,139
|
2,002
|
|||||||||||||||||
|
Net
income
|
$
|
4,758
|
$
|
5,260
|
$
|
5,001
|
$
|
4,786
|
$
|
4,085
|
$
|
4,395
|
$
|
4,105
|
$
|
4,070
|
|||||||||
Net
Interest Income
Net
interest income is the largest component of our net income. Net interest income
is the difference between our income earned on interest-earning assets and
interest paid on deposits and borrowings. Net interest income is determined
by
the rates earned on interest-earning assets, rates paid on interest-bearing
liabilities, the relative amounts of interest-earning assets and
interest-bearing liabilities, the degree of mismatch, and the maturity and
repricing characteristics of interest-earning assets and interest-bearing
liabilities. Net interest income divided by average interest-earning assets
represents our net interest margin.
The
Federal Reserve raised short-term interest rates 100 basis points during 2006
and maintained a 5.25% targeted Fed funds rate as of December 31, 2006.
Increases in short-term rates have caused an inversion on the front end of
the
yield curve. We, like many other financial institutions, have relied more
heavily on higher cost certificates of deposit balances for funding during
2006.
The decrease in our net interest margin reflects these factors as interest
rates
on our average interest-bearing liabilities have adjusted higher more quickly
than yields on interest-earning assets. However, we have continued to grow
interest-earnings assets to sustain net interest income in spite of the margin
compression.
Net
interest income highlighted for the year ended December 31, 2006:
| · |
Net
interest income increased by $11.8 million, or 18.0%, to $77.4 million
during 2006.
|
| · |
Higher
2006 net interest income was volume related as total average
interest-earning assets increased by $347.9 million, or 22.4%, during
2006.
|
| · |
An
increase in loans was the largest contributor to volume
increase.
|
| · |
Decrease
of 29 basis points in net interest spread significantly offset our
strong
interest-earning asset growth during
2006.
|
| · |
Non-TE
(non-taxable equivalent) net interest margin decreased 15 basis points
to
4.08%.
|
| · |
Net
interest margin (taxable equivalent) decreased 16 basis points to
4.12%.
|
| · |
Interest-free
funds favorably impacted net interest margin by 50 basis
points.
|
Net
interest income highlighted for the year ended December 31, 2005:
| · |
Net
interest income increased by $12.3 million, or 23.1%, to $65.6 million
during 2005.
|
| · |
Higher
2005 net interest income was volume related as total average
interest-earning assets increased by $310.0 million, or 25.0%, during
2005.
|
| · |
Decrease
of 14 basis points in net interest spread significantly offset the
impact
of strong interest-earning asset
growth.
|
| · |
Non-TE
net interest margin decreased 6 basis points to
4.23%.
|
| · |
Net
interest margin decreased 9 basis points to
4.28%.
|
| · |
Interest-free
funds favorably impacted net interest margin by 36 basis
points.
|
Net
interest income highlighted for the year ended December 31, 2004:
| · |
Net
interest income increased by $3.0 million, or 6.0%, to $53.3 million
during 2004.
|
| · |
Higher
2004 net interest income was related to volume and the decrease in
rates
on average interest-earning assets.
|
| · |
Total
average interest-earning assets increased $117.3 million, or 10.4%,
during
2004.
|
17
| · |
Decrease
of 16 basis points in net interest spread partially offset the impact
of
strong earning asset growth, reflecting a greater decline in rates
earned
on interest-earning assets as compared with rates paid on interest-bearing
liabilities.
|
| · |
Non-TE
net interest margin decreased 18 basis points to
4.29%.
|
| · |
Net
interest margin decreased 19 basis points to 4.37%, resulting from
a
continued low interest rate
environment.
|
| · |
Interest-free
funds favorably impacted net interest margin by 28 basis
points.
|
Table
2 - Volume and Rate Variance Analysis
|
2006
Compared to 2005
|
2005
Compared to 2004
|
||||||||||||||||||
|
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)
|
$
|
21,421
|
$
|
13,659
|
$
|
35,080
|
$
|
15,971
|
$
|
8,352
|
$
|
24,323
|
|||||||
|
Investments:
|
|||||||||||||||||||
|
Taxable
|
1,439
|
949
|
2,388
|
739
|
552
|
1,291
|
|||||||||||||
|
Tax
exempt (3)
|
(140
|
)
|
88
|
(52
|
)
|
(267
|
)
|
23
|
(244
|
)
|
|||||||||
|
Funds
sold
|
(377
|
)
|
486
|
109
|
833
|
(22
|
)
|
811
|
|||||||||||
|
Interest-earning
deposits
|
|||||||||||||||||||
|
with
banks
|
(258
|
)
|
87
|
(171
|
)
|
32
|
167
|
199
|
|||||||||||
|
Total
interest income
|
22,085
|
15,269
|
37,354
|
17,308
|
9,072
|
26,380
|
|||||||||||||
|
Interest
expense on:
|
|||||||||||||||||||
|
Deposits
|
|||||||||||||||||||
|
Interest-bearing
|
|||||||||||||||||||
|
transaction
accounts
|
76
|
769
|
845
|
86
|
229
|
315
|
|||||||||||||
|
Savings
|
406
|
2,829
|
3,235
|
1,009
|
2,864
|
3,873
|
|||||||||||||
|
Certificates
of deposit
|
5,950
|
9,654
|
15,604
|
2,080
|
3,635
|
5,715
|
|||||||||||||
|
Funds
purchased
|
632
|
2,413
|
3,045
|
250
|
2,094
|
2,344
|
|||||||||||||
|
Notes
payable
|
2,413
|
429
|
2,842
|
1,357
|
463
|
1,820
|
|||||||||||||
|
Total
interest expense
|
9,477
|
16,094
|
25,571
|
4,782
|
9,285
|
14,067
|
|||||||||||||
|
Net
interest income
|
$
|
12,608
|
$
|
(825
|
)
|
$
|
11,783
|
$
|
12,526
|
$
|
(213
|
)
|
$
|
12,313
|
|||||
(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.
18
Table
3 - Yields on Average Interest-Earning Assets and Rates on Average
Interest-Bearing Liabilities
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Years
Ended December 31,
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|||
|
(Dollars
in thousands)
|
Balance
|
|
|
Earned/Paid
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Earned/Paid
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Earned/Paid
|
|
|
Yield/Rate
|
|||
|
Assets
|
||||||||||||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||||||
|
Loans,
net of unearned income
|
$
|
1,667,312
|
$
|
120,670
|
7.24
|
%
|
$
|
1,333,554
|
$
|
85,590
|
6.42
|
%
|
$
|
1,057,813
|
$
|
61,267
|
5.79
|
%
|
||||||||||
|
Investment
securities
|
||||||||||||||||||||||||||||
|
Taxable
|
181,426
|
8,551
|
4.71
|
%
|
147,071
|
6,162
|
4.19
|
%
|
127,370
|
4,861
|
3.82
|
%
|
||||||||||||||||
|
Tax
exempt
|
24,031
|
1,165
|
4.85
|
%
|
27,164
|
1,217
|
4.48
|
%
|
33,417
|
1,461
|
4.37
|
%
|
||||||||||||||||
|
Funds
sold
|
21,647
|
1,058
|
4.89
|
%
|
30,056
|
949
|
3.16
|
%
|
11,156
|
138
|
1.24
|
%
|
||||||||||||||||
|
Interest-earning
deposits with banks
|
3,899
|
203
|
5.21
|
%
|
12,568
|
375
|
2.98
|
%
|
10,613
|
186
|
1.75
|
%
|
||||||||||||||||
|
Total
interest-earning assets
|
1,898,315
|
131,647
|
6.93
|
%
|
1,550,413
|
94,293
|
6.08
|
%
|
1,240,369
|
67,913
|
5.48
|
%
|
||||||||||||||||
|
Cash
and other assets
|
174,438
|
137,299
|
102,103
|
|||||||||||||||||||||||||
|
Less,
allowance for loan losses
|
(21,135
|
)
|
(16,687
|
)
|
(13,026
|
)
|
||||||||||||||||||||||
|
Total
assets
|
$
|
2,051,618
|
$
|
1,671,025
|
$
|
1,329,446
|
||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
$
|
276,101
|
$
|
1,899
|
0.69
|
%
|
$
|
257,538
|
$
|
1,054
|
0.41
|
%
|
$
|
230,749
|
$
|
739
|
0.32
|
%
|
||||||||||
|
Savings
|
361,718
|
9,228
|
2.55
|
%
|
338,759
|
5,993
|
1.77
|
%
|
229,545
|
2,120
|
0.92
|
%
|
||||||||||||||||
|
Certificates
of deposit
|
694,932
|
29,703
|
4.27
|
%
|
488,689
|
14,099
|
2.89
|
%
|
391,542
|
8,384
|
2.14
|
%
|
||||||||||||||||
|
Funds
purchased
|
149,081
|
6,076
|
4.08
|
%
|
123,352
|
3,031
|
2.46
|
%
|
90,445
|
687
|
0.76
|
%
|
||||||||||||||||
|
Notes
payable
|
134,775
|
7,375
|
5.47
|
%
|
87,959
|
4,533
|
5.15
|
%
|
58,630
|
2,713
|
4.63
|
%
|
||||||||||||||||
|
Total
interest-bearing liabilities
|
1,616,607
|
54,281
|
3.36
|
%
|
1,296,297
|
28,710
|
2.21
|
%
|
1,000,911
|
14,643
|
1.46
|
%
|
||||||||||||||||
|
Demand
deposits
|
266,400
|
240,941
|
208,106
|
|||||||||||||||||||||||||
|
Other
liabilities
|
12,896
|
7,527
|
5,549
|
|||||||||||||||||||||||||
|
Shareholders'
equity
|
155,715
|
126,260
|
114,880
|
|||||||||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$
|
2,051,618
|
$
|
1,671,025
|
$
|
1,329,446
|
||||||||||||||||||||||
|
Net
interest spread
|
3.58
|
%
|
3.87
|
%
|
4.01
|
%
|
||||||||||||||||||||||
|
Impact
on interest free funds
|
0.50
|
%
|
0.36
|
%
|
0.28
|
%
|
||||||||||||||||||||||
|
Net
interest margin (non-taxable equivalent)
|
4.08
|
%
|
4.23
|
%
|
4.29
|
%
|
||||||||||||||||||||||
|
Net
interest margin
|
$
|
77,366
|
$
|
65,583
|
$
|
53,270
|
||||||||||||||||||||||
19
Noninterest
Income and Expense
Noninterest
income provides us with additional revenues that are significant sources of
income. These sources provide stability when our banks experience net interest
margin compression as in 2006 and in recent years. In 2006, 2005, and 2004,
noninterest income comprised 25.7%, 26.7%, and 29.8%, respectively, of total
net
interest and noninterest income. The decrease from 2005 resulted from an
increase in our net interest income, driven by total interest-earning asset
growth and interest rate increases for the year ended December 31,
2006.
Table
4 - Noninterest Income for the Three Years
|
|
Years
Ended December 31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Service
charges on deposit accounts
|
$
|
13,377
|
$
|
12,473
|
$
|
11,854
|
||||
|
Secondary
market mortgage fees
|
5,613
|
5,054
|
3,892
|
|||||||
|
Bankcard
services income
|
3,422
|
2,647
|
1,690
|
|||||||
|
Investment
services income
|
1,418
|
1,118
|
866
|
|||||||
|
Trust
fees
|
730
|
577
|
556
|
|||||||
|
Other
service charges, commissions, and fees
|
2,149
|
1,986
|
3,792
|
|||||||
|
Total
noninterest income
|
$
|
26,709
|
$
|
23,855
|
$
|
22,650
|
||||
Noninterest
income growth of 12.0% for the year ended December 31, 2006 compared to 2005
came as a result of the following:
| · |
Service
charges on deposit accounts increased 7.2%, driven by strong deposit
growth in 2006.
|
| · |
Secondary
market mortgage fees increased 11.1%, driven by an increase in service
release premiums for the year ended December 31, 2006. During 2006,
production in secondary market mortgages remained consistent with
the
previous year.
|
| · |
Bankcard
services income increased 29.3%, driven largely by the number of
new
accounts opened in 2006 and the introduction of the SCBT Rewards
for debit
cards.
|
| · |
Investment
services income increased 26.8%, driven by increased productivity
of our
existing investment consultants and the addition of two investment
consultants in the last two quarters of 2006. We continue to retain
an
experienced staff that we believe contributed to an increase in income
for
the year ended December 31, 2006. We plan to hire additional investment
consultants for targeted high growth South Carolina markets during
the
first half of 2007.
|
| · |
Other
service charges, commissions, and fees grew 8.2% during 2006, driven
by a
$108,000, or 49.6%, increase in cash surrender value of Bank Owned
Life
Insurance, a $99,000, or 36.4%, increase in cashier check fees, and
a
$48,000, or 19.4%, increase in wire, exchange, and other
fees.
|
Noninterest
income growth of 5.3% for the year ended December 31, 2005 compared to 2004
came
as a result of the following:
| · |
Service
charges on deposit accounts increased 5.2%, driven by the strong
deposit
account growth during 2005.
|
| · |
Secondary
market mortgage fees increased 29.9%. During 2005, we produced $197.0
million more in secondary market mortgages than the previous year.
This
growth in volume is related to the increase in mortgage originators
and
their production in our bank subsidiaries and the establishment of
The
Mortgage Banc in 2004.
|
| · |
Bankcard
services income increased 56.6%, driven by an increase in new accounts
opened in 2005.
|
| · |
Investment
services income increased 29.1%, driven by strong productivity from
new
and existing investment
consultants.
|
| · |
Other
service charges, commissions, and fees decreased 47.6% during
2005.
|
Noninterest
expense represents the largest expense category for our company. During 2006,
we
emphasized carefully controlling our noninterest expense.
20
Table
5 - Noninterest Expense for the Three Years
|
|
Years
Ended December 31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Salaries
and employee benefits
|
$
|
40,394
|
$
|
34,074
|
$
|
27,762
|
||||
|
Net
furniture and equipment expense
|
4,690
|
4,340
|
4,447
|
|||||||
|
Net
occupancy expense
|
4,227
|
3,493
|
3,309
|
|||||||
|
Advertising
and public relations
|
3,186
|
2,519
|
1,881
|
|||||||
|
Information
services expense
|
2,306
|
1,872
|
1,249
|
|||||||
|
Bankcard
services expense
|
1,026
|
738
|
598
|
|||||||
|
Amortization
|
825
|
576
|
488
|
|||||||
|
Loss
on sale of securities
|
330
|
202
|
4
|
|||||||
|
Other
|
11,734
|
12,239
|
11,397
|
|||||||
|
Total
noninterest expense
|
$
|
68,718
|
$
|
60,053
|
$
|
51,135
|
||||
Noninterest
expense increased 14.4% for the year ended December 31, 2006 compared to 2005
primarily as a result of the following:
| · |
Salaries
and employee benefits expense increased 18.5%, driven by sales volume
incentives paid to employees on certain banking products and an increase
in the number of employees as a result of organic growth. We expect
that
salaries and employee benefits expense will be driven largely by
sales
volume incentives and organic growth in 2007. This expense was the
largest
component of noninterest expense comprising 58.8% of the category
totals
for 2006. At December 31, 2006, we employed 634 full-time equivalent
employees compared to 590 at the end of
2005.
|
| · |
Net
occupancy expense increased 21.0%, driven by newly opened financial
centers during 2006 and the increased lease expense and operating
costs
associated with the new facilities. In 2006, we increased our total
number
of financial centers to 45 by opening locations in Charleston, Fort
Mill,
Lexington, and Irmo, South
Carolina.
|
| · |
Net
furniture and equipment expense increased by 8.1% as a result of
purchases
for new facilities.
|
| · |
Advertising
and public relations expense increased 26.5% from the prior year.
While
the increase was lower than the increase in 2005, the increase reflects
the expanded “How Can We Make Your Day?” advertising initiative in 2006 to
build SCBT brand recognition in South Carolina. The increase also
reflects
advertising to generate customer
deposits.
|
| · |
Information
services expense increased 23.2%, driven by adding new financial
centers.
|
| · |
Recognized
loss on the sale of $10.4 million of available-for-sale securities
for the
year ended December 31, 2006. We expect that the reinvestment of
the
proceeds from the sale will increase the overall yield of our investment
portfolio going forward.
|
| · |
Other
noninterest expense decreased 4.1% resulting from our focus on cost
reduction during 2006. The decrease was driven by lower property
tax
accruals, smaller community donations, and a reclassification of
overdraft
charge-offs to the allowance for loan
losses.
|
Noninterest
expense increased 17.4% for the year ended December 31, 2005 compared to 2004
primarily as a result of the following:
| · |
Salaries
and employee benefits expense increased 22.7% percent, driven primarily
by
the result of an increase in full-time equivalent employees gained
in
acquisitions made during 2005 and the related benefits and incentive
costs
associated with increased staffing levels. At December 31, 2005,
we
employed 590 full-time equivalent employees compared to 513 at the
end of
2004.
|
| · |
Net
occupancy expense increased 5.6%, driven by newly opened or acquired
financial centers during 2005 and the increased lease expense and
operating costs associated with the new
facilities.
|
| · |
Net
furniture and equipment expense decreased 2.4% as service contract
costs
were largely offset by decreased expenses associated with equipment
data
processing leases.
|
| · |
Advertising
and public relations expense increased 33.9%, driven mainly by continued
loan and deposit marketing campaigns and marketing the SCBT brand
in newly
entered geographical markets.
|
| · |
Information
services expense increased 49.9%, driven by our expanded footprint
in two
additional markets in South
Carolina.
|
| · |
Strategically
repositioned a portion of our investment portfolio during 2005 for
the
current interest rate environment generating a loss on the sale of
available-for-sale securities.
|
| · |
Other
noninterest expense increased 7.4% resulting from an increase in
charitable contributions and merger related costs. Charitable
contributions increased by $400,000, which included a $100,000
contribution to establish a SCBT Foundation fund within the Central
Carolina Community Foundation. We will be able to grow this foundation
fund over time through contributions and investment returns, and
we will
be able to largely centralize our donation activities through
self-directed donations. We incurred approximately $266,000 of merger
related costs during 2005.
|
21
Investment
Securities
We
use
investment securities, the second largest category of interest-earning assets,
to generate interest income through the employment of excess funds, to provide
liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for public funds deposits and repurchase agreements. The composition
of the portfolio remained relatively consistent with a bias towards increasing
purchases of U.S. government agency bonds rather than mortgage-backed
securities. We continued our approach of slightly lengthening the average life
of the portfolio as interest rates increased in anticipation of the end of
the
Federal Reserve’s tightening cycle. At December 31, 2006, investment securities
were $210.4 million, or 10.5% of earning assets, compared with $182.7 million,
or 10.3% of earning assets, at December 31, 2005. See Note 1 “Summary of
Significant Accounting Policies” in the audited consolidated financial
statements for our accounting policy on investment securities.
As
securities are purchased, they are designated as held to maturity or available
for sale based upon our intent, which incorporates liquidity needs, interest
rate expectations, asset/liability management strategies, and capital
requirements. We do not currently hold, nor have we ever held, any securities
that are designated as trading securities. The following table presents the
book
value of investment securities for the five years as of December 31,
2006:
Table
6 - Investment Securities for the Five Years
|
|
December
31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Held-to-maturity
(amortized cost):
|
||||||||||||||||
|
Mortgage-backed
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
51
|
||||||
|
State
and municipal
|
18,112
|
18,194
|
24,604
|
29,487
|
33,160
|
|||||||||||
|
Total
held-to-maturity
|
18,112
|
18,194
|
24,604
|
29,487
|
33,211
|
|||||||||||
|
Available-for-sale
(fair value):
|
||||||||||||||||
|
Government-sponsored
enterprises
|
67,448
|
37,749
|
25,185
|
25,453
|
45,859
|
|||||||||||
|
Mortgage-backed
|
93,238
|
99,595
|
94,664
|
78,560
|
74,694
|
|||||||||||
|
Corporate
bonds
|
14,358
|
11,361
|
10,300
|
6,500
|
-
|
|||||||||||
|
Corporate
stocks
|
7,069
|
4,923
|
4,909
|
6,734
|
6,414
|
|||||||||||
|
Total
available-for-sale
|
182,113
|
153,628
|
135,058
|
117,247
|
126,967
|
|||||||||||
|
Total
other investments
|
10,166
|
10,922
|
5,784
|
5,275
|
4,773
|
|||||||||||
|
Total
investment securities
|
$
|
210,391
|
$
|
182,744
|
$
|
165,446
|
$
|
152,009
|
$
|
164,951
|
||||||
During
2006, total investment securities increased $27.6 million, or 15.1%, from the
comparable year of 2005. The balance as of December 31, 2005 increased $17.3
million, or 10.5%, from the comparable year of 2004. At December 31, 2006,
the
fair value of the total investment securities portfolio was $1.7 million, or
0.8%, lower than its book value. Comparable valuations at December 31, 2005
reflected a total investment portfolio fair value that was $1.9 million, or
1.0%, lower than book value.
Held-to-maturity
Securities
held to maturity consist mainly of tax-exempt state and municipal securities.
The following are highlights:
| · |
Total
securities held to maturity decreased $82,000 from the balance at
December
31, 2005.
|
| · |
The
balance of securities held to maturity represented 0.8% of total
assets at
December 31, 2006 and 0.9% of the total assets at December 31,
2005.
|
| · |
Interest
earned amounted to $641,000, a decrease of $264,000, or 29.2%, from
$905,000 in the comparable year of 2005. Less interest earned reflected
a
143 basis point decrease in the yield on securities held to
maturity.
|
The
average maturity of the held to maturity portfolio was 4.3 years and 1.7 years
at December 31, 2006 and 2005, respectively.
Available-for-sale
Securities
available for sale consist mainly of Government-sponsored enterprises and
mortgage-backed securities. At December 31, 2006, investment securities with
an
amortized cost of $183.9 million and fair value of $182.1 million were
classified as available for sale. The negative adjustment of $1.8 million
between the carrying value of these securities and their amortized cost has
been
reflected, net of tax, in the consolidated balance sheets as accumulated other
comprehensive loss. The following are highlights:
| · |
Total
securities available for sale increased $28.5 million, or 18.5%,
from the
balance at December 31, 2005.
|
22
| · |
The
balance of securities available for sale represented 8.4% of total
assets
at December 31, 2006 and 8.0% at December 31,
2005.
|
| · |
Interest
earned amounted to $9.0 million, an increase of $2.6 million, or
40.6%,
from $6.4 million in the comparable year of 2005. Higher interest
earned
reflected a 55 basis point increase in the yield on available for
sale
securities and an increase in the average balance for the year ended
December 31, 2006.
|
While
securities classified as available for sale may be sold from time to time to
meet liquidity or other needs, it is not our normal practice to trade this
segment of the investment securities portfolio. While we generally hold these
assets on a long-term basis or until maturity, any short-term investments or
securities available for sale could be converted at an earlier point, depending
partly on changes in interest rates and alternative investment
opportunities.
Other
Investments
Other
investment securities included principally Federal Reserve Bank stock and
Federal Home Loan Bank of Atlanta (“FHLB”) stock, each with no readily
determinable market value. The amortized cost and fair value of the securities
both equal the same amount. The following are highlights:
| · |
Total
other investment securities decreased $756,000, or 6.9%, from the
balance
at December 31, 2005. The balance increased $5.1 million, or 88.8%
from
the comparable year in 2004. The lower balance between 2006 and 2005
reflected a $1.8 million decrease in FHLB stock during 2006. Our
banks are
required to maintain a certain level of FHLB stock based on total
assets,
advances, and letters of credit. The decrease was offset by a $1.0
million
increase in Federal Reserve stock. This increase resulted from Sunbank
being dissolved and merged into our lead bank
subsidiary.
|
| · |
The
balance of other investment securities represented 0.5% and 0.6%
of total
assets at December 31, 2006 and 2005,
respectively.
|
During
2006, we realized a pretax loss on the disposition of investment securities
of
$330,000, as we elected to strategically reposition a portion of our investment
portfolio for the current interest rate environment. We realized a pretax loss
of $202,000 in 2005 and $4,000 in 2004.
23
Table
7 - Maturity Distribution and Yields of Investment
Securities
|
Due
In
|
|
|
Due
After
|
|
|
Due
After
|
|
|
Due
After
|
||||||||||||||||||||||||||||
|
1
Year or Less
|
|
|
1
Thru 5 Years
|
|
|
5
Thru 10 Years
|
|
|
10
Years
|
|
|
Total
|
|
|
Par
|
|
|
Fair
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|||
|
Held-to-maturity
|
|||||||||||||||||||||||||||||||||||||
|
State
and municipal
|
$
|
3,841
|
6.50
|
%
|
$
|
7,434
|
6.70
|
%
|
$
|
3,148
|
6.22
|
%
|
$
|
3,689
|
6.12
|
%
|
$
|
18,112
|
5.21
|
%
|
$
|
18,105
|
$
|
18,271
|
|||||||||||||
|
Total
held-to-maturity
|
3,841
|
6.50
|
%
|
7,434
|
6.70
|
%
|
3,148
|
6.22
|
%
|
3,689
|
6.12
|
%
|
18,112
|
5.21
|
%
|
18,105
|
18,271
|
||||||||||||||||||||
|
Available-for-sale
|
|||||||||||||||||||||||||||||||||||||
|
Government-sponsored
enterprises
|
7,112
|
4.03
|
%
|
56,224
|
5.03
|
%
|
4,112
|
0.00
|
%
|
--
|
0.00
|
%
|
67,448
|
4.96
|
%
|
67,998
|
67,448
|
||||||||||||||||||||
|
Mortgage-backed
|
255
|
5.69
|
%
|
87,863
|
4.51
|
%
|
5,120
|
5.01
|
%
|
--
|
0.00
|
%
|
93,238
|
5.54
|
%
|
95,498
|
93,238
|
||||||||||||||||||||
|
Corporate
bonds
|
--
|
0.00
|
%
|
--
|
0.00
|
%
|
--
|
0.00
|
%
|
14,358
|
0.00
|
%
|
14,358
|
6.04
|
%
|
14,300
|
14,358
|
||||||||||||||||||||
|
Corporate
stocks
|
--
|
0.00
|
%
|
2,120
|
0.00
|
%
|
3,958
|
0.00
|
%
|
991
|
1.27
|
%
|
7,069
|
7.25
|
%
|
6,991
|
7,069
|
||||||||||||||||||||
|
Total
available-for-sale
|
7,367
|
4.09
|
%
|
146,207
|
4.65
|
%
|
13,190
|
1.94
|
%
|
15,349
|
0.08
|
%
|
182,113
|
4.92
|
%
|
184,787
|
182,113
|
||||||||||||||||||||
|
Total
other investments (1)
|
--
|
0.00
|
%
|
--
|
0.00
|
%
|
--
|
0.00
|
%
|
10,166
|
5.92
|
%
|
10,166
|
5.92
|
%
|
10,166
|
10,166
|
||||||||||||||||||||
|
Total
investment securities
|
$
|
11,208
|
4.92
|
%
|
$
|
153,641
|
4.75
|
%
|
$
|
16,338
|
2.77
|
%
|
$
|
29,204
|
2.11
|
%
|
$
|
210,391
|
5.00
|
%
|
$
|
213,058
|
$
|
210,550
|
|||||||||||||
|
Percent
of total
|
5
|
%
|
73
|
%
|
8
|
%
|
14
|
%
|
|||||||||||||||||||||||||||||
|
Cumulative
percent of total
|
5
|
%
|
78
|
%
|
86
|
%
|
100
|
%
|
|||||||||||||||||||||||||||||
(1)
Federal Reserve Bank and other corporate stocks have no set maturity date and
are classified in “Due after 10 Years.”
24
Loan
Portfolio
Our
loan
portfolio remains our largest category of interest-earning assets. A 30.3%
increase in loans secured by commercial real estate including owner occupied
real estate drove overall growth in total loans for the year ended December
31,
2006. At December 31, 2006, total loans, net of unearned income, grew to $1.8
billion, an increase of $224.9 million, or 14.6%, compared to $1.5 billion
at
the end of 2005. Average loans outstanding during 2006 were $1.7 billion, an
increase of $333.1 million, or 25.4%, over the 2005 average of $1.3 billion.
The
following table presents a summary of the loan portfolio by
category:
Table
8 - Distribution of Net Loans by Type
|
|
December
31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Real
estate:
|
||||||||||||||||
|
Commercial
|
$
|
835,892
|
$
|
641,275
|
$
|
430,244
|
$
|
362,897
|
$
|
322,664
|
||||||
|
Consumer
|
434,957
|
421,860
|
334,578
|
244,425
|
230,945
|
|||||||||||
|
Commercial
|
190,635
|
178,039
|
138,228
|
108,665
|
108,717
|
|||||||||||
|
Firstline
|
144,910
|
145,404
|
128,429
|
101,101
|
81,545
|
|||||||||||
|
Consumer
|
130,596
|
127,817
|
104,553
|
98,180
|
110,732
|
|||||||||||
|
Other
loans
|
23,870
|
21,605
|
17,375
|
24,270
|
10,211
|
|||||||||||
|
Total
loans
|
$
|
1,760,860
|
$
|
1,536,000
|
$
|
1,153,407
|
$
|
939,538
|
$
|
864,814
|
||||||
|
Percent
of Total
|
||||||||||||||||
|
Real
estate:
|
||||||||||||||||
|
Commercial
|
47.5
|
%
|
41.7
|
%
|
37.3
|
%
|
38.6
|
%
|
37.3
|
%
|
||||||
|
Consumer
|
24.7
|
%
|
27.5
|
%
|
29.0
|
%
|
26.0
|
%
|
26.7
|
%
|
||||||
|
Commercial
|
10.8
|
%
|
11.6
|
%
|
12.0
|
%
|
11.6
|
%
|
12.6
|
%
|
||||||
|
Firstline
|
8.2
|
%
|
9.5
|
%
|
11.1
|
%
|
10.8
|
%
|
9.4
|
%
|
||||||
|
Consumer
|
7.4
|
%
|
8.3
|
%
|
9.1
|
%
|
10.4
|
%
|
12.8
|
%
|
||||||
|
Other
loans
|
1.4
|
%
|
1.4
|
%
|
1.5
|
%
|
2.6
|
%
|
1.2
|
%
|
||||||
|
Total
loans
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
Regarding
the table above, the loan category commercial and consumer real estate includes
owner occupied real estate. Firstline loans are home equity lines of
credit.
Real
estate mortgage loans continue to comprise the largest segment of our loan
portfolio. All commercial and residential loans secured by real estate are
included in this category. As of December 31, 2006 compared to December 31,
2005:
| · |
Loans
secured by real estate mortgages were $1.4 billion, and comprised
80.4% of
the total loan portfolio. This was an increase of $207.2 million,
or
17.1%, over year-end 2005.
|
| · |
Loans
secured by commercial real estate grew by $194.6 million, or
30.3%.
|
| · |
Loans
secured by consumer real estate grew by $13.1 million, or
3.1%.
|
| · |
Commercial
non real estate loans grew $12.6 million, or 7.1%, from the comparable
year of 2005. The balance represented 10.8% of total
loans.
|
Loan
interest income, including fees, was $120.7 million in 2006, an increase of
$35.1 million, or 41.0% percent, over 2005 income of $85.6 million. The increase
was the result of a substantial increase in the total average outstanding loan
balance in 2006 compared with 2005, as well as an average loan portfolio yield
in 2006 of 7.24% which was 82 basis points higher than the 6.42% loan yield
in
2005. Interest and fee income for 2005 was 39.6% above the 2004 income of $61.3
million. The average loan yield in 2005 was 63 basis points higher than the
2004
yield of 5.79%. The table below shows the maturity and interest rate sensitivity
of the loan portfolio at December 31, 2006.
25
Table
9 - Maturity Distribution of Loans
|
December
31, 2006
|
|
|
|
1
Year
|
|
|
Maturity
|
|
|
Over
|
|||
|
(Dollars
in thousands)
|
Total
|
|
|
or
Less
|
|
|
1
to 5 Years
|
|
|
5
Years
|
|||
|
Real
estate:
|
|||||||||||||
|
Commercial
|
$
|
835,892
|
$
|
253,262
|
$
|
499,674
|
$
|
82,956
|
|||||
|
Consumer
|
434,957
|
103,662
|
175,123
|
156,172
|
|||||||||
|
Commercial
|
190,635
|
71,423
|
102,864
|
16,348
|
|||||||||
|
Firstline
|
144,910
|
3,165
|
16,267
|
125,478
|
|||||||||
|
Consumer
|
130,596
|
13,458
|
102,805
|
14,333
|
|||||||||
|
Other
loans
|
23,870
|
18,118
|
5,651
|
101
|
|||||||||
|
Total
loans
|
$
|
1,760,860
|
$
|
463,088
|
$
|
902,384
|
$
|
395,388
|
Nonaccrual
Loans
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 well
secured and in the process of collection are allowed to remain on an accrual
basis until they become 120 days past due. Unsecured commercial loans are
charged off on or before the date they become 90 days past due and, therefore,
do not reach nonaccrual status. Commercial and real estate loans that are
partially secured are written down to the collateral value and placed on
nonaccrual status on or before becoming 90 days past due. Closed end consumer
loans are charged off or written down to the contractual value on or before
becoming 120 days past due. Open end consumer loans are charged off or written
down to the contractual value on or before becoming 180 days past
due.
The
level
of risk elements in the loan portfolio for the past five years is shown
below:
Table
10 - Nonaccrual and Past Due Loans
|
|
December
31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Loans
past due 90 days or more
|
$
|
1,039
|
$
|
1,512
|
$
|
840
|
$
|
2,082
|
$
|
1,729
|
||||||
|
Loans
on a nonaccruing basis
|
3,567
|
2,760
|
2,429
|
4,669
|
3,010
|
|||||||||||
|
$
|
4,606
|
$
|
4,272
|
$
|
3,269
|
$
|
6,751
|
$
|
4,739
|
|||||||
Loan
Loss Provision
On
December 13, 2006, the Office of the Comptroller of the Currency, Board of
Governors of the Federal Reserve System, Federal Deposit Insurance Corporation,
and other regulatory agencies collectively revised the banking agencies’ 1993
policy statement on the allowance for loan and lease losses to ensure
consistency with generally accepted accounting principles in the United States
and more recent supervisory guidance. Our loan loss policy adheres to the
interagency guidance.
The
allowance for loan losses is an estimate made by management. We maintain an
allowance for loan losses at a level that we believe is appropriate to cover
estimated credit losses on individually evaluated loans that are determined
to
be impaired as well as estimated credit losses inherent in the remainder of
our
loan portfolio. Arriving at the allowance involves a high degree of management
judgment and results in a range of estimated losses. We periodically evaluate
the adequacy of the allowance through our 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
our 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.
26
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 our ongoing consideration of such factors, we consider our allowance for
loan
losses to be adequate. The following table presents changes in the allowance
for
loan losses for the five years at December 31, 2006:
Table
11 - Summary of Loan Loss Experience
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Allowance
for loan losses at January 1
|
$
|
20,025
|
$
|
14,470
|
$
|
11,700
|
$
|
11,065
|
$
|
9,818
|
||||||
|
Total
charge-offs
|
(3,438
|
)
|
(1,850
|
)
|
(2,008
|
)
|
(2,410
|
)
|
(2,236
|
)
|
||||||
|
Total
recoveries
|
813
|
383
|
446
|
700
|
256
|
|||||||||||
|
Net
charge-offs
|
(2,625
|
)
|
(1,467
|
)
|
(1,562
|
)
|
(1,710
|
)
|
(1,980
|
)
|
||||||
|
Provision
for loan losses
|
5,268
|
4,907
|
4,332
|
2,345
|
3,227
|
|||||||||||
|
Reserve
acquired in business combination
|
--
|
2,115
|
--
|
--
|
--
|
|||||||||||
|
Allowance
for loan losses at December 31
|
$
|
22,668
|
$
|
20,025
|
$
|
14,470
|
$
|
11,700
|
$
|
11,065
|
||||||
|
Average
loans, net of unearned income *
|
$
|
1,646,906
|
$
|
1,313,796
|
$
|
1,043,471
|
$
|
899,421
|
$
|
792,594
|
||||||
|
Ratio
of net charge-offs to average
|
||||||||||||||||
|
loans,
net of unearned income **
|
0.16
|
%
|
0.11
|
%
|
0.15
|
%
|
0.19
|
%
|
0.25
|
%
|
*
-
Average loans, net of unearned income does not include loans held for
sale.
**
- The
increase in the ratio in 2006 is partially attributable to a 0.04% increase
resulting from adding AOP net charge-offs to the allowance for loan
losses.
The
higher
provision in 2006 reflects our close attention to asset quality and response
to
strong loan growth during the year. The following provides highlights for the
years ended December 31, 2006 and 2005:
| · |
Allowance
for loan losses as a percentage of total loans, net of unearned income,
was 1.29% compared to 1.30% for the comparable year in
2005.
|
| · |
Total
charge-offs increased $1.6 million, or 85.9% for the year ended December
31, 2006 compared to a $158,000, or 7.9%, decrease for the comparable
year
in 2005. The increase reflects strong organic loan growth in our
loan
portfolio during 2006 and adding AOP net charge-offs to the
allowance.
|
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, 2006 and December 31, 2005, other
real estate owned was $597,000 and $379,000, respectively.
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 investment demands and deposit withdrawals. We have
employed our funds in a manner to provide liquidity in both assets and
liabilities sufficient to meet our cash needs.
Asset
liquidity is maintained by the maturity structure of loans, investment
securities, and other short-term investments. We have policies and procedures
governing the length of time to maturity on loans and investments. As reported
in table 7, five percent of the investment portfolio contractually matures
in
one year or less. This segment of the portfolio consists largely of
Government-sponsored enterprises securities, municipal obligations, and agency
preferred stock. Loans and other investments are generally held for longer
terms
and not used for day-to-day operating needs.
Increases
in our liabilities provide liquidity on a day-to-day basis. Daily liquidity
needs may be met from deposit growth or from the use of federal funds purchased,
securities sold under agreements to repurchase and other short-term
borrowings.
We
regularly obtain borrowed funds in the form of cash management or “sweep”
accounts that are accommodations to corporate and governmental customers
pursuant to the sale of securities sold under agreements to repurchase
arrangements. During 2006, we maintained a prudent level of liquidity through
growth in interest-bearing and non-interest-bearing deposits, cash management
accounts, federal funds purchased, and advances from the Federal Home Loan
Bank
of Atlanta.
27
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). We do not currently employ financial
derivatives, nor do we maintain a trading portfolio.
Asset-Liability
Management and Market Risk Sensitivity
Our
earnings and the economic value of our shareholders’ equity may vary in relation
to changes in interest rates and in relation to the accompanying fluctuations
in
market prices of certain of our financial instruments. We use 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 our contractual agreements with regard to investments, loans
and deposits. Although our simulation model is subject to the accuracy of the
assumptions that underlie the process, we believe 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 we have, or may incur in future periods, arising from
interest rate changes or other market risk factors.
Our
policy
is to monitor exposure to interest rate increases and decreases of as much
as
200 basis points ratably over a 12-month period. Our 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. We
traditionally have maintained a risk position within the policy guideline level.
As of December 31, 2006, the earnings simulations indicated that the impact
of a
200 basis point decrease in rates over 12 months would result in an approximate
1.0 percent increase in net interest income while a 200 basis point increase
in
rates over the same period would basically leave net interest income essentially
unchanged -- both as compared with a base case unchanged interest rate
environment. These results indicate that our rate sensitivity is basically
neutral to very slightly liability sensitive to the indicated change in interest
rates over a one-year horizon. 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” to “slightly inverted” yield curve having a dampening effect on
our slight liability sensitivity, as is currently the case.
As
mentioned above, another (though less useful) indicator of interest rate risk
exposure is the interest rate sensitivity gap and cumulative gap. Interest
rate
sensitivity gap analysis is based on the concept of comparing financial assets
that reprice with financial liabilities that reprice within a stated time
period. The time period in which a financial instrument is considered to be
rate
sensitive is determined by that instrument’s first opportunity to reprice to a
different interest rate. For variable rate products the period in which
repricing occurs is contractually determined. For fixed rate products the
repricing opportunity is deemed to occur at the instrument’s maturity or call
date, if applicable. For 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 below at December 31, 2006, we had a greater dollar value
of
financial liabilities that were subject to repricing within a 12-month time
horizon than financial assets that were subject to repricing. The next
twelve-month period displays about an equal amount of financial liabilities
and
financial assets subject to repricing. Thereafter, generally there are more
financial assets subject to repricing as compared to financial liabilities.
We
have a cumulatively small negative interest rate gap for the 5-year aggregate
period through 2011. 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 the table below.
We
do not
currently use interest rate swaps or other derivatives to modify the interest
rate risk of our financial instruments.
The
following table provides information as of December 31, 2006 about our 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 the table below, projected maturity dates for such
deposits were determined based on decay rate assumptions used internally by
us
to evaluate such deposits. For further information on the fair value of
financial instruments, see Note 24 to the consolidated financial
statements.
28
Table
12 - Financial Instruments that are Sensitive to Changes in Interest
Rates
|
(Dollars
in thousands)
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
There-
after
|
|
|
Total
|
|
|
Fair
Value
12/31/2006
|
|||
|
Financial
Assets:
|
|||||||||||||||||||||||||
|
Loans,
net of unearned income:
|
|||||||||||||||||||||||||
|
Fixed
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
$
|
319,743
|
$
|
227,218
|
$
|
169,576
|
$
|
132,159
|
$
|
109,176
|
$
|
61,530
|
$
|
1,019,402
|
$
|
993,455
|
|||||||||
|
Average
interest rate
|
6.31
|
%
|
6.35
|
%
|
6.50
|
%
|
6.63
|
%
|
0.00
|
%
|
7.46
|
%
|
5.79
|
%
|
|||||||||||
|
Variable
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
649,997
|
32,875
|
30,336
|
24,713
|
9,360
|
700
|
747,981
|
751,032
|
|||||||||||||||||
|
Average
interest rate
|
8.02
|
%
|
6.06
|
%
|
5.89
|
%
|
5.95
|
%
|
0.00
|
%
|
6.40
|
%
|
7.68
|
%
|
|||||||||||
|
Securites
held to maturity:
|
|||||||||||||||||||||||||
|
Fixed
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
6,078
|
3,542
|
1,004
|
1,140
|
1,840
|
4,528
|
18,132
|
18,271
|
|||||||||||||||||
|
Average
interest rate
|
7.19
|
%
|
4.23
|
%
|
4.34
|
%
|
5.14
|
%
|
0.00
|
%
|
4.03
|
%
|
4.81
|
%
|
|||||||||||
|
Variable
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||
|
Average
interest rate
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
|||||||||||
|
Securites
available for sale:
|
|||||||||||||||||||||||||
|
Fixed
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
53,435
|
35,064
|
30,927
|
27,178
|
15,756
|
6,327
|
168,687
|
168,687
|
|||||||||||||||||
|
Average
interest rate
|
5.25
|
%
|
4.42
|
%
|
4.19
|
%
|
4.87
|
%
|
0.00
|
%
|
4.61
|
%
|
4.31
|
%
|
|||||||||||
|
Variable
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
14,479
|
--
|
--
|
--
|
--
|
--
|
14,479
|
14,479
|
|||||||||||||||||
|
Average
interest rate
|
6.03
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
6.03
|
%
|
|||||||||||
|
Other
investments:
|
|||||||||||||||||||||||||
|
Fixed
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
--
|
--
|
--
|
--
|
--
|
2,912
|
2,912
|
2,912
|
|||||||||||||||||
|
Average
interest rate
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
6.00
|
%
|
6.00
|
%
|
|||||||||||
|
Variable
Rate:
|
|||||||||||||||||||||||||
|
Book
Value
|
6,016
|
--
|
--
|
--
|
--
|
--
|
6,016
|
6,016
|
|||||||||||||||||
|
Average
interest rate
|
4.56
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
4.56
|
%
|
|||||||||||
|
Federal
funds sold
|
32,696
|
250
|
--
|
--
|
--
|
--
|
32,946
|
32,946
|
|||||||||||||||||
|
Average
interest rate
|
5.20
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
5.16
|
%
|
|||||||||||
|
Total
Financial Assets
|
$
|
1,082,444
|
$
|
298,949
|
$
|
231,843
|
$
|
185,190
|
$
|
136,132
|
$
|
75,997
|
$
|
2,010,555
|
$
|
1,987,798
|
|||||||||
|
Financial
Liabilities:
|
|||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
$
|
50,471
|
$
|
51,561
|
$
|
51,561
|
$
|
51,561
|
$
|
51,561
|
$
|
--
|
$
|
256,716
|
$
|
225,652
|
|||||||||
|
Average
interest rate
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
N/A
|
||||||||||||||||||
|
Interest-bearing
|
|||||||||||||||||||||||||
|
savings
and checking
|
230,972
|
222,721
|
67,710
|
67,710
|
67,034
|
--
|
656,147
|
614,431
|
|||||||||||||||||
|
Average
interest rate
|
1.76
|
%
|
2.55
|
%
|
0.89
|
%
|
0.89
|
%
|
0.00
|
%
|
0.00
|
%
|
1.67
|
%
|
|||||||||||
|
Time
deposits
|
767,243
|
20,591
|
3,480
|
483
|
1,015
|
815
|
793,627
|
793,400
|
|||||||||||||||||
|
Average
interest rate
|
4.89
|
%
|
4.00
|
%
|
3.86
|
%
|
4.05
|
%
|
0.00
|
%
|
5.21
|
%
|
4.85
|
%
|
--
|
||||||||||
|
Federal
funds purchased
|
|||||||||||||||||||||||||
|
and
securities sold under
|
|||||||||||||||||||||||||
|
agreements
to repurchase
|
203,105
|
--
|
--
|
--
|
--
|
--
|
203,105
|
203,105
|
|||||||||||||||||
|
Average
Interest Rate
|
4.69
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
4.69
|
%
|
|||||||||||
|
Notes
payable
|
13,997
|
3,211
|
13,137
|
8,392
|
29,651
|
22,112
|
90,500
|
90,928
|
|||||||||||||||||
|
Average
interest rate
|
7.06
|
%
|
5.45
|
%
|
4.65
|
%
|
6.34
|
%
|
0.00
|
%
|
5.86
|
%
|
3.98
|
%
|
--
|
||||||||||
|
Total
Financial Liabilities
|
$
|
1,265,788
|
$
|
298,084
|
$
|
135,888
|
$
|
128,146
|
$
|
149,261
|
$
|
22,927
|
$
|
2,000,095
|
$
|
1,927,516
|
|||||||||
|
Interest
rate sensitivity gap
|
($183,344
|
)
|
$
|
865
|
$
|
95,955
|
$
|
57,044
|
($13,130
|
)
|
$
|
53,070
|
$
|
18,460
|
|||||||||||
|
Cumulative
interest rate
|
($183,344
|
)
|
($182,479
|
)
|
($86,524
|
)
|
($29,480
|
)
|
($42,610
|
)
|
$
|
10,460
|
|||||||||||||
|
sensitivity
gap
|
|||||||||||||||||||||||||
|
Cumulative
interest rate
|
|||||||||||||||||||||||||
|
sensitivity
gap as percent
|
|||||||||||||||||||||||||
|
of
total financial assets
|
-9.12
|
%
|
-9.08
|
%
|
-4.30
|
%
|
-1.47
|
%
|
-2.12
|
%
|
0.52
|
%
|
29
Deposits
We
rely on
deposits by our customers as a primary source of funds for the continued growth
of our loan and investment security portfolios. Customer deposits are
categorized as either noninterest-bearing deposits or interest-bearing deposits.
Noninterest-bearing deposits (or demand deposits) are transaction accounts
that
provide SCBT with “interest-free” sources of funds. Interest-bearing deposits
include savings deposit, interest-bearing transaction accounts, certificates
of
deposits, and other time deposits. Interest-bearing transaction accounts include
NOW, HSA, IOLTA, and Market Rate checking accounts. The following table presents
total deposits for the five years at December 31, 2006:
Table
13 - Total Deposits
|
|
December
31,
|
|||||||||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|||
|
Demand
deposits
|
$
|
256,717
|
$
|
250,899
|
$
|
226,423
|
$
|
170,313
|
$
|
146,116
|
||||||
|
Savings
deposits
|
76,734
|
76,609
|
73,702
|
67,480
|
59,954
|
|||||||||||
|
Interest-bearing
deposits
|
579,398
|
545,811
|
457,801
|
339,336
|
293,161
|
|||||||||||
|
Total
savings and interest-bearing
|
656,132
|
622,420
|
531,503
|
406,816
|
353,115
|
|||||||||||
|
Certificates
of deposit
|
793,540
|
599,673
|
415,513
|
370,028
|
398,722
|
|||||||||||
|
Other
time deposits
|
326
|
297
|
270
|
242
|
223
|
|||||||||||
|
Total
time deposits
|
793,866
|
599,970
|
415,783
|
370,270
|
398,945
|
|||||||||||
|
Total
deposits
|
$
|
1,706,715
|
$
|
1,473,289
|
$
|
1,173,709
|
$
|
947,399
|
$
|
898,176
|
||||||
Growth
in
total deposits at December 31, 2006 compared to 2005 resulted largely from
an
increase in certificates of deposit balances during 2006. The following are
key
highlights regarding overall growth in total deposits:
| · |
Total
deposits increased $233.4 million, or 15.8%, for the year ended December
31, 2006, driven largely by the $193.9 million increase in certificates
of
deposit. We introduced competitive certificate of deposit products
in
certain South Carolina markets during 2006, which led to an increase
in
certificate of deposit balances. For the year ended December 31,
2005,
total deposits increased $299.6 million, or
25.5%.
|
| · |
Total
savings and interest bearing account balances increased $33.7 million
for
the year ended December 31, 2006, driven by a $45.7 million, or 17.3%,
increase in our Market Rate checking
product.
|
| · |
Noninterest-bearing
deposits or demand deposits grew by $5.8 million for the year ended
December 31, 2006.
|
| · |
Interest-bearing
deposits increased by $227.6 million, or 18.6%, for the year ended
December 31, 2006.
|
| · |
At
December 31, 2006, the ratio of savings, interest-bearing, and time
deposits to total deposits was 85.0%, up slightly from 83.0% at the
end of
2005.
|
| · |
Contributing
to these increases was a corporate-wide free checking deposit campaign
to
increase new account activity which resulted in 15,922 new personal
accounts and 3,390 new business checking accounts. This represents
a 21.2%
increase in new checking accounts from 2005.
|
| · |
Whereas
$167.9 million in new deposits were acquired in merger transactions
in the
prior year 2005, we had purely organic deposit growth for the year
ended
December 31, 2006. We expect to continue to maintain organic deposit
growth and grow deposits through future
acquisitions.
|
The
following are key highlights regarding overall growth in total average
deposits:
| · |
Total
deposits averaged $1.6 billion in 2006, an increase of 20.6% from
2005.
This increase was attributed to higher certificates of deposit balances
during 2006. Total deposits averaged $1.3 billion in 2005, an increase
of
25.1% from 2004.
|
| · |
Average
interest-bearing transaction account deposits grew by $18.6 million,
or
7.2%, in 2006 compared to 2005.
|
| · |
Average
noninterest-bearing demand deposits increased by $25.5 million, or
10.6%,
in 2006 compared to 2005.
|
| · |
In
2005, average total deposits were $1.3 billion, an increase of $266.0
million, or 25.1%, from 2004.
|
30
The
following table provides a maturity distribution of certificates of deposit
of
$100,000 or more for the next twelve months as of December 31:
Table
14 - Maturity Distribution of Certificates of Deposits of $100 Thousand or
More
|
|
December
31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
%
Change
|
|||
|
Within
three months
|
$
|
134,609
|
$
|
78,377
|
71.7
|
%
|
||||
|
After
three through six months
|
100,363
|
58,567
|
71.4
|
%
|
||||||
|
After
six through twelve months
|
126,547
|
81,533
|
55.2
|
%
|
||||||
|
After
twelve months
|
9,998
|
49,735
|
-79.9
|
%
|
||||||
|
$
|
371,517
|
$
|
268,212
|
38.5
|
%
|
|||||
Short-Term
Borrowed Funds
Our
short-term borrowed funds consist of Federal funds purchased and securities
sold
under repurchase agreements. Note 8, “Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase,” in our audited financial statements
provides a profile of these funds for the last three years at the year-end,
the
average amounts outstanding during each period, the maximum amounts outstanding
at any month-end, and the weighted average interest rates on year-end and
average balances in each category. Federal funds purchased and securities sold
under agreements to repurchase most typically have maturities within one to
three days from the transaction date. Certain of these borrowings have no
defined maturity date.
Capital
and Dividends
Traditionally,
our strong shareholders’ equity base has provided support for our banking
operations and growth opportunities, while ensuring sufficient resources to
absorb the risks inherent in our business. As of December 31, 2006, we had
$161.9 million in total shareholders’ equity, or 7.4% of total assets. This
compares to $148.4 million in total shareholders’ equity, or 7.7% of total
assets, at the end of 2005.
The
Federal Reserve Board on March 1, 2005 announced changes to its capital adequacy
rules, including the capital treatment of trust preferred securities. The
Federal Reserve’s new rules, which took effect in early April 2005, permit bank
holding companies to treat outstanding trust preferred securities as Tier 1
Capital for the first 25 years of the 30 year term of the related junior
subordinated debt securities. We issued $40,000,000 of these types of junior
non-consolidated securities during 2005, positively impacting Tier I Capital.
We
did not issue trust preferred securities for the year ended December 31, 2006.
(See Note 1 on page F-10 of the Notes to Consolidated Financial Statements
for a
more detailed explanation of our trust preferred securities.)
We
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.
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.
Table
15 - Capital Adequacy Ratios
|
|
December
31,
|
|||||||||
|
(In
percent)
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Tier
1 risk-based capital
|
10.11
|
10.25
|
9.85
|
|||||||
|
Total
risk-based capital
|
11.36
|
11.45
|
11.10
|
|||||||
|
Tier
1 leverage
|
8.11
|
8.58
|
8.05
|
|||||||
Compared
to December 31, 2005 our capital ratios have slightly declined because of the
continuing growth in assets. Our capital ratios are currently well in excess
of
the minimum standards and continue to be in the “well capitalized” regulatory
classifications.
31
We
pay
cash dividends to shareholders from funds provided mainly by dividends received
from our subsidiary banks. Dividends paid by our bank subsidiaries are subject
to certain regulatory restrictions. We must gain approval of the Office of
the
Comptroller of the Currency in order to pay dividends in excess of our 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, 2006,
approximately $37.3 million of the Banks’ retained earnings was available for
distribution to the SCBT as dividends without prior regulatory approval. The
following table provides the amount of dividends and payout ratios for the
years
ended December 31:
Table
16 - Dividends Paid to Shareholders
|
|
Years
Ended December 31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
|
|
2005
|
|
|
2004
|
|||
|
Shareholder
dividend payments
|
$
|
5,911
|
$
|
5,527
|
$
|
5,228
|
||||
|
Dividend
payout ratios
|
30.88
|
%
|
34.29
|
%
|
36.66
|
%
|
||||
We
retain
earnings to grow our loan and investment portfolios and to support certain
acquisitions or other business expansion opportunities.
Asset
Quality
Asset
quality is maintained through our management of certain concentrations of credit
risk. We review each individual earning asset including investment securities
and loans for credit risk. To facilitate this review, we have established credit
and investment policies that include credit limits, documentation, periodic
examination, and follow-up. In addition, we examine these portfolios for
exposure to concentration in any one industry, government agency, or geographic
location.
Loan
and Deposit Concentration
We
have no
material concentration of deposits from any single customer or group of
customers. We have no significant portion of our loans concentrated within
a
single industry or group of related industries. Furthermore, we attempt 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 that could
cause these aggregated loans to be similarly impacted by economic or other
conditions. At December 31, 2006 and 2005, there were no aggregated loan
concentrations of this type. We do not believe there are any material seasonal
factors that would have a material adverse effect on us. We do not have foreign
loans or deposits.
Concentration
of Credit Risk
Each
category of earning assets has a certain degree of credit risk. We use various
techniques to measure credit risk. Credit risk in the investment portfolio
can
be measured through bond ratings published by independent agencies. In the
investment securities portfolio, 99.5% 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. We maintain our loan
portfolio in accordance with credit policies that we have
established.
We
consider 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 percent of total risk-based capital.
Based on this criteria, we had six such credit concentrations at December 31,
2006, including loans to borrowers engaged in other activities related to real
estate, loans to lessors of nonresidential buildings, loans to religious
organizations, loans to borrowers constructing new single family housing, loans
to lessors of residential buildings, and loans to physicians for office
buildings.
Off-Balance
Sheet Arrangements
Through
the operations of our Banks, we have made contractual commitments to extend
credit in the ordinary course of our business activities. These commitments
are
legally binding agreements to lend money to our customers at predetermined
interest rates for a specified period of time. We evaluate each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if
deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes.
At
December 31, 2006, the Banks had issued commitments to extend credit and standby
letters of credit and financial guarantees of $393.9 million through various
types of lending arrangements, of which $336.4 million was at variable rates.
We
believe that we have adequate sources of liquidity to fund commitments that
are
drawn upon by the borrowers.
32
In
addition to commitments to extend credit, we also issue standby letters of
credit, which are assurances to third parties that they will not suffer a loss
if our customer fails to meet its contractual obligation to the third party.
Standby letters of credit totaled $10.7 million at December 31, 2006. Past
experience indicates that many of these standby letters of credit will expire
unused. However, through our various sources of liquidity, we believe that
we
will have the necessary resources to meet these obligations should the need
arise.
Except
as
disclosed in this report, we are not involved in off-balance sheet contractual
relationships, unconsolidated related entities that have off-balance sheet
arrangements or transactions that could result in liquidity needs or other
commitments that significantly impact earnings.
Effect
of Inflation and Changing Prices
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the measure of financial position and results of operations in terms
of
historical dollars, without consideration of changes in the relative purchasing
power over time due to inflation. Unlike most other industries, the majority
of
the assets and liabilities of a financial institution are monetary in nature.
As
a result, interest rates generally have a more significant effect on a financial
institution’s performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While
the
effect of inflation on banks is normally not as significant as is its influence
on those businesses which have large investments in plant and inventories, it
does have an effect. During periods of high inflation, there are normally
corresponding increases in money supply, and banks will normally experience
above average growth in assets, loans and deposits. Also, general increases
in
the prices of goods and services will result in increased operating expenses.
Inflation also affects our Banks’ customers and may result in an indirect effect
on our Banks’ business.
Contractual
Obligations
The
following table presents payment schedules for certain contractual obligations
of the Company as of December 31, 2006. Long-term debt obligations totaling
$90.4 million include advance agreements (borrowings) with the Federal Home
Loan
Bank (FHLB) of Atlanta and junior subordinated debt. These advances are
collateralized by stock in the FHLB of Atlanta and qualifying first mortgage
residential loans and commercial real estate loans under a blanket-floating
lien. Operating lease obligations of $23.0 million pertain to banking facilities
and equipment. Certain lease agreements include payment of property taxes and
insurance and contain various renewal options. Additional information regarding
leases is contained in Note 19 to the audited consolidated financial
statements.
Table
17 - Obligations
|
|
|
|
|
Less
Than
|
|
|
1
to 3
|
|
|
4
to 5
|
|
|
More
Than
|
|||
|
(Dollars
in thousands)
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|||
|
Long-term
debt obligations*
|
$
|
90,416
|
$
|
1,627
|
$
|
16,338
|
$
|
29,768
|
$
|
42,683
|
||||||
|
Operating
lease obligations
|
23,006
|
3,295
|
10,388
|
1,665
|
7,658
|
|||||||||||
|
Total
|
$
|
113,422
|
$
|
4,922
|
$
|
26,726
|
$
|
31,433
|
$
|
50,341
|
*
-
Represents principal maturities.
See
“Asset-Liability Management and Market Risk Sensitivity” on page 28 in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations for quantitative and qualitative disclosures about market
risk.
See
Table
1 on page 17 for our unaudited quarterly results of operations and the pages
beginning with F-1 for the Company’s audited consolidated financial statements.
Not
applicable.
33
Evaluation
of Disclosure Controls and Procedures
As
of
December 31, 2006 (the "Evaluation Date"), we carried out an evaluation, under
the supervision and with the participation of management, including our
President and Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of SCBT’s disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. We applied our judgment in
the
process of reviewing these controls and procedures, which, by their nature,
can
provide only reasonable assurance regarding our control objectives. Based upon
this evaluation, our President and Chief Executive Officer and our Chief
Financial Officer concluded that SCBT's disclosure controls and procedures
as of
the Evaluation Date were effective to provide reasonable assurance regarding
our
control objectives.
Changes
in Internal Controls
There
were
no changes in our internal controls over financial reporting that occurred
during our most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Management’s
Report on Internal Controls Over Financial Reporting
We
are
responsible for establishing and maintaining adequate internal control over
financial reporting. Management’s assessment of the effectiveness of SCBT’s
internal control over financial reporting as of December 31, 2006 is included
in
Item 8 of this Report under the heading “Management’s Report on Internal
Controls Over Financial Reporting.”
Our
independent auditors have issued an audit report on management’s assessment of
internal controls over financial reporting. This report titled “Report of
Independent Registered Public Accounting Firm” appears in Item 8.
Not
applicable.
The
information required by this item is incorporated herein by reference to the
information in SCBT’s definitive proxy statement to be filed in connection with
the our 2007 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 subsection titled “Governance
Committee” under the caption “The Board of Directors and Committees,” and under
the caption “Section 16(a) Beneficial Ownership Reporting
Compliance.”
The
information required by this item is incorporated herein by reference to the
information in SCBT’s definitive proxy statement to be filed in connection with
the our 2007 Annual Meeting of Shareholders under the caption “Executive
Compensation,” including the sections titled “Compensation Discussion and
Analysis,” “Summary Compensation Table,” “Grants of Plan Based Awards,”
“Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock
Vested,” “Pension Benefits,” “Deferred Compensation Plan,” “Compensation
Committee Report,” “Potential Payments Upon Termination or Change of Control,”
“Director Compensation,” and “Compensation Committee Interlocks and Insider
Participation.”
34
The
following table contains certain information as of December 31, 2006, relating
to securities authorized for issuance under our equity compensation
plans:
|
|
A
|
|
|
B
|
|
|
C
|
|||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants,
and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
"A")
|
|
||
|
Equity
compensation plans approved by security holders
|
293,684
|
$
|
25.47
|
802,939
|
||||||
|
Equity
compensation plans not approved by security holders
|
None
|
n/a
|
n/a
|
Included
within the 802,939 number of securities available for future issuance in the
table above are a total of 261,271 shares remaining from the authorized total
of
315,000 under SCBT’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 captions "Beneficial Ownership of Certain Parties" and
"Beneficial Ownership of Directors and Executive Officers" in the definitive
proxy statement of SCBT to be filed in connection with our 2007 Annual Meeting
of Shareholders.
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 SCBT to be filed in connection with our
2007 Annual Meeting of Shareholders.
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 SCBT to be filed in connection with our 2007 Annual Meeting of
Shareholders.
35
(a) 1.
The
financial statements and independent auditors’ report referenced in “Item 8 -
Financial Statements and Supplementary Data” are listed below:
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
SCBT’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 (001-12669).
|
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)
|
|
4.1
|
Specimen
SCBT Common Stock Certificate
|
|
4.2
|
Articles
of Incorporation (included as Exhibit 3.1)
|
|
4.3
|
Bylaws
(included as Exhibit 3.2)
|
|
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*
|
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. 333-90014)
|
|
10.5*
|
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)
|
|
10.6*
|
Executive
Incentive Plan (incorporated by reference to Exhibit 10.28 to the
Registrant’s Current Report on Form 10-K filed on March 15,
2005)
|
|
|
|
|
10.7*
|
Compensation
of Directors (incorporated by reference to Exhibit 10.30 to the
Registrant’s Current Report on Form 10-K filed on March 15, 2005)
|
|
10.8
|
Guarantee
Agreement between SCBT Financial Corporation and Wilmington Trust
Company,
which is incorporated by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form 8-K filed on April 13,
2005
|
36
|
10.9
|
Amended
and Restated Declaration of Trust among SCBT Financial Corporation,
as
Sponsor, Wilmington Trust Company, as Institutional Trustee, Wilmington
Trust Company, as Delaware Trustee, and the Administrators Named
therein,
including exhibits containing the related forms of the SCBT Capital
Trust
I Common Securities Certificate and the Preferred Securities Certificate,
which is incorporated by reference to Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on April 13, 2005
|
|
|
|
|
10.10
|
Guarantee
Agreement between SCBT Financial Corporation and Wilmington Trust
Company,
which is incorporated by reference to Exhibit 10.5 to the Registrant’s
Current Report on Form 8-K filed on April 13, 2005
|
|
10.11
|
Amended
and Restated Declaration of Trust among SCBT Financial Corporation,
as
Sponsor, Wilmington Trust Company, as Institutional Trustee, Wilmington
Trust Company, as Delaware Trustee, and the Administrators Named
therein,
including exhibits containing the related forms of the SCBT Capital
Trust
II Common Securities Certificate and the Preferred Securities Certificate,
which is incorporated by reference to Exhibit 10.6 to the Registrant’s
Current Report on Form 8-K filed on April 13, 2005.
|
|
10.12
|
Employment
Agreement between SCBT Financial Corporation and Thomas Bouchette,
which
is incorporated by reference to Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on July 22, 2005.
|
|
10.13
|
Noncompete
Agreement between SCBT Financial Corporation and Thomas Bouchette,
which
is incorporated by reference to Exhibit 10.2 to the Registrant’s Current
Report on Form 8-K filed on July 22, 2005.
|
|
10.14
|
Guarantee
Agreement between SCBT Financial Corporation and JPMorgan Chase
Bank,
National Association, which is incorporated by reference to Exhibit
10.2
to the Registrant’s Current Report on Form 8-K filed on July 22,
2005.
|
|
10.15
|
Amended
and Restated Declaration of Trust among SCBT Financial Corporation,
as
Sponsor, JPMorgan Chase Bank, National Association, as Institutional
Trustee, Chase Bank USA, National Association, as Delaware Trustee,
and
the Administrators Named therein, including exhibits containing
the
related forms of the SCBT Capital Trust III Capital Securities
Certificate
and the Common Securities Certificate, which is incorporated by
reference
to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on
July 22, 2005.
|
|
10.16
|
Form
of SCBT Financial Corporation Restricted Stock Agreement for Restricted
Stock Awarded to Directors Under the SCBT Financial Corporation
Stock
Incentive Plan, effective as of May 27, 2004.
|
|
10.17
|
Form
of SCBT Financial Corporation Restricted Stock Agreement for Restricted
Stock Awarded to Employees Under the SCBT Financial Corporation
Stock
Incentive Plan, effective as of May 27, 2004.
|
|
10.18
|
Form
of SCBT Financial Corporation Stock Option Agreement for Options
Granted
to Directors Under the SCBT Financial Corporation Stock Incentive
Plan,
effective as of May 27, 2004.
|
|
10.19
|
Form
of SCBT Financial Corporation Stock Option Agreement for Options
Granted
to Affiliates Under the SCBT Financial Corporation Stock Incentive
Plan,
effective as of May 27, 2004.
|
|
10.20*
|
Amended
and Restated Employment Agreement between the Registrant and Robert
R.
Hill, Jr., effective as of May 1, 2006 (incorporated by reference
to
Exhibit 10.1 to the Registrant’s Form 8-K filed on November 7,
2006)
|
|
10.21*
|
Amended
and Restated Employment Agreement between the Registrant and Thomas
S.
Camp, effective as of September 1, 2006 (incorporated by reference
to
Exhibit 10.4 to the Registrant’s Form 8-K filed on November 7,
2006)
|
|
10.22*
|
Amended
and Restated Employment Agreement between the Registrant and John
C.
Pollok, effective as of September 1, 2006 (incorporated by reference
to
Exhibit 10.2 to the Registrant’s Form 8-K filed on November 7,
2006)
|
|
10.23*
|
Amended
and Restated Employment Agreement between the Registrant and Richard
C.
Mathis, effective as of September 1, 2006 (incorporated by reference
to
Exhibit 10.3 to the Registrant’s Form 8-K filed on November 7,
2006)
|
|
10.24*
|
Amended
and Restated Employment Agreement between the Registrant and Joe
E. Burns,
effective as of September 1, 2006 (incorporated by reference to
Exhibit
10.5 to the Registrant’s Form 8-K filed on November 7, 2006)
|
37
|
10.25*
|
Employment
Agreement between the Registrant and John F. Windley, effective
as of
September 1, 2006 (incorporated by reference to Exhibit 10.6 to
the
Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.26*
|
Employment
Agreement between the Registrant and Dane H. Murray, effective
as of
September 1, 2006 (incorporated by reference to Exhibit 10.7 to
the
Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.27*
|
Amended
and Restated Supplemental Executive Retirement Agreement between
South
Carolina Bank and Trust, National Association and Robert R. Hill,
Jr.,
effective as of July 1, 2006 (incorporated by reference to Exhibit
10.8 to
the Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.28*
|
Amended
and Restated Supplemental Executive Retirement Agreement between
South
Carolina Bank and Trust, National Association and Thomas S. Camp,
effective as of July 1, 2006 (incorporated by reference to Exhibit
10.11
to the Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.29*
|
Amended
and Restated Supplemental Executive Retirement Agreement between
South
Carolina Bank and Trust, National Association and John C. Pollok,
effective as of July 1, 2006 (incorporated by reference to Exhibit
10.9 to
the Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.30*
|
Amended
and Restated Supplemental Executive Retirement Agreement between
South
Carolina Bank and Trust, National Association and Richard C. Mathis,
effective as of July 1, 2006 (incorporated by reference to Exhibit
10.10
to the Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.31*
|
Amended
and Restated Supplemental Executive Retirement Agreement between
South
Carolina Bank and Trust, National Association and Joseph E. Burns,
effective as of July 1, 2006 (incorporated by reference to Exhibit
10.12
to the Registrant’s Form 8-K filed on November 7, 2006)
|
|
10.32*
|
Supplemental
Executive Retirement Agreement between South Carolina Bank and
Trust,
National Association and John F. Windley, effective as of July
1, 2006
(incorporated by reference to Exhibit 10.13 to the Registrant’s Form 8-K
filed on November 7, 2006)
|
|
10.33*
|
Supplemental
Executive Retirement Agreement between South Carolina Bank and
Trust,
National Association and Dane H. Murray, effective as of July 1,
2006
(incorporated by reference to Exhibit 10.14 to the Registrant’s Form 8-K
filed on November 7, 2006)
|
|
10.34*
|
2006
Long-Term Retention and Incentive Plan (incorporated by reference
to
Exhibit 10.15 to the Registrant’s Form 8-K filed on November 7,
2006)
|
|
10.35*
|
Amended
and Restated South Carolina Bank and Trust Deferred Income Plan
executed
on November 16, 2006 to be effective January 1, 2005 (incorporated
by
reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on November
22, 2006)
|
|
10.36
|
Amended
and Restated South Carolina Bank and Trust Non-Employee Directors
Deferred
Income Plan executed on November 16, 2006 to be effective January
1, 2005
(incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K
filed on November 22, 2006)
|
|
10.37
|
Form
of Agreement for Restricted Stock Issued Pursuant to the Long-Term
Retention and Incentive Plan
|
|
14
|
SCBT
Code of Ethics, which is incorporated by reference to Exhibit 14
to the
Registrant’s Current Report on Form 10-K filed on March 12,
2004.
|
|
21
|
Subsidiaries
of the Registrant
|
|
23
|
Consent
of J. W. Hunt and Company, LLP
|
|
24
|
Power
of Attorney (filed with the signature page hereof)
|
|
31.1
|
Rule
13a-14(a) Certification of the Principal Executive
Officer
|
|
31.2
|
Rule
13a-14(a) Certification of the Principal Financial
Officer
|
|
32
|
Section
1350 Certifications
|
38
|
99.1
|
Supplemental
Materials Distributed to
Shareholders
|
___________________________________________________________________________________
*
Denotes
a management compensatory plan or arrangement.
(b)
See
Exhibit Index following the Annual Report on Form 10-K for a listing of exhibits
filed herewith.
(c)
Not
Applicable.
39
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 15th day of March, 2007.
SCBT
FINANCIAL CORPORATION
(Registrant)
By:
/s/
Robert R. Hill, Jr.
President
and Chief Executive Officer
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Robert R. Hill, Jr., his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the
Securities and Exchange Commission, granting unto attorney-in-fact and agent
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
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.
|
Signature
|
Title
|
Date
|
|
/s/
Robert R. Hill, Jr.
|
President
and Chief Executive Officer
|
March
15, 2007
|
|
Robert
R. Hill, Jr.
|
||
|
/s/
John C. Pollok
|
Senior
Executive Vice President,
|
March
15, 2007
|
|
John
C. Pollok
|
Chief
Operating Officer and Chief Financial Officer
|
|
|
/s/
Richard C. Mathis
|
Executive
Vice President and Chief Risk Officer
|
March
15, 2007
|
|
Richard
C. Mathis
|
||
|
/s/
Karen L. Dey
|
Senior
Vice President and Controller
|
March
15, 2007
|
|
Karen
L. Dey
|
||
|
/s/
Robert R. Horger
|
Chairman
of the Board of Directors
|
March
15, 2007
|
|
Robert
R. Horger
|
||
|
/s/
Jimmy E. Addison
|
Director
|
March
15, 2007
|
|
Jimmy
E. Addison
|
||
|
/s/
Colden R. Battey, Jr.
|
Director
|
March
15, 2007
|
|
Colden
R. Battey, Jr.
|
||
|
/s/
Luther J. Battiste, III
|
Director
|
March
15, 2007
|
|
Luther
J. Battiste, III
|
||
|
/s/
M. Oswald Fogle
|
Director
|
March
15, 2007
|
|
M.
Oswald Fogle
|
40
SIGNATURES
(CONT.)
|
Signature
|
Title
|
Date
|
|
/s/
Dalton
B. Floyd, Jr.
|
Director
|
March
15, 2007
|
|
Dalton
B. Floyd, Jr.
|
||
|
/s/
Dwight
W. Frierson
|
Director
|
March
15, 2007
|
|
Dwight
W. Frierson
|
||
|
|
||
|
/s/
R.
Caine Halter
|
Director
|
March
15, 2007
|
|
R.
Caine Halter
|
||
|
/s/
Harry
M. Mims, Jr.
|
Director
|
March
15, 2007
|
|
Harry
M. Mims, Jr.
|
||
|
/s/
Ralph
W. Norman
|
Director
|
March
15, 2007
|
|
Ralph
W. Norman
|
||
|
/s/
James
W. Roquemore
|
Director
|
March
15, 2007
|
|
James
W. Roquemore
|
||
|
/s/
Thomas
E. Suggs
|
Director
|
March
15, 2007
|
|
Thomas
E. Suggs
|
||
|
/s/
Susie
H. VanHuss
|
Director
|
March
15, 2007
|
|
Susie
H. VanHuss
|
||
|
/s/
A.
Dewall Waters
|
Director
|
March
15, 2007
|
|
A.
Dewall Waters
|
||
|
/s/John
W. Williamson, III
|
Director
|
March
15, 2007
|
|
John
W. Williamson, III
|
||
|
/s/
Cathy
Cox Yeadon
|
Director
|
March
15, 2007
|
|
Cathy
Cox Yeadon
|
41
|
Exhibit
No.
|
Description
of Exhibit
|
|
4.1
|
SCBT
Financial Corporation Stock Certificate Specimen
|
|
10.37
|
Form
of Agreement for Restricted Stock Issued Pursuant to the Long-Term
Retention and Incentive Plan
|
|
21
|
Subsidiaries
of the Registrant
|
|
23
|
Consent
of J.W. Hunt and Company, LLP
|
|
31.1
|
Rule
13a-14(a) Certification of the Principal Executive
Officer
|
|
31.2
|
Rule
13a-14(a) Certification of the Principal Financial
Officer
|
|
32
|
Section
1350 Certifications
|
|
99.1
|
Supplemental
Materials Distributed to
Shareholders
|
42
MANAGEMENT’S
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management
of SCBT Financial Corporation (the “Company”) is responsible for establishing
and maintaining adequate internal control over financial reporting. Management
has assessed the effectiveness of internal control over financial reporting
using the criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors
of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisitions, use, or disposition of the Company’s
assets that could have a material effect on the financial statements.
Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation
of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Based
on
the testing performed using the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO), management of the Company believes that
the
company’s internal control over financial reporting was effective as of December
31, 2006.
The
Company’s external auditor, J.W. Hunt and Company, LLP, has issued an
attestation report on management’s assessment and the effectiveness of the
Company’s internal control over financial reporting.
SCBT
Financial Corporation
Columbia,
South Carolina
March
15,
2007
www.SCBTonline.com
(803)
771-2265 | P.O. Box 1030 | Columbia, South Carolina | 29202-1030
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and
Shareholders
of SCBT Financial Corporation
We
have
audited the accompanying consolidated balance sheets of SCBT Financial
Corporation and subsidiaries as of December 31, 2006 and 2005, 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, 2006.
We
also have audited management’s assessment, included in the accompanying
Management Report on Internal Control over Financial Reporting, that SCBT
Financial Corporation maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control - Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
SCBT Financial Corporation’s management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these financial
statements, an opinion on management’s assessment, and an opinion on the
effectiveness of the company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a
test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining
an
understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as
we
considered necessary in the circumstances. We believe that our audits provide
a
reasonable basis for our opinions.
F-2
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or
timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
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, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, management’s
assessment that SCBT Financial Corporation maintained effective internal
control
over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal
Control - Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Furthermore, in our opinion, SCBT Financial Corporation maintained, in all
material respects, effective internal control over financial reporting as
of
December 31, 2006, based on criteria established in Internal
Control - Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Columbia,
South Carolina
March
15,
2007
F-3
SCBT
Financial Corporation and Subsidiaries
Consolidated
Balance Sheets
(Dollars
in thousands, except par value)
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|||||||
|
Cash
and cash equivalents:
|
|||||||
|
Cash
and due from banks
|
$
|
45,460
|
$
|
58,554
|
|||
|
Interest-bearing
deposits with banks
|
2,946
|
3,140
|
|||||
|
Federal
funds sold and securities purchased under agreements to
resell
|
30,000
|
41,440
|
|||||
|
Total
cash and cash equivalents
|
78,406
|
103,134
|
|||||
|
Investment
securities:
|
|||||||
|
Securities
held to maturity (fair value of $18,271 in 2006 and $18,453 in
2005)
|
18,112
|
18,194
|
|||||
|
Securities
available for sale, at fair value
|
182,113
|
153,628
|
|||||
|
Other
investments
|
10,166
|
10,922
|
|||||
|
Total
investment securities
|
210,391
|
182,744
|
|||||
|
Loans
held for sale
|
23,236
|
12,961
|
|||||
|
Loans:
|
1,760,860
|
1,536,000
|
|||||
|
Less
unearned income
|
(30
|
)
|
(99
|
)
|
|||
|
Less
allowance for loan losses
|
(22,668
|
)
|
(20,025
|
)
|
|||
|
Loans,
net
|
1,738,162
|
1,515,876
|
|||||
|
Premises
and equipment, net
|
48,904
|
43,664
|
|||||
|
Goodwill
|
32,313
|
32,220
|
|||||
|
Other
assets
|
47,001
|
35,257
|
|||||
|
Total
assets
|
$
|
2,178,413
|
$
|
1,925,856
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Deposits:
|
|||||||
|
Noninterest-bearing
|
$
|
256,717
|
$
|
250,899
|
|||
|
Interest-bearing
|
1,449,998
|
1,222,390
|
|||||
|
Total
deposits
|
1,706,715
|
1,473,289
|
|||||
|
Federal
funds purchased and securities sold under agreements to
repurchase
|
203,105
|
150,163
|
|||||
|
Other
borrowings
|
90,416
|
144,257
|
|||||
|
Other
liabilities
|
16,289
|
9,744
|
|||||
|
Total
liabilities
|
2,016,525
|
1,777,453
|
|||||
|
Commitments
and contingencies (Notes 20, 21 and 23)
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Common
stock - $2.50 par value; authorized 40,000,000 shares
|
|||||||
|
8,719,146
and 8,644,883 shares issued and outstanding
|
21,798
|
21,612
|
|||||
|
Surplus
|
92,099
|
90,481
|
|||||
|
Retained
earnings
|
51,508
|
37,614
|
|||||
|
Accumulated
other comprehensive loss
|
(3,517
|
)
|
(1,304
|
)
|
|||
|
Total
shareholders' equity
|
161,888
|
148,403
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
2,178,413
|
$
|
1,925,856
|
|||
The
Accompanying Notes are an Integral Part of the Financial
Statements.
F-4
SCBT
Financial Corporation and Subsidiaries
Consolidated
Statements of Income
(Dollars
in thousands, except per share data)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Interest
income:
|
||||||||||
|
Loans,
including fees
|
$ | 120,670 | $ | 85,590 | $ | 61,267 | ||||
|
Investment
securities:
|
||||||||||
|
Taxable
|
8,551
|
6,162
|
4,861
|
|||||||
|
Tax-exempt
|
1,165
|
1,217
|
1,461
|
|||||||
|
Federal
funds sold and securities
|
||||||||||
|
purchased
under agreements to resell
|
1,058
|
949
|
138
|
|||||||
|
Money
market funds
|
--
|
1
|
11
|
|||||||
|
Deposits
with banks
|
203
|
374
|
175
|
|||||||
|
Total
interest income
|
131,647
|
94,293
|
67,913
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
40,830
|
21,146
|
11,243
|
|||||||
|
Federal
funds purchased and securities
|
||||||||||
|
sold
under agreements to repurchase
|
6,076
|
3,031
|
687
|
|||||||
|
Other
borrowings
|
7,375
|
4,533
|
2,713
|
|||||||
|
Total
interest expense
|
54,281
|
28,710
|
14,643
|
|||||||
|
Net
interest income:
|
||||||||||
|
Net
interest income
|
77,366
|
65,583
|
53,270
|
|||||||
|
Provision
for loan losses
|
5,268
|
4,907
|
4,332
|
|||||||
|
Net
interest income after provision for loan losses
|
72,098
|
60,676
|
48,938
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Service
charges on deposit accounts
|
13,377
|
12,473
|
11,854
|
|||||||
|
Other
service charges and fees
|
13,332
|
11,375
|
9,030
|
|||||||
|
Gain
on sale of assets
|
--
|
7
|
1,766
|
|||||||
|
Total
noninterest income
|
26,709
|
23,855
|
22,650
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
40,394
|
34,074
|
27,762
|
|||||||
|
Net
occupancy expense
|
4,227
|
3,493
|
3,309
|
|||||||
|
Furniture
and equipment expense
|
4,690
|
4,340
|
4,447
|
|||||||
|
Realized
losses on securities available for sale
|
330
|
202
|
4
|
|||||||
|
Other
expense
|
19,077
|
17,944
|
15,613
|
|||||||
|
Total
noninterest expense
|
68,718
|
60,053
|
51,135
|
|||||||
|
Earnings:
|
||||||||||
|
Income
before provision for income taxes
|
30,089
|
24,478
|
20,453
|
|||||||
|
Provision
for income taxes
|
10,284
|
7,823
|
6,437
|
|||||||
|
Net
income
|
$
|
19,805
|
$
|
16,655
|
$
|
14,016
|
||||
|
Earnings
per share:
|
||||||||||
|
Basic
|
$
|
2.17
|
$
|
1.95
|
$
|
1.66
|
||||
|
Diluted
|
$
|
2.15
|
$
|
1.93
|
$
|
1.64
|
||||
The Accompanying Notes are an Integral Part of the Financial Statements.
F-5
SCBT
Financial Corporation and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Equity
(Dollars
in thousands, except per share data)
|
Accumulated
|
||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||
|
|
|
Common Stock
|
|
Stock
Dividend
|
|
|
|
Retained
|
|
Comprehensive
|
|
|
|
|||||||||
|
|
|
Shares
|
|
Amount
|
Distributable
|
Surplus
|
Earnings
|
Income
(Loss)
|
|
Total
|
|
|||||||||||
|
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 reclassification adjustment and 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
|
|||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
16,655
|
--
|
16,655
|
|||||||||||||||
|
Change
in net unrealized loss on securities available for sale,
|
||||||||||||||||||||||
|
net
of reclassification adjustment and tax effects
|
--
|
--
|
--
|
--
|
--
|
(1,439
|
)
|
(1,439
|
)
|
|||||||||||||
|
Total
comprehensive income
|
15,216
|
|||||||||||||||||||||
|
Cash
dividends declared at $.68 per share
|
--
|
--
|
--
|
--
|
(5,527
|
)
|
--
|
(5,527
|
)
|
|||||||||||||
|
Stock
options exercised
|
21,191
|
53
|
--
|
342
|
--
|
--
|
395
|
|||||||||||||||
|
Employee
stock purchases
|
12,166
|
30
|
--
|
287
|
--
|
--
|
317
|
|||||||||||||||
|
Restricted
stock awards
|
17,067
|
43
|
--
|
516
|
--
|
--
|
559
|
|||||||||||||||
|
Common
stock repurchased
|
(8,342
|
)
|
(21
|
)
|
--
|
(231
|
)
|
--
|
--
|
(252
|
)
|
|||||||||||
|
Common
stock issued
|
564,379
|
1,411
|
--
|
17,486
|
--
|
--
|
18,897
|
|||||||||||||||
|
Common
stock dividend issued
|
381,328
|
953
|
(955
|
)
|
2
|
--
|
--
|
-- | ||||||||||||||
|
Balance,
December 31, 2005
|
8,644,883
|
$
|
21,612
|
$
|
--
|
$
|
90,481
|
$
|
37,614
|
$
|
(1,304
|
)
|
148,403
|
|||||||||
F-6
SCBT
Financial Corporation and Subsidiaries
Consolidated
Statements of Changes in Shareholders’ Equity (continued)
(Dollars
in thousands, except per share data)
|
Accumulated
|
||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||
|
|
Common
Stock
|
Stock
Dividend
|
Retained
|
Comprehensive
|
||||||||||||||||||
|
|
|
Shares
|
Amount
|
Distributable
|
Surplus
|
Earnings
|
Income
(Loss)
|
|
Total
|
|||||||||||||
|
Balance,
December 31, 2005
|
8,644,883
|
$
|
21,612
|
$
|
--
|
$
|
90,481
|
$
|
37,614
|
$
|
(1,304
|
)
|
$
|
148,403
|
||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||
|
Net
income
|
--
|
--
|
--
|
--
|
19,805
|
--
|
19,805
|
|||||||||||||||
|
Change
in net unrealized loss on securities available for sale,
|
||||||||||||||||||||||
|
net
of reclassification adjustment and tax effects
|
--
|
--
|
--
|
--
|
--
|
402
|
402
|
|||||||||||||||
|
Total
comprehensive income
|
20,207
|
|||||||||||||||||||||
|
Cash
dividends declared at $.68 per share
|
--
|
--
|
--
|
--
|
(5,911
|
)
|
--
|
(5,911
|
)
|
|||||||||||||
|
Stock
options exercised
|
45,523
|
114
|
--
|
727
|
--
|
--
|
841
|
|||||||||||||||
|
Employee
stock purchases
|
14,054
|
35
|
--
|
388
|
--
|
--
|
423
|
|||||||||||||||
|
Restricted
stock awards
|
26,441
|
66
|
--
|
(66
|
)
|
--
|
--
|
--
|
||||||||||||||
|
Common
stock repurchased
|
(11,755
|
)
|
(29
|
)
|
--
|
(414
|
)
|
--
|
--
|
(443
|
)
|
|||||||||||
|
Share-based
compensation expense
|
--
|
--
|
--
|
983
|
--
|
--
|
983
|
|||||||||||||||
|
Adjustment
to initially apply FASB Statement No. 158, net of tax
|
--
|
--
|
--
|
--
|
--
|
(2,615
|
)
|
(2,615
|
)
|
|||||||||||||
|
Balance,
December 31, 2006
|
8,719,146
|
$
|
21,798
|
$
|
--
|
$
|
92,099
|
$
|
51,508
|
$
|
(3,517
|
)
|
$
|
161,888
|
||||||||
The
Accompanying Notes are an Integral Part of the Financial
Statements.
F-7
SCBT
Financial Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(Dollars
in thousands)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
19,805
|
$
|
16,655
|
$
|
14,016
|
||||
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
3,267
|
3,057
|
2,698
|
|||||||
|
Provision
for loan losses
|
5,268
|
4,907
|
4,332
|
|||||||
|
Deferred
income taxes
|
(714
|
)
|
(1,591
|
)
|
(651
|
)
|
||||
|
Loss
on sale of securities available for sale
|
330
|
202
|
4
|
|||||||
|
Share-based
compensation expense
|
983
|
--
|
--
|
|||||||
|
Gain
on sale of assets
|
--
|
(7
|
)
|
(1,766
|
)
|
|||||
|
Net
amortization (accretion) of investment securities
|
(96
|
)
|
309
|
526
|
||||||
|
Net
change in:
|
||||||||||
|
Loans
held for sale
|
(10,275
|
)
|
876
|
(1,491
|
)
|
|||||
|
Accrued
interest receivable
|
(2,648
|
)
|
(2,317
|
)
|
(1,120
|
)
|
||||
|
Prepaid
assets
|
244
|
(614
|
)
|
256
|
||||||
|
Cash
surrender value of life insurance
|
(10,000
|
)
|
--
|
--
|
||||||
|
Miscellaneous
other assets
|
(87
|
)
|
1,620
|
(2,856
|
)
|
|||||
|
Accrued
interest payable
|
4,674
|
1,622
|
429
|
|||||||
|
Accrued
income taxes
|
4
|
517
|
36
|
|||||||
|
Miscellaneous
other liabilities
|
120
|
445
|
356
|
|||||||
|
Net
cash provided by operating activities
|
10,875
|
25,681
|
14,769
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Proceeds
from sales of investment securities available for sale
|
10,371
|
6,998
|
1,996
|
|||||||
|
Proceeds
from maturities and calls of
|
||||||||||
|
investment
securities held to maturity
|
6,437
|
6,367
|
2,595
|
|||||||
|
Proceeds
from maturities of investment securities available for
sale
|
23,935
|
25,262
|
56,594
|
|||||||
|
Proceeds
from sales of other investment securities
|
4,639
|
788
|
832
|
|||||||
|
Purchases
of investment securities available for sale
|
(62,264
|
)
|
(34,698
|
)
|
(75,415
|
)
|
||||
|
Purchases
of investment securities held to maturity
|
(6,384
|
)
|
--
|
--
|
||||||
|
Purchases
of other investment securities
|
(3,884
|
)
|
(4,991
|
)
|
(1,341
|
)
|
||||
|
Net
increase in customer loans
|
(228,368
|
)
|
(229,171
|
)
|
(225,341
|
)
|
||||
|
Recoveries
of loans previously charged off
|
813
|
383
|
446
|
|||||||
|
Acquisition,
net of cash acquired
|
--
|
(20,650
|
)
|
--
|
||||||
|
Purchase
of trust preferred securities
|
--
|
(840
|
)
|
--
|
||||||
|
Purchases
of premises and equipment
|
(8,700
|
)
|
(5,300
|
)
|
(3,337
|
)
|
||||
|
Proceeds
from sale of premises and equipment
|
399
|
141
|
277
|
|||||||
|
Proceeds
from sale of credit card portfolio
|
--
|
--
|
9,814
|
|||||||
|
Net
cash used in investing activities
|
(263,006
|
)
|
(255,711
|
)
|
(232,880
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
increase in deposits
|
233,426
|
133,975
|
236,753
|
|||||||
|
Net
increase in federal funds purchased and securities sold
|
||||||||||
|
under
agreements to repurchase
|
52,942
|
60,956
|
8,240
|
|||||||
|
Proceeds
from issuance of debt
|
41,500
|
103,329
|
96,000
|
|||||||
|
Repayment
of debt
|
(95,375
|
)
|
(17,602
|
)
|
(96,122
|
)
|
||||
|
Payment
in connection with sale of branch
|
--
|
--
|
(12,214
|
)
|
||||||
|
Common
stock issuance
|
423
|
876
|
427
|
|||||||
|
Common
stock repurchased
|
(443
|
)
|
(252
|
)
|
(3,590
|
)
|
||||
|
Dividends
paid
|
(5,911
|
)
|
(5,527
|
)
|
(5,228
|
)
|
||||
|
Stock
options exercised
|
841
|
395
|
1,304
|
|||||||
|
Payments
on noncompete agreements
|
--
|
(123
|
)
|
--
|
||||||
|
Net
cash provided by financing activities
|
227,403
|
276,027
|
225,570
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(24,728
|
)
|
45,997
|
7,459
|
||||||
|
Cash
and cash equivalents at beginning of period
|
103,134
|
57,137
|
49,678
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
78,406
|
$
|
103,134
|
$
|
57,137
|
||||
F-8
SCBT
Financial Corporation and Subsidiaries
Consolidated
Statements of Cash Flows (continued)
(Dollars
in thousands)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Supplemental
Disclosures:
|
||||||||||
|
Cash
Flow Information:
|
||||||||||
|
Cash
paid for:
|
||||||||||
|
Interest
|
$
|
49,607
|
$
|
26,351
|
$
|
14,231
|
||||
|
Income
taxes
|
$
|
11,141
|
$
|
8,887
|
$
|
7,110
|
||||
|
Schedule
of Noncash Investing Transactions:
|
||||||||||
|
Acquisition
of SunBank, N.A.:
|
||||||||||
|
Fair
value of tangible assets acquired
|
$
|
--
|
$
|
97,497
|
$
|
--
|
||||
|
Goodwill
and other intangible assets acquired
|
--
|
17,424
|
--
|
|||||||
|
Liabilities
assumed
|
--
|
(88,346
|
)
|
--
|
||||||
|
Common
stock issued
|
--
|
(18,897
|
)
|
--
|
||||||
|
Real
estate acquired in full or in partial settlement of loans
|
703
|
1,073
|
1,911
|
|||||||
|
$
|
703
|
$
|
8,751
|
$
|
1,911
|
|||||
The
Accompanying Notes are an Integral Part of the Financial
Statements.
F-9
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 provide general banking services within the State of South
Carolina. The Mortgage Banc, Inc. (“TMB”), a wholly-owned subsidiary of South
Carolina Bank and Trust, N.A., provides mortgage products and services to
other
financial institutions and mortgage companies in South Carolina and some
out-of-state markets. TMB’s offices and personnel are located in the Company’s
headquarters facility in Columbia, South Carolina. The accounting and reporting
policies of the Company and its subsidiaries conform with accounting principles
generally accepted in the United States of America. SCBT Capital Trust I
and
SCBT Capital Trust II are unconsolidated subsidiaries of the Company established
for the purpose of issuing an aggregate of $20,000,000 of trust preferred
securities. SCBT Capital Trust III is an unconsolidated subsidiary of the
Company established for the purpose of issuing an aggregate of $20,000,000
of
trust preferred securities.
In
March
2006, the Company merged SunBank, N.A. into its lead bank subsidiary, South
Carolina Bank and Trust, N.A.
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and
other
entities in which it has a controlling financial interest. All significant
intercompany balances and transactions have been eliminated in consolidation.
Assets held by the Company in trust are not assets of the Company and are
not
included in the accompanying consolidated financial statements.
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
$47,755,000 at December 31, 2006. Based on this criteria, the Company had
six
such credit concentrations at the end of 2006, including $122,941,000 of
loans
to borrowers engaged in other activities related to real estate, $87,430,000
of
loans to lessors of nonresidential buildings, $66,761,000 of loans to religious
organizations, $61,087,000 of loans to borrowers constructing new single
family
housing, $60,406,000 of loans to lessors of residential buildings, and
$44,879,000 loans to physicians for office buildings.
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, purchases of
securities under agreements to resell, 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.
F-10
The
Company enters into purchases of securities under agreements to resell
substantially identical securities for the purpose of collateralizing certain
customer deposit relationships. Securities purchased under agreements to
resell
at December 31, 2006 and 2005 consisted of U.S. Government agency and
mortgage-backed securities. It is the Company’s policy to take possession of
securities purchased under agreements to resell. The securities are delivered
by
appropriate entry into the Company’s account maintained by a third-party
custodian designated by the Company under a written custodial agreement that
explicitly recognizes the Company’s interest in the securities. At December 31,
2006, these agreements were considered to be short-term investments with
maturities of three months or less.
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 and trust preferred
securities. Stock acquired for regulatory purposes includes Federal Home
Loan
Bank of Atlanta (“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. Trust preferred
securities represent a minority investment in SCBT Capital Trust I, SCBT
Capital
Trust II, and SCBT Capital Trust III. These investments are recorded at cost
and
the Company receives quarterly dividend payments on these
investments.
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.
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 income and the allowance for loan losses. Unearned
income on installment loans are recognized as income over the terms of the
loans
by methods that 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 placed on nonaccrual status depending
upon the type of loan, the past due status, and the collection activities
in
progress. Well-secured loans, in the process of collection, are allowed to
remain on an accrual basis until they become 120 days past due. Partially
secured loans are written down to the collateral value and placed on nonaccrual
status on or before becoming 90 days past due. Unsecured commercial loans
are
charged off on or before the date they become 90 days past due. Closed end
consumer loans and open end consumer loans are charged off or written down
to
the fair value of collateral on or before becoming 120 and 180 days past
due,
respectively. A nonaccrual loan may not be considered impaired if it is expected
that the delay in payment is minimal.
A
loan is
considered impaired when, in management’s judgment, 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. 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
residential mortgage, overdraft protection, home equity line, and consumer
installment loans for impairment disclosures.
F-11
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. Operational processes may create timing differences where the final
delivery of a forward contract to purchase a loan may occur in the reporting
period immediately following the period when the loan was originally closed.
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.
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 including lease renewals only when the Company is reasonably
assured of the aggregate term of the lease. 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.
F-12
Intangible
Assets
Intangible
assets consist primarily of goodwill and core deposit premium costs that
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. Goodwill is not amortized,
and is
reviewed annually 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.
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.
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).
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 hired on or before December 31, 2005,
who
have attained age 21, and who 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 21 and completing one year of eligible
service. Plan participants elect to contribute portions of their annual base
compensation as a before tax contribution. In 2005 and prior years, the Company
has matched 50% of these contributions up to a 6% employee conribution. 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. In 2006, the Company continued its previous matching policy
for
employees hired before 2006 and who were age 45 and higher with five or more
years of service. The Company has changed some of the provisions in its defined
benefit plan and as a result of reduced benefits for certain employees, will
match 100% of contributions up to 6% of salary of current employees under
age 45
or with less than five years of service. Additionally, any employee hired
in
2006 or thereafter will not participate in the defined benefit pension plan,
but
will receive the Company’s 100% matching of their 401(k) plan contribution, up
to 6% of salary.
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, 2006, and the liability for future
benefits has been recorded in the consolidated financial
statements.
Employee
Stock Purchase Plan - The Company has registered 315,000 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 six months
of
service. The price at which common stock may be purchased for each quarterly
option period is the lesser of 85% of the common stock’s fair value on either
the first or last day of the quarter.
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, net operating loss carryforwards, 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.
Share-Based
Compensation Plans
The
Company accounts for its share-based compensation awards including stock
options, restricted stock awards, and the employee stock purchase plan using
the
fair value method in accordance with Statement of Financial Accounting Standards
(“Statement”) No. 123 (revised 2004), Share-Based
Payment
(see
“Recent Accounting Pronouncements” below and Note 17).
F-13
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.
Reclassification
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.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R),
which
revises the reporting of assets and liabilities for pensions and other
post-retirement benefits. The new standard requires an employer to recognize
the
overfunded or underfunded status of a defined benefit pension and other
postretirement plan (other than a multi-employer plan) as an asset or liability
in its statement of financial position and to recognize changes in the funded
status in the year in which the changes occur through other comprehensive
income. This statement requires an employer to measure the funded status
of a
plan as of the date of its year-end statement of financial position, with
limited exceptions. Statement 158 applies to the Company for the year ended
December 31, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position is effective for fiscal years ending after December 15,
2008.
Before adoption, the Company recognized a prepaid pension cost in other assets
for its pension retirement plan and an accrued pension cost for its
post-retirement benefits plan. After adoption, the Company recognizes an
accrued
pension cost in other liabilities for its pension retirement plan and an
increase in the accrued pension cost for its post-retirement benefits plan.
The
accrued pension cost is the equivalent of the underfunded status on a projected
benefit obligation (“PBO”) basis for its retirement plan and post-retirement
benefit plan as of the plans’ measurement date of October 31, 2006.
In
September 2006, the FASB issued Statement No. 157, Fair
Value Measurements,
which
provides a common definition of fair value and a framework for measuring
assets
and liabilities at fair values when a particular standard prescribes it.
In
addition, the statement prescribes a more enhanced disclosure of fair value
measures, and requires a more expanded disclosure when non-market data is
used
to assess fair values. The statement will be effective January 1, 2008. The
Company is in the process of determining the effects, if any, on its financial
statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108 which expressed the staff’s views
regarding the process of quantifying financial statement misstatements due
to
the diversity in practice. The staff is requiring that a company accumulate
and
quantify misstatements using both the “rollover” and “iron curtain” approaches.
The rollover approach quantifies a misstatement based on the amount of the
error
originating in the current year income statement. The iron curtain approach
quantifies a misstatement based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective
of
the misstatement’s year or years of origination. The SEC requires application
for the year ending December 31, 2006. The adoption of the Bulletin did not
have
an impact on the Company’s financial position, results of operations, and cash
flows.
In
September 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No.
06-4, Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements and
Issue
No. 06-5, Accounting
for Purchases of Life Insurance—Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin, No. 85-4.
EITF
06-4 requires that policyholders recognize a liability for the postretirement
benefits provided through endorsement split-dollar life insurance. The liability
to recognize is dependent upon whether the Company is deemed to have promised
a
death benefit to the participant or to maintain the split-dollar arrangement
for
the participant’s benefit. EITF 06-5 provides guidance for calculating policy
amounts that could be realized and recognized as assets on the policyholder’s
balance sheet. Both EITF 06-4 and 06-5 will be effective for fiscal years
beginning after December 15, 2007. The Company does not anticipate that these
Issues will have a material effect on its financial statements.
In
June
2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting
for Uncertainty in Income Taxes.
FIN 48
is an interpretation of FASB Statement No. 109, Accounting
for Income Taxes.
FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This Interpretation
also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 will be
effective for fiscal years beginning after December 15, 2006. The Company
does
not anticipate that this Interpretation will have a material effect on its
financial statements.
F-14
In
March
2006, the FASB issued Statement No. 156, Accounting
for Servicing of Financial Assets. Statement
No. 156, which is an amendment to Statement No. 140, simplifies the accounting
for servicing assets and liabilities, such as those common with mortgage
securitization activities. The new standard clarifies when an obligation
to
service financial assets should be separately recognized as a servicing asset
or
a servicing liability; requires that a separately recognized servicing asset
or
servicing liability be initially measured at fair value, if practicable;
and
permits an entity with a separately recognized servicing asset or servicing
liability to choose either the amortization method or fair value method for
subsequent measurement. Statement No. 156 is effective for separately recognized
servicing assets and liabilities acquired or issued after the beginning of
an
entity’s fiscal year that begins after September 15, 2006, with early adoption
permitted. Adoption of this statement is not expected to have a material
effect
on the Company’s results of operations or financial condition.
In
February 2006, the FASB issued Statement No. 155, Accounting
for Certain Hybrid Instruments,
which is
an amendment of Statements No. 133 and 140. Statement No. 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis. The statement
also clarifies which interest-only strips and principal-only strips are not
subject to the requirements of Statement No. 133; establishes a requirement
to
evaluate interests in securitized financial assets to identify interests
that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and amends Statement No. 140 to eliminate the prohibition on
a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. Statement No. 155 is effective for all financial instruments
acquired or issued after the beginning of an entity’s first fiscal year that
begins after September 15, 2006. Adoption of this statement is not expected
to
have a material effect on the Company’s results of operations or financial
condition.
In
November 2005, the FASB issued Statement 115-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.
The provisions of Statement No. 115-1 are effective for other-than-temporary
impairment analysis conducted in periods beginning after December 15, 2005.
Adoption of this Statement did not have a material effect
on the Company's results of operations or financial
condition.
In
December 2004, the FASB issued Statement No. 123 (revised 2004), Share-based
Payment,
which
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board (“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. Statement
No. 123R also amends Statement 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. In the first quarter of 2005, the SEC
issued SAB 107, which addresses the interaction between Statement No.
123R and certain SEC rules and regulations and provides the SEC staff’s views
regarding the valuation of share-based payment arrangements for public
companies. Also, in April 2005, the SEC adopted a new rule that made
Statement
No. 123R
effective beginning with the first interim or annual reporting period of
the
registrant’s first fiscal year beginning on or after June 15, 2005. The Company
adopted Statement No. 123R in the first quarter of 2006 and currently discloses
the effect on net income and earnings per share based on the fair value
recognition provisions of Statement No. 123, Accounting
for Stock-Based Compensation.
In
December 2004, the FASB issued Statement No. 153, Exchanges
of Nonmonetary Assets - an amendment of APB Opinion No. 29.
Statement No. 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. Statement No. 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 provisions of Statement
No. 153 are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Statement No. 153 did not have a material
impact on its financial position or results of operations.
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, 2006 and 2005 was approximately $2,500,000 and
$14,073,000, respectively.
In
accordance with regulatory guidelines, the Banks were able to maintain a
smaller
reserve of funds with the Federal Reserve as a result of a system change
to
reclassify demand deposit accounts from transactional to
non-transactional.
At
December 31, 2006, the Company and its subsidiaries had due from bank balances
in excess of federally insured limits of approximately $2,767,000. The risk
associated with this excess is limited due to the soundness of the financial
institutions with which the funds are deposited.
F-15
Note
3 - Investment Securities
The
following is the amortized cost and fair value of investment securities held
to
maturity:
|
Gross
|
Gross
|
||||||||||||
|
Amortized
|
Unrealized
|
|
Unrealized
|
Fair
|
|||||||||
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
December
31, 2006:
|
|||||||||||||
|
State
and municipal
|
$
|
18,112
|
$
|
165
|
$
|
(6
|
)
|
$
|
18,271
|
||||
|
December
31, 2005:
|
|||||||||||||
|
State
and municipal
|
$
|
18,194
|
$
|
264
|
$
|
(5
|
)
|
$
|
18,453
|
||||
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 investment securities
available for sale:
|
Gross
|
Gross
|
||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
||||||||||
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
December
31, 2006:
|
|||||||||||||
|
Government-sponsored
enterprises*
|
$
|
67,791
|
$
|
52
|
$
|
(395
|
)
|
$
|
67,448
|
||||
|
Mortgage-backed
|
94,894
|
197
|
(1,853
|
)
|
93,238
|
||||||||
|
Corporate
bonds
|
14,260
|
107
|
(9
|
)
|
14,358
|
||||||||
|
Corporate
stocks
|
6,991
|
120
|
(42
|
)
|
7,069
|
||||||||
|
$
|
183,936
|
$
|
476
|
$
|
(2,299
|
)
|
$
|
182,113
|
|||||
|
December
31, 2005:
|
|||||||||||||
|
Government-sponsored
enterprises*
|
$
|
38,228
|
$
|
55
|
$
|
(534
|
)
|
$
|
37,749
|
||||
|
Mortgage-backed
|
101,754
|
201
|
(2,360
|
)
|
99,595
|
||||||||
|
Corporate
bonds
|
11,309
|
54
|
(2
|
)
|
11,361
|
||||||||
|
Corporate
stocks
|
4,522
|
401
|
--
|
4,923
|
|||||||||
|
$
|
155,813
|
$
|
711
|
$
|
(2,896
|
)
|
$
|
153,628
|
|||||
*
-
Government-sponsored enterprises are comprised of securities offered by Federal
Home Loan Mortgage Corporation (“FHLMC”) or Freddie Mac, Federal National
Mortgage Association (“FNMA”) or Fannie Mae, Federal Home Loan Bank (“FHLB”),
and Federal Farm Credit Banks (“FFCB”).
The
following is the amortized cost and fair value of other investment
securities:
|
Gross
|
|
Gross
|
|||||||||||
|
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||
|
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||
|
December
31, 2006:
|
|||||||||||||
|
Federal
Reserve Bank stock
|
$
|
2,911
|
$
|
--
|
$
|
--
|
$
|
2,911
|
|||||
|
Federal
Home Loan Bank stock
|
6,016
|
--
|
--
|
6,016
|
|||||||||
|
Investment
in unconsolidated subsidiaries
|
1,239
|
--
|
--
|
1,239
|
|||||||||
|
$
|
10,166
|
$
|
--
|
$
|
--
|
$
|
10,166
|
||||||
|
December
31, 2005:
|
|||||||||||||
|
Federal
Reserve Bank stock
|
$
|
1,888
|
$
|
--
|
$
|
--
|
$
|
1,888
|
|||||
|
Federal
Home Loan Bank stock
|
7,795
|
--
|
--
|
7,795
|
|||||||||
|
Investment
in unconsolidated subsidiaries
|
1,239
|
--
|
--
|
1,239
|
|||||||||
|
$
|
10,922
|
$
|
--
|
$
|
--
|
$
|
10,922
|
||||||
F-16
The
amortized cost and fair value of debt securities at December 31, 2006 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.
|
Securities
|
Securities
|
||||||||||||
|
|
Held
to Maturity
|
Available
for Sale
|
|||||||||||
|
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|
||||||||
|
(Dollars
in thousands)
|
Cost
|
Value
|
|
Cost
|
|
Value
|
|||||||
|
Due
in one year or less
|
$
|
3,841
|
$
|
3,848
|
$
|
7,444
|
$
|
7,367
|
|||||
|
Due
after one year through five years
|
7,434
|
7,531
|
145,871
|
144,086
|
|||||||||
|
Due
after five years through ten years
|
3,148
|
3,177
|
9,370
|
9,233
|
|||||||||
|
Due
after ten years
|
3,689
|
3,715
|
14,260
|
14,358
|
|||||||||
|
$
|
18,112
|
$
|
18,271
|
$
|
176,945
|
$
|
175,044
|
||||||
There
were
no sales or transfers of held-to-maturity securities during 2006, 2005 or
2004.
The following table summarizes information with respect to sale of
available-for-sale securities:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|
2004
|
||||||
|
Sale
proceeds
|
$
|
10,371
|
$
|
6,998
|
$
|
1,996
|
||||
|
Gross
realized gains
|
$
|
--
|
$
|
--
|
$
|
--
|
||||
|
Gross
realized losses
|
(330
|
)
|
(202
|
)
|
(4
|
)
|
||||
|
Net
realized loss
|
$
|
(330
|
)
|
$
|
(202
|
)
|
$
|
(4
|
)
|
|
The
Company had 91 securities with gross unrealized losses at December 31, 2006.
Information pertaining to securities with gross unrealized losses at December
31, 2006 and 2005, 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 More
|
||||||||||||
|
|
Gross
|
Gross
|
|||||||||||
|
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
|||||||||
|
(Dollars
in thousands)
|
Losses
|
|
Value
|
|
Losses
|
Value
|
|||||||
|
December
31, 2006:
|
|||||||||||||
|
Securities
Held to Maturity
|
|||||||||||||
|
State
and municipal
|
$
|
--
|
$
|
--
|
$
|
6
|
$
|
559
|
|||||
|
|
$ | -- |
$
|
--
|
$
|
6
|
$
|
559
|
|||||
|
Securities
Available for Sale
|
|||||||||||||
|
Government-sponsored
enterprises
|
$
|
54
|
$
|
22,868
|
$
|
341
|
$
|
26,625
|
|||||
|
Mortgage-backed
|
114
|
10,442
|
1,739
|
62,701
|
|||||||||
|
Corporate
bonds
|
9
|
3,951
|
--
|
||||||||||
|
Corporate
stocks
|
42
|
3,958
|
--
|
--
|
|||||||||
|
$
|
219
|
$
|
41,219
|
$
|
2,080
|
$
|
89,326
|
||||||
|
December
31, 2005:
|
|||||||||||||
|
Securities
Held to Maturity
|
|||||||||||||
|
State
and municipal
|
$
|
5
|
$
|
785
|
$
|
--
|
$
|
--
|
|||||
|
$
|
5
|
$
|
785
|
$
|
--
|
$
|
--
|
||||||
|
Securities
Available for Sale
|
|||||||||||||
|
Government-sponsored
enterprises
|
$
|
214
|
$
|
24,185
|
$
|
320
|
$
|
11,175
|
|||||
|
Mortgage-backed
|
551
|
40,213
|
1,809
|
50,309
|
|||||||||
|
Corporate
bonds
|
2
|
506
|
--
|
--
|
|||||||||
|
$
|
767
|
$
|
64,904
|
$
|
2,129
|
$
|
61,484
|
||||||
F-17
At
December 31, 2006 and 2005, debt securities with unrealized losses have
depreciated only 1.7% and 2.2%, respectively, from their amortized cost basis.
These unrealized losses relate principally to mortgage-backed securities
whose
prepayment speeds were different than anticipated at the time of purchase.
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, (3) the anticipated outlook for changes
in
the general level of interest rates, and (4) 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.
At
December 31, 2006 and 2005, investment securities with a carrying value of
$76,860,000 and $74,424,000, respectively, were pledged to secure public
deposits, FHLB advances and for other purposes required and permitted by
law. At
December 31, 2006 and 2005, the carrying amount of the securities pledged
to
secure repurchase agreements was $95,967,000 and $62,564,000,
respectively.
Note
4 - Loans and Allowance for Loan Losses
The
following is a summary of loans by category at December 31:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Real
estate:
|
|||||||
|
Commercial
|
$
|
835,892
|
$
|
641,275
|
|||
|
Consumer
|
434,957
|
421,860
|
|||||
|
Commercial
|
190,635
|
178,039
|
|||||
|
Firstline
|
144,910
|
145,404
|
|||||
|
Consumer
|
130,596
|
127,817
|
|||||
|
Other
loans
|
23,870
|
21,605
|
|||||
|
Total
loans
|
1,760,860
|
1,536,000
|
|||||
|
Less,
unearned income
|
(30
|
)
|
(99
|
)
|
|||
|
Less,
allowance for loan losses
|
(22,668
|
)
|
(20,025
|
)
|
|||
|
Loans,
net
|
$
|
1,738,162
|
$
|
1,515,876
|
|||
Changes
in
the allowance for loan losses for the three years ended December 31, were
as
follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at beginning of period
|
$
|
20,025
|
$
|
14,470
|
$
|
11,700
|
||||
|
Loans
charged-off
|
(3,438
|
)
|
(1,850
|
)
|
(2,008
|
)
|
||||
|
Recoveries
of loans previously charged-off
|
813
|
383
|
446
|
|||||||
|
Balance
before provision for loan losses
|
17,400
|
13,003
|
10,138
|
|||||||
|
Provision
for loan losses
|
5,268
|
4,907
|
4,332
|
|||||||
|
Allowance
acquired in business combinations
|
--
|
2,115
|
--
|
|||||||
|
Balance
at end of period
|
$
|
22,668
|
$
|
20,025
|
$
|
14,470
|
F-18
The following is a summary of information pertaining to impaired and nonaccrual loans at December 31:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Impaired
loans without a valuation allowance
|
$
|
3,499
|
$
|
3,160
|
|||
|
Impaired
loans with a valuation allowance
|
303
|
621
|
|||||
|
$
|
3,802
|
$
|
3,781
|
||||
|
Valuation
allowance related to impaired loans
|
$
|
83
|
$
|
220
|
|||
|
Average
of impaired loans during the year
|
$
|
3,791
|
$
|
3,355
|
|||
|
Total
nonaccrual loans
|
$
|
3,567
|
$
|
2,760
|
|||
|
Total
loans past due ninety days or more and
|
|||||||
|
still
accruing
|
$
|
1,039
|
$
|
1,512
|
|||
Included
in the balance sheet under the caption "Other assets" are certain real
properties that 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 $597,000 and $379,000 at December
31, 2006 and 2005, respectively.
Note
5 - Premises and Equipment
Premises
and equipment consisted of the following at December 31:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
Useful
Life
|
2006
|
2005
|
|||||||
|
Land
|
$
|
12,163
|
$
|
10,216
|
||||||
|
Buildings
and leasehold improvements
|
15-40
years
|
36,803
|
33,108
|
|||||||
|
Equipment
and furnishings
|
3-10
years
|
19,042
|
18,039
|
|||||||
|
Construction
in process
|
1,545
|
2,725
|
||||||||
|
Total
|
69,553
|
64,088
|
||||||||
|
Less,
accumulated depreciation
|
20,649
|
20,424
|
||||||||
|
$
|
48,904
|
$
|
43,664
|
|||||||
Depreciation
expense charged to operations was $2,956,000, $2,473,000, and $2,210,000
for the
years ended December 31, 2006, 2005, and 2004, respectively.
Computer
software with an original cost of $2,304,000 is being amortized using the
straight-line method over thirty-six months. Amortization expense totaled
$299,000, $261,000, and $302,000 for the years ended December 31, 2006, 2005,
and 2004, respectively.
Note
6 - Goodwill and Other Intangible Assets
In
accordance with SFAS No. 142, the Company ceased amortization 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, 2006. The changes in the
carrying amount of goodwill for the years ended December 31, 2006 and 2005
are
as follows:
|
Balance,
January 1, 2005
|
$
|
3,717
|
||
|
Devine
Mortgage, New Commerce BanCorp,
|
||||
|
and
Sun Bancshares acquisitions
|
28,503
|
|||
|
Balance,
December 31, 2005
|
32,220
|
|||
|
SunBank
acquisition
|
93
|
|||
|
Balance,
December 31, 2006
|
$
|
32,313
|
F-19
The
Company’s other intangible assets, consisting primarily of core deposit premium
costs, are included in “Other assets”. The following is a summary of gross
carrying amounts and accumulated amortization of core deposit premium costs
at
December 31:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Gross
carrying amount
|
$
|
7,821
|
$
|
7,821
|
|||
|
Accumulated
amortization
|
(4,455
|
)
|
(3,973
|
)
|
|||
|
$
|
3,366
|
$
|
3,848
|
||||
Amortization
expense totaled $482,000, $305,000, and $186,000 for the years ended
December 31, 2006, 2005, and 2004, respectively. Estimated
amortization expense for core deposit premium costs for each of the next
five
years is as follows:
|
(Dollars
in thousands)
|
||||
|
Years
ending December 31:
|
||||
|
2007
|
$
|
463
|
||
|
2008
|
445
|
|||
|
2009
|
427
|
|||
|
2010
|
409
|
|||
|
2011
|
391
|
|||
|
$
|
2,135
|
|||
Note
7 - Deposits
The
aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2006 and 2005 was $371,517,000 and $268,212,000,
respectively.
At
December 31, 2006, the scheduled maturities of time deposits of all
denominations are as follows:
|
(Dollars
in thousands)
|
||||
|
Years
ending December 31:
|
||||
|
2007
|
$
|
767,097
|
||
|
2008
|
20,591
|
|||
|
2009
|
3,540
|
|||
|
2010
|
483
|
|||
|
2011
|
1,015
|
|||
|
Thereafter
|
814
|
|||
|
$
|
793,540
|
|||
F-20
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. Some
securities underlying these agreements include arrangements to resell securities
from broker-dealers approved by the Company. Information concerning federal
funds purchased and securities sold under agreements to repurchase are
below:
|
December
31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Rate
|
Amount
|
Rate
|
|
Amount
|
Rate
|
||||||||||||
|
At
period-end:
|
|||||||||||||||||||
|
Federal
funds purchased
|
|||||||||||||||||||
|
and
securities sold under
|
|||||||||||||||||||
|
repurchase
agreeements
|
$
|
203,105
|
4.46%
|
|
$
|
150,163
|
3.47%
|
|
$
|
89,206
|
1.43%
|
|
|||||||
|
|
|||||||||||||||||||
|
Average
for the year:
|
|||||||||||||||||||
|
Federal
funds purchased
|
|||||||||||||||||||
|
and
securities sold under
|
|||||||||||||||||||
|
repurchase
agreeements
|
$
|
149,081
|
4.08%
|
|
$
|
123,352
|
2.46%
|
|
$
|
90,445
|
0.76%
|
|
|||||||
|
Maximum
month-end balance:
|
|||||||||||||||||||
|
Federal
funds purchased
|
|||||||||||||||||||
|
and
securities sold under
|
|||||||||||||||||||
|
repurchase
agreeements
|
$
|
203,105
|
$
|
163,593
|
$
|
111,889
|
|||||||||||||
F-21
Note
9 - Other Borrowings
The
Company’s other borrowings were as follows as of December 31:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
FHLB
advances with various maturity dates (ranging from less than
one to
eighteen years), various contractual terms, and various repayment
schedules with fixed rates of interest (net of discount of $84
and $117 in
2006 and 2005, respectively).
|
$
|
47,677
|
$
|
101,018
|
|||
|
SCBT
Capital Trust I junior subordinated debt with a variable interest
rate
equal to the three-month LIBOR rate (5.36% at December 31, 2006)
plus a
spread adjusted quarterly; guaranteed by the Company on a subordinated
basis, matures in 30 years, and can be called by the issuer without
penalty on or after June 30, 2010.
|
12,372
|
12,372
|
|||||
|
SCBT
Capital Trust II junior subordinated debt with a fixed interest
rate of
6.37% for five years and thereafter at a rate equal to the three-month
LIBOR rate plus a spread; guaranteed by the Company on a subordinated
basis, matures in 30 years, and can be called by the issuer without
penalty on or after June 30, 2010.
|
8,248
|
8,248
|
|||||
|
SCBT
Capital Trust III junior subordinated debt with a fixed interest
rate of
5.92% for ten years and thereafter at a rate equal to the three-month
LIBOR rate plus a spread; matures in 30 years, and can be called
by the
issuer without penalty on or after September 15, 2012.
|
20,619
|
20,619
|
|||||
|
Other
|
1,500
|
2,000
|
|||||
|
$
|
90,416
|
$
|
144,257
|
||||
FHLB
Advances
The
Company has entered into borrowing agreements with the FHLB. Advances under
these agreements are collateralized by stock in the FHLB, qualifying first
and
second mortgage residential loans, and commercial real estate loans under
a
blanket-floating lien.
Advances
outstanding of $26,500,000 and $3,000,000 at December 31, 2006 will convert
to a
floating interest rate indexed to LIBOR when the index equals or exceeds
7.50%
and 7.00%, respectively. There were no advances at variable rates as of December
31, 2006. Net eligible loans of the Company pledged to the FHLB for advances
and
letters of credit at December 31, 2006, were approximately $230,085,000.
With
the haircut reduction, total borrowing capacity at FHLB was $149,405,000.
After
accounting for outstanding advances totaling $47,761,000 and letters of credit
totaling $26,000,000, the Company had unused net credit available in the
amount
of $75,644,000 at December 31, 2006.
The
maximum FHLB advances outstanding at any month-end for the years ended December
31, 2006 and 2005 was $101,012,000 and $104,045,000, respectively. The average
amount outstanding for the years ended December 31, 2006 and 2005 was
$93,536,000 and $63,327,000, respectively. The weighted-average interest
rate
during the years ended December 31, 2006 and 2005 was 5.10% and 4.90%,
respectively. The weighted-average interest rate at December 31, 2006 and
2005
was 5.05% and 4.72%, respectively.
Junior
Subordinated Debt
The
obligations of the Company with respect to the issuance of the capital
securities constitute a full and unconditional guarantee by the Company of
the
Trusts’ obligations with respect to the capital securities. Subject to certain
exceptions and limitations, the Company may elect from time to time to defer
interest payments on the junior subordinated debt securities, which would
result
in a deferral of distribution payments on the related capital
securities.
As
of
December 31, 2006, the sole asset of the Trusts is an aggregate of $41,239,000
of the Company’s junior subordinated debt securities with like maturities and
like interest rates to the trust preferred securities.
F-22
For
regulatory purposes, the junior subordinated debt securities may be classified
as Tier 1 Capital. The trust preferred securities represent a minority
investment in an unconsolidated subsidiary, which is currently included in
Tier
1 Capital so long as it does not exceed 25% of total Tier 1
Capital.
Principal
maturities of other borrowings are summarized below:
|
Junior
|
||||||||||
|
FHLB
|
Subordinated
|
|||||||||
|
(Dollars
in thousands)
|
Borrowings
|
Debt
|
Other
|
|||||||
|
Years
Ended December 31,
|
||||||||||
|
2007
|
$
|
127
|
$
|
--
|
$
|
1,500
|
||||
|
2008
|
3,208
|
--
|
--
|
|||||||
|
2009
|
13,130
|
--
|
--
|
|||||||
|
2010
|
133
|
--
|
--
|
|||||||
|
2011
|
29,635
|
--
|
--
|
|||||||
|
Thereafter
|
1,444
|
41,239
|
--
|
|||||||
|
$
|
47,677
|
$
|
41,239
|
$
|
1,500
|
|||||
Note 10 - Income Taxes
The
provision for income taxes consists of the following:
|
|
Years
Ended December 31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|
2004
|
|
|||||
|
Current:
|
||||||||||
|
Federal
|
$
|
10,078
|
$
|
8,634
|
$
|
6,454
|
||||
|
State
|
920
|
780
|
634
|
|||||||
|
Total
current tax expense
|
10,998
|
9,414
|
7,088
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
(714
|
)
|
(1,539
|
)
|
(510
|
)
|
||||
|
State
|
--
|
(52
|
)
|
(141
|
)
|
|||||
|
Total
deferred tax benefit
|
(714
|
)
|
(1,591
|
)
|
(651
|
)
|
||||
|
Provision
for income taxes
|
$
|
10,284
|
$
|
7,823
|
$
|
6,437
|
||||
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:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Provision
for loan losses
|
$
|
(951
|
)
|
$
|
(569
|
)
|
$
|
(1,049
|
)
|
|
|
Net
operating loss carryforwards
|
568
|
(1,189
|
)
|
--
|
||||||
|
Pension
cost and post-retirement benefits
|
79
|
131
|
307
|
|||||||
|
Intangible
assets
|
(139
|
)
|
429
|
136
|
||||||
|
Depreciation
|
(146
|
)
|
(143
|
)
|
221
|
|||||
|
Share-based
compensation
|
(180
|
)
|
--
|
--
|
||||||
|
Deferred
compensation
|
(4
|
)
|
(137
|
)
|
(250
|
)
|
||||
|
Other
|
59
|
(113
|
)
|
(16
|
)
|
|||||
|
$
|
(714
|
)
|
$
|
(1,591
|
)
|
$
|
(651
|
)
|
||
F-23
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:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Income
taxes at federal statutory rate
|
$
|
10,531
|
$
|
8,567
|
$
|
7,159
|
||||
|
Increase
(reduction) of taxes resulting from:
|
||||||||||
|
State
income taxes, net of federal tax benefit
|
608
|
500
|
430
|
|||||||
|
Tax-exempt
interest
|
(432
|
)
|
(489
|
)
|
(558
|
)
|
||||
|
Income
tax credits
|
(324
|
)
|
(354
|
)
|
(194
|
)
|
||||
|
Utilization
of net operating loss carryforwards
|
--
|
(266
|
)
|
--
|
||||||
|
Dividends
received deduction
|
(183
|
)
|
(116
|
)
|
(158
|
)
|
||||
|
Other,
net
|
84
|
(19
|
)
|
(242
|
)
|
|||||
|
$
|
10,284
|
$
|
7,823
|
$
|
6,437
|
|||||
The
components of the net deferred tax asset, included in other assets at December
31 are as follows:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Allowance
for loan losses
|
$
|
7,935
|
$
|
6,984
|
|||
|
Net
operating loss carryforwards
|
1,037
|
1,443
|
|||||
|
Pension
plan
|
681
|
--
|
|||||
|
Unrealized
losses on investment
|
|||||||
|
securities
available for sale
|
615
|
943
|
|||||
|
Deferred
compensation
|
391
|
387
|
|||||
|
Share-based
compensation
|
180
|
--
|
|||||
|
Post-retirement
benefits
|
114
|
107
|
|||||
|
Other
real estate owned
|
5
|
--
|
|||||
|
Total
deferred tax assets
|
10,958
|
9,864
|
|||||
|
Depreciation
|
1,414
|
1,559
|
|||||
|
Intangible
assets
|
139
|
279
|
|||||
|
Pension
plan
|
--
|
837
|
|||||
|
Other
|
164
|
100
|
|||||
|
Total
deferred tax liabilities
|
1,717
|
2,775
|
|||||
|
Net
deferred tax asset before
|
|||||||
|
valuation
allowance
|
9,241
|
7,089
|
|||||
|
Less,
valuation allowance
|
(418
|
)
|
(257
|
)
|
|||
|
Net
deferred tax asset
|
$
|
8,823
|
$
|
6,832
|
|||
At
December 31, 2006, the Company had operating loss carryforwards for federal
and
state income tax purposes of approximately $1,775,000 and $8,311,000,
respectively, available to offset future taxable income. The carryforwards
expire in varying amounts through 2020. The valuation allowance is based
on
management's estimate of the ultimate realization of the deferred tax
asset.
F-24
Note
11 - Other Expense
The
following is a summary of the components of other noninterest
expense:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Advertising
|
$
|
3,186
|
$
|
2,519
|
$
|
1,881
|
||||
|
Data
and computer services
|
1,805
|
1,384
|
1,040
|
|||||||
|
Telephone
and postage
|
1,738
|
1,559
|
1,462
|
|||||||
|
Business
development and staff related
|
1,717
|
1,519
|
1,315
|
|||||||
|
Professional
fees
|
1,605
|
1,501
|
1,987
|
|||||||
|
Office
supplies
|
1,464
|
1,443
|
1,077
|
|||||||
|
Bankcard
services
|
1,026
|
738
|
598
|
|||||||
|
Regulatory
fees
|
1,021
|
884
|
731
|
|||||||
|
Other
loan expense
|
1,014
|
1,352
|
1,367
|
|||||||
|
Amortization
|
825
|
576
|
488
|
|||||||
|
Retail
products
|
594
|
450
|
483
|
|||||||
|
Directors
fees
|
507
|
443
|
438
|
|||||||
|
Property
and sales tax
|
483
|
891
|
889
|
|||||||
|
Donations
|
375
|
582
|
282
|
|||||||
|
Insurance
|
327
|
277
|
251
|
|||||||
|
Other
|
1,390
|
1,826
|
1,324
|
|||||||
|
$
|
19,077
|
$
|
17,944
|
$
|
15,613
|
|||||
Note 12 - Earnings Per Share
The
following table sets forth the computation of basic and diluted earnings
per
share:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
|
2005
|
|
2004
|
|||||
|
Numerator:
|
||||||||||
|
Net
income - numerator for basic
|
||||||||||
|
and
diluted earnings per share
|
$
|
19,805
|
$
|
16,655
|
$
|
14,016
|
||||
|
Denominator:
|
||||||||||
|
Denominator
for basic earnings per share -
|
||||||||||
|
weighted-average
shares outstanding
|
9,126
|
8,539
|
8,466
|
|||||||
|
Effect
of dilutive securities:
|
||||||||||
|
Employee
stock options
|
92
|
83
|
84
|
|||||||
|
Dilutive
potential shares:
|
||||||||||
|
Denominator
for diluted earnings per
|
||||||||||
|
share
- adjusted weighted-average
|
||||||||||
|
shares
and assumed conversions
|
9,218
|
8,622
|
8,550
|
|||||||
|
Basic
earnings per share
|
$
|
2.17
|
$
|
1.95
|
$
|
1.66
|
||||
|
Diluted
earnings per share
|
$
|
2.15
|
$
|
1.93
|
$
|
1.64
|
||||
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 March 9,
2007
and December 20, 2004.
F-25
The
calculation of diluted earnings per share excludes outstanding stock options
that have exercise prices greater than the average market price of the common
shares for the year as follows:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
|
2004
|
||||||
|
Number
of shares
|
--
|
36,848
|
--
|
|||||||
|
Range
of exercise prices
|
--
|
$
|
30.39
to $31.97
|
--
|
||||||
Note
13 - Other Comprehensive Loss
The
components of other comprehensive loss and related tax effects related to
unrealized holding gains (losses) on securities available for sale are as
follows:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Unrealized
holding gains (losses) on securities
|
||||||||||
|
available
for sale arising during the year
|
$
|
319
|
$
|
(2,603
|
)
|
$
|
(779
|
)
|
||
|
Less,
reclassification adjustment for losses
|
||||||||||
|
realized
in net income
|
330
|
202
|
4
|
|||||||
|
Net
change in unrealized holding losses
|
649
|
(2,401
|
)
|
(775
|
)
|
|||||
|
Tax
effect
|
(247
|
)
|
962
|
295
|
||||||
|
Net-of-tax
amount
|
$
|
402
|
$
|
(1,439
|
)
|
$
|
(480
|
)
|
||
For
the
year ended December 31, 2006, the Company recognized the following amounts
in
other comprehensive loss related to the adjustment to initially apply FASB
Statement No. 158:
|
(Dollars
in thousands)
|
||||
|
Retirement
plan:
|
||||
|
Net
loss
|
$
|
(5,280
|
)
|
|
|
Prior
service credit
|
1,243
|
|||
|
(4,037
|
)
|
|||
|
Post-retirement
benefits:
|
||||
|
Net
gain
|
10
|
|||
|
Transition
obligation
|
(190
|
)
|
||
|
(180
|
)
|
|||
|
Net
change in unrecognized amounts
|
(4,217
|
)
|
||
|
Tax
effect
|
1,602
|
|||
|
Net-of-tax
amount
|
$
|
(2,615
|
)
|
|
Note 14 - Restrictions on Subsidiary Dividends, Loans, or Advances
The
Company pays cash dividends to shareholders 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, 2006,
approximately $37,317,000 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 $39,747,000
at
December 31, 2006.
F-26
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:
|
(Dollars
in thousands)
|
2006
|
|
2005
|
|
|||
|
Change
in benefit obligation:
|
|||||||
|
Benefit
obligation at beginning of year
|
$
|
15,658
|
$
|
14,059
|
|||
|
Service
cost
|
624
|
948
|
|||||
|
Interest
cost
|
822
|
834
|
|||||
|
Plan
amendment
|
(1,154
|
)
|
--
|
||||
|
Actuarial
loss
|
659
|
153
|
|||||
|
Benefits
paid
|
(345
|
)
|
(336
|
)
|
|||
|
Benefit
obligation at end of year
|
16,264
|
15,658
|
|||||
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets at beginning of year
|
13,062
|
11,279
|
|||||
|
Actual
return on plan assets
|
1,356
|
530
|
|||||
|
Employer
contribution
|
780
|
1,589
|
|||||
|
Benefits
paid
|
(345
|
)
|
(336
|
)
|
|||
|
Fair
value of plan assets at end of year
|
14,853
|
13,062
|
|||||
|
Funded
status
|
(1,411
|
)
|
(2,596
|
)
|
|||
|
Unrecognized
net actuarial loss
|
--
|
5,242
|
|||||
|
Unrecognized
prior service benefit
|
--
|
(261
|
)
|
||||
|
Prepaid
benefit cost (accrued pension liability)
|
$
|
(1,411
|
)
|
$
|
2,385
|
||
The
incremental effect of applying Statement No. 158, including the Company’s
post-retirement plan in Note 16, on individual line items in the statement
of
financial position follows:
|
Before
|
After
|
|||||||||
|
(Dollars
in thousands)
|
Application
|
Adjustments
|
Application
|
|||||||
|
Prepaid
benefit cost
|
$
|
2,625
|
$
|
(2,625
|
)
|
$
|
--
|
|||
|
Liability
for pension benefits and
|
||||||||||
|
post-retirement
benefits
|
324
|
1,593
|
1,917
|
|||||||
|
Deferred
income taxes
|
7,218
|
1,603
|
8,821
|
|||||||
|
Total
liabilities
|
2,014,932
|
1,593
|
2,016,525
|
|||||||
|
Accumulated
other comprehensive loss
|
(902
|
)
|
(2,615
|
)
|
(3,517
|
)
|
||||
|
Total
stockholders' equity
|
164,503
|
(2,615
|
)
|
161,888
|
||||||
The
components of net periodic pension cost are as follows:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Service
cost
|
$
|
624
|
$
|
948
|
$
|
665
|
||||
|
Interest
cost
|
822
|
834
|
716
|
|||||||
|
Expected
return on plan assets
|
(1,106
|
)
|
(957
|
)
|
(792
|
)
|
||||
|
Amortization
of prior service cost
|
(173
|
)
|
(38
|
)
|
(38
|
)
|
||||
|
Recognized
net actuarial loss
|
372
|
359
|
186
|
|||||||
|
$
|
539
|
$
|
1,146
|
$
|
737
|
|||||
F-27
The
other
changes in plan assets and benefit obligations recognized in other comprehensive
loss as of December 31, 2006 are as follows:
|
(Dollars
in thousands)
|
||||
|
Net
loss
|
$
|
5,280
|
||
|
Prior
service credit
|
(1,243
|
)
|
||
|
Amortization
of prior service cost
|
--
|
|||
|
Total
amount recognized
|
$
|
4,037
|
||
Amortization
of prior service cost will be a component of the annual change in 2007. As
a
result of implementing Statement No. 158, the change to other comprehensive
loss
is the full existing unrecognized amount.
The
following is information as of the measurement date:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Information
as of the measurement date:
|
|||||||
|
Projected
benefit obligation
|
$
|
16,264
|
$
|
15,658
|
|||
|
Accumulated
benefit obligation
|
14,516
|
12,953
|
|||||
|
Fair
value of plan assets at October 31
|
14,853
|
13,062
|
|||||
The
Company used a 5.75% discount rate and a 5.00% rate of compensation increase
in
its weighted-average assumptions used to determine benefit obligation at
the
October 31 measurement date. The assumptions used to determine net periodic
pension cost for the years ended December 31, 2006, 2005, and 2004 are as
follows:
|
|
Years
Ended December 31,
|
|
||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
6.50
|
%
|
||||
|
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
55% in U.S. equities, 10% in international equities, 30% in fixed income,
and 5%
in cash equivalents.
In
developing the 8% long-term rate of return assumption for the pension plan,
the
Company utilized the following long-term rate of return and standard deviation
assumptions:
|
Rate
of
|
Standard
|
||||||
|
|
|
Return
|
Deviation
|
||||
|
Asset
Class
|
Assumption
|
Assumption
|
|||||
|
High
Grade Fixed Income
|
6.93
|
%
|
7.27
|
%
|
|||
|
High
Yield Fixed Income
|
9.26
|
%
|
7.74
|
%
|
|||
|
International
Fixed Income
|
9.91
|
%
|
8.56
|
%
|
|||
|
Large
Cap Equity
|
12.21
|
%
|
16.42
|
%
|
|||
|
Small
Cap Equity
|
13.20
|
%
|
19.68
|
%
|
|||
|
Foreign
Equity
|
11.06
|
%
|
18.81
|
%
|
|||
|
Inflation
|
3.00
|
%
|
n/a
|
||||
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.
F-28
Below
is a
summary of the Plan’s year-end asset allocation:
|
2006
|
2005
|
||||||||||||
|
(Dollars
in thousands)
|
Fair
Value
|
Percentage
|
Fair
Value
|
Percentage
|
|||||||||
|
Cash
or cash equivalents
|
$
|
3,455
|
23.26
|
%
|
$
|
529
|
4.00
|
%
|
|||||
|
Guaranteed
investment account
|
--
|
0.00
|
%
|
1,914
|
14.70
|
%
|
|||||||
|
Short-term
fixed income
|
2,136
|
14.38
|
%
|
2,049
|
15.70
|
%
|
|||||||
|
Broad
market fixed income
|
2,145
|
14.44
|
%
|
2,050
|
15.70
|
%
|
|||||||
|
Domestic
equity
|
6,255
|
42.11
|
%
|
5,840
|
44.70
|
%
|
|||||||
|
Foreign
equity
|
862
|
5.81
|
%
|
680
|
5.20
|
%
|
|||||||
|
$
|
14,853
|
100.00
|
%
|
$
|
13,062
|
100.00
|
%
|
||||||
As
of
December 31, 2006, the Plan’s domestic equity securities did not include any of
the Company’s common stock. The Plan sold $793,000 or 19,554 shares of the
Company’s common stock during the year ended December 31, 2006. As of December
31, 2005, the Plan’s domestic equity securities included $648,000 (19,382 shares
representing 4.96% of plan assets) of the Company’s common stock. The plan made
purchases totaling $6,000 or 172 shares and $32,000 or 1,040 shares of the
Company’s common stock for the years ended December 31, 2006 and 2005,
respectively. Dividends on the Company’s common stock received by the plan
totaled $10,000 and $13,000 for 2006 and 2005, respectively.
Estimated
future benefit payments (including expected future service as
appropriate):
|
(Dollars
in thousands)
|
||||
|
2007
|
$
|
403
|
||
|
2008
|
490
|
|||
|
2009
|
593
|
|||
|
2010
|
623
|
|||
|
2011
|
679
|
|||
|
2012-2016
|
4,706
|
|||
|
$
|
7,494
|
Expenses
incurred and charged against operations with regard to all of the Company’s
retirement plans were as follows:
|
Years
Ended December 31,
|
||||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Pension
|
$
|
539
|
$
|
1,146
|
$
|
737
|
||||
|
Profit-sharing
|
900
|
479
|
460
|
|||||||
|
$
|
1,439
|
$
|
1,625
|
$
|
1,197
|
|||||
The
Company expects to contribute approximately $650,000 to the pension plan
in
2007, but reserves the right to contribute between the minimum required and
maximum deductible amounts as determined under applicable federal
laws.
Effective
January 1, 2006, amendments were made to our pension plan and 401(k) savings
plan. On this date a new benefit formula applies only to participants who
have
not attained age 45 or who do not have five years of service. Concurrently,
changes in our 401(k) plan will be effective for new employees hired on or
after
this date or for employees under the age of 45 or who have attained at least
five years of service.
F-29
Note
16 - Post-Retirement Benefits
The
following sets forth the plan’s funded status and amounts recognized in the
Company's accompanying consolidated financial statements at December
31:
|
(Dollars
in thousands)
|
2006
|
2005
|
|||||
|
Change
in benefit obligation:
|
|||||||
|
Benefit
obligation at beginning of year
|
$
|
548
|
$
|
547
|
|||
|
Interest
cost
|
30
|
31
|
|||||
|
Actuarial
(gain) / loss
|
(22
|
)
|
23
|
||||
|
Benefits
paid
|
(50
|
)
|
(53
|
)
|
|||
|
Benefit
obligation at end of year
|
506
|
548
|
|||||
|
Change
in plan assets:
|
|||||||
|
Fair
value of plan assets at beginning of year
|
--
|
--
|
|||||
|
Employer
contribution
|
50
|
53
|
|||||
|
Benefits
paid
|
(50
|
)
|
(53
|
)
|
|||
|
Fair
value of plan assets at end of year
|
--
|
--
|
|||||
|
Funded
status
|
|
|
(506
|
)
|
|
(548
|
)
|
|
Unrecognized
net actuarial loss
|
--
|
12
|
|||||
|
Unrecognized
transition obligation
|
--
|
221
|
|||||
|
Accrued
benefit cost
|
$
|
(506
|
)
|
$
|
(315
|
)
|
|
Weighted-average
assumptions used to determine benefit obligations and net periodic benefit
cost
using an October 31 measurement date are as follows:
|
2006
|
2005
|
|
|||||
|
Weighted-average
assumptions used to
|
|||||||
|
determine
benefit obligation
|
|||||||
|
as
of measurment date:
|
|||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
|||
|
Weighted-average
assumptions used to
|
|||||||
|
determine
net periodic benefit cost for years
|
|||||||
|
ended
December 31:
|
|||||||
|
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
|||
|
Assumed
health care cost trend rates
|
|||||||
|
at
December 31:
|
|||||||
|
Health
care cost trend rate assumed
|
|||||||
|
for
next year
|
5.00
|
%
|
5.00
|
%
|
|||
|
Year
that the rate reaches the
|
|||||||
|
ultimate
trend rate
|
2006
|
2005
|
|||||
Components
of net periodic benefit cost are as follows:
|
|
Years
Ended December 31,
|
|||||||||
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
|||||||
|
Interest
cost
|
$
|
30
|
$
|
31
|
$
|
36
|
||||
|
Amortization
of transition obligation
|
32
|
31
|
31
|
|||||||
|
Net
periodic benefit cost
|
$
|
62
|
$
|
62
|
$
|
67
|
||||
F-30
The
other
changes in plan assets and benefit obligations recognized in other comprehensive
loss as of December 31, 2006 are as follows:
|
(Dollars
in thousands)
|
||||
|
Net
(gain) loss
|
$
|
(10
|
)
|
|
|
Transition
obligation
|
190
|
|||
|
Amortization
of transition obligation
|
--
|
|||
|
Total
amount recognized
|
$
|
180
|
||
Amortization
of transition obligation will be a component of the annual change in 2007.
As a
result of implementing Statement No. 158, the change to other comprehensive
loss
is the full existing unrecognized amount.
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point change in assumed health
care
cost trend rates would have the following effects at the end of
2006:
|
One-Percentage
Point
|
|||||||
|
(Dollars
in thousands)
|
Increase
|
Decrease
|
|||||
|
Effect
on total of service and interest cost
|
$
|
3
|
$
|
(2
|
)
|
||
|
Effect
on postretirement benefit obligation
|
41
|
(37
|
)
|
||||
Estimated
future benefit payments (including expected future service as
appropriate):
|
(Dollars
in thousands)
|
||||
|
2007
|
$
|
48
|
||
|
2008
|
48
|
|||
|
2009
|
48
|
|||
|
2010
|
47
|
|||
|
2011
|
46
|
|||
|
2012-2016
|
217
|
|||
|
$
|
454
|
|||
The
Company expects to contribute approximately $48,000 to the post-retirement
medical plan in 2007.
Note
17 - Share-Based Compensation
The
Company’s 1999 and 2004 stock option programs are long-term retention programs
intended to attract, retain, and provide incentives for key employees and
non-employee directors in the form of incentive and non-qualified stock options
and restricted stock.
With
the
exception of non-qualified options granted to directors under the 1999 and
2004
plans, which in some cases may be exercised at any time prior to expiration
and
in some other cases may be exercised at intervals less than one year following
the grant date, incentive stock options granted under the plans may not be
exercised in whole or in part within one year following the date of the grant,
as these incentive stock options become exercisable in 25% increments ratably
over the four year period following the grant date. 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 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 share-based compensation grants may be issued. It
is
the Company’s policy to grant options out of the 600,000 shares registered under
the 2004 plan.
Prior
to
January 1, 2006, the Company’s stock option plans were accounted for under the
recognition and measurement provisions of APB Opinion No. 25 (“Opinion 25”),
Accounting
for Stock Issued to Employees,
and
related Interpretations, as permitted by FASB Statement No. 123, Accounting
for Stock-Based Compensation (as amended by Statement No. 148, Accounting
for
Stock-Based Compensation—Transition and Disclosure)
(collectively “Statement No. 123”). No share-based employee compensation cost
related to stock options was recognized in the Company’s consolidated statements
of income through December 31, 2005, as all options granted under the plans
had
an exercise price equal to the market value of the underlying common stock
on
the date of grant. Effective January 1, 2006, the Company adopted the fair
value
recognition provisions of FASB Statement No. 123(R), Share-Based
Payment,
using
the modified-prospective transition method. Under that transition method,
compensation cost recognized in 2006 includes: (a) compensation cost for
all
share-based payments granted prior to, but not yet vested as of January 1,
2006,
based on the grant date fair value calculated in accordance with the original
provisions of Statement No. 123, and (b) compensation cost for all share-based
payments granted subsequent to December 31, 2005, based on the grant-date
fair
value estimated in accordance with the provisions of Statement No.
123R.
F-31
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.
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
|
|
|
|
Weighted-
|
Weighted-
|
Weighted-
|
|||||||||||||
|
|
|
|
|
Average
|
Average
|
Average
|
|||||||||||||
|
|
|
|
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||
|
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
|
Outstanding
at January 1
|
304,018
|
$
|
23.32
|
298,748
|
$
|
21.66
|
316,247
|
$
|
19.12
|
||||||||||
|
Granted
|
41,714
|
33.85
|
45,568
|
32.47
|
73,080
|
28.57
|
|||||||||||||
|
Exercised
|
(45,525
|
)
|
18.47
|
(21,191
|
)
|
18.66
|
(75,030
|
)
|
17.36
|
||||||||||
|
Expired/Forfeited
|
(6,523
|
)
|
27.73
|
(19,107
|
)
|
24.37
|
(15,549
|
)
|
23.16
|
||||||||||
|
Outstanding
at December 31
|
293,684
|
25.47
|
304,018
|
23.32
|
298,748
|
21.66
|
|||||||||||||
|
Exercisable
at December 31
|
189,215
|
22.46
|
171,809
|
20.14
|
117,457
|
18.97
|
|||||||||||||
|
Weighted-average
fair value of
|
|||||||||||||||||||
|
options
granted during the year
|
$
|
7.75
|
$
|
9.53
|
$
|
8.76
|
|||||||||||||
Information
pertaining to options outstanding at December 31, 2006, is as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Weighted-
|
||||||||||||||||
|
Average
|
||||||||||||||||
|
Remaining
|
Weighted-
|
Weighted-
|
||||||||||||||
|
|
Number
|
Contractual
|
Average
|
Number
|
Average
|
|||||||||||
|
|
Outstanding
|
Life
|
Exercise
Price
|
Outstanding
|
Exercise
Price
|
|||||||||||
|
$11.96
- $16.71
|
56,063
|
4.8
years
|
$
|
15.53
|
56,063
|
$
|
15.53
|
|||||||||
|
$19.05
- $23.24
|
80,188
|
5.1
years
|
21.67
|
67,607
|
21.42
|
|||||||||||
|
$24.68
- $29.50
|
83,376
|
7.1
years
|
28.50
|
53,959
|
28.52
|
|||||||||||
|
$31.91
- $33.57
|
60,057
|
8.5
years
|
33.45
|
8,086
|
33.47
|
|||||||||||
|
$33.86
- $36.38
|
14,000
|
9.2
years
|
34.71
|
3,500
|
34.46
|
|||||||||||
|
293,684
|
6.5
years
|
189,215
|
||||||||||||||
The
fair
value of options is estimated at the date of grant using the Black-Scholes
option pricing model and expensed over the options’ vesting periods. The
following weighted-average assumptions were used in valuing options
issued:
|
2006
|
|
2005
|
2004
|
|||||||
|
Dividend
yield
|
2.15%
|
|
2.19%
|
|
2.47%
|
|
||||
|
Expected
life
|
7
years
|
10
years
|
10
years
|
|||||||
|
Expected
volatility
|
19%
|
|
24%
|
|
25%
|
|
||||
|
Risk-free
interest rate
|
4.49%
|
|
4.24%
|
|
4.67%
|
|
||||
F-32
The
following table presents pro forma net income and earnings per share as if
the
fair value based method had been applied to all outstanding and unvested
awards
for years ended December 31, 2005 and 2004:
|
Years
Ended December 31,
|
|||||||
|
(Dollars
in thousands, except per share data)
|
2005
|
2004
|
|||||
|
Net
income, as reported
|
$
|
16,655
|
$
|
14,016
|
|||
|
Less,
total share-based employee
|
|||||||
|
compensation
expense determined under the fair
|
|||||||
|
value
based method, net of related tax effects
|
280
|
237
|
|||||
|
Pro
forma net income
|
$
|
16,375
|
$
|
13,779
|
|||
|
Earnings
per share:
|
|||||||
|
Basic
- as reported
|
$
|
1.95
|
$
|
1.66
|
|||
|
Basic
- pro forma
|
1.91
|
1.63
|
|||||
|
Diluted
- as reported
|
$
|
1.93
|
$
|
1.64
|
|||
|
Diluted
- pro forma
|
1.90
|
1.61
|
|||||
As
a
result of adopting Statement No. 123R on January 1, 2006, earnings before
income
taxes for the year ended December 31, 2006 were $536,000 lower than if
share-based compensation had continued to be accounted for under Opinion
25. The
total income tax benefit recognized in the income statement for share-based
compensation arrangements was $204,000 for the year ended December 31,
2006.
The
Company from time-to-time also grants shares of restricted stock to key
employees and non-employee directors. These awards help align the interests
of
these employees and directors with the interests of the shareholders of the
Company by providing economic value directly related to increases in the
value
of the Company’s stock. The value of the stock awarded is established as the
fair market value of the stock at the time of the grant. The Company recognizes
expense, equal to the total value of such awards, ratably over the vesting
period of the stock grants. Grants to employees typically vest over a 48-month
period, while grants to non-employee directors typically vest within a 12-month
period.
All
restricted stock 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 key employees and non-employee directors
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. The Company
granted 27,435, 17,592, and 5,000 shares in 2006, 2005, and 2004, respectively.
The weighted-average-grant-date fair value of restricted shares granted in
2006,
2005, and 2004 was $33.56, $32.70, and $29.00, respectively. Compensation
expense of $447,000, $275,000, and $81,000 was recorded in 2006, 2005, and
2004,
respectively.
Nonvested
restricted stock for the year ended December 31, 2006 is summarized in the
following table. All information has been retroactively adjusted for stock
dividends and stock splits.
|
Weighted-
|
|||||||
|
Average
|
|||||||
|
|
Grant-Date
|
||||||
|
|
Shares
|
Fair
Value
|
|||||
|
Nonvested
at January 1
|
34,656
|
$
|
30.29
|
||||
|
Granted
|
27,435
|
33.56
|
|||||
|
Vested
|
15,066
|
32.91
|
|||||
|
Nonvested
at December 31
|
47,025
|
31.30
|
|||||
F-33
The
vesting schedule of non-vested shares at December 31, 2006, is as
follows:
|
Shares
|
||||
|
2007
|
14,663
|
|||
|
2008
|
8,464
|
|||
|
2009
|
17,214
|
|||
|
2010
|
5,184
|
|||
|
2011
|
1,500
|
|||
|
47,025
|
||||
The
2002
Employee Stock Purchase Plan permits eligible employees to purchase Company
stock at a 15% discounted price. For the year ended December 31, 2006, employees
participating in the plan purchased 14,054 shares. As a result of adopting
Statement No. 123R, the Company recognized $75,000 in share-based compensation
expense for the year ended December 31, 2006 related to employee stock purchases
under this plan.
As
of
December 31, 2006, there was $1,982,000 of total unrecognized compensation
cost
related to nonvested share-based compensation arrangements granted under
the
plan. That cost is expected to be recognized over a weighted average period
of
2.16 years. The total fair value of shares vested during the years ended
December 31, 2006 was $951,000.
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. No shares were repurchased under this program
in 2006 and 2005. During the year ended December 31, 2004, the Company
repurchased 120,908 shares at a cost of $3,590,000. Under other arrangements
where directors or officers sold or surrendered currently owned shares to
the
Company to acquire proceeds for exercising stock options or paying taxes
on
currently vesting restricted stock, the Company repurchased 13,149, 8,467,
and 18,780 shares at a cost of
$443,000, $256,000, and $613,000 in 2006, 2005, and
2004, respectively.
Note
19 - Lease Commitments
The
Company’s subsidiaries were obligated at December 31, 2006, under certain
noncancelable operating leases extending to the year 2030 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)
|
||||
|
Years
Ending December 31,
|
||||
|
2007
|
$ | 3,295 | ||
|
2008
|
3,450
|
|||
|
2009
|
3,451
|
|||
|
2010
|
3,487
|
|||
|
2011
|
1,665
|
|||
|
Thereafter
|
7,658
|
|||
|
$
|
23,006
|
|||
Total lease expense for the years ended December 31, 2006, 2005, and 2004 was $2,924,000, $2,695,000, and $3,003,000, 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.
F-34
Note
21 - Related Party Transactions
During
2006 and 2005, the Company’s banking subsidiaries had loan and deposit
relationships with certain related parties, principally directors and executive
officers, their immediate families and their business interests. All of these
relationships were in the ordinary course of business. Loans outstanding
to this
group (including immediate families and business interests) totaled $35,785,000
and $34,701,000 at December 31, 2006 and 2005 respectively. During 2006,
$15,864,000 of new loans were made to this group while repayments of $14,661,000
were received during the year. Other changes resulted in an decrease of
$119,000. Related party deposits totaled approximately $25,338,000 and
$31,571,000 at December 31, 2006 and 2005, respectively.
Note
22 - Financial Instruments with Off-Balance Sheet Risk
The
Company’s subsidiaries are parties to credit related financial instruments with
off-balance sheet risks in the normal course of business to meet the financing
needs of their customers. These financial instruments include commitments
to
extend credit, standby letters of credit and financial guarantees. Such
commitments involve, to varying degrees, elements of credit, interest rate,
or
liquidity risk in excess of the amounts recognized in the consolidated balance
sheets. The contract amounts of these instruments express the extent of
involvement the subsidiaries have in particular classes of financial
instruments.
The
subsidiaries’ exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit, and financial guarantees is represented by the
contractual amount of those instruments. The subsidiaries use the same credit
policies in making commitments and conditional obligations as they do for
on-balance sheet instruments. At December 31, 2006 and 2005, the following
financial instruments were outstanding whose contract amounts represent credit
risk:
|
2006
|
2005
|
||||||
|
Commitments
to extend credit
|
$
|
383,233
|
$
|
389,114
|
|||
|
Standby
letters of credit and financial guarantees
|
10,697
|
7,499
|
|||||
|
$
|
393,930
|
$
|
396,613
|
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 subsidiary banks 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:
F-35
Cash
and Cash Equivalents
The
carrying amount is a reasonable estimate of fair value.
Investment
Securities
Securities
available for sale 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. The carrying value of the Company’s investment in unconsolidated
subsidiaries approximates fair value.
Mortgage
Loans Held for Sale
Fair
values of mortgage loans held for sale are based on commitments on hand from
investors or prevailing market prices.
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) 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, borrowings under repurchase agreements,
and
other short-term borrowings maturing within ninety days approximate their
fair
values.
Other
Borrowings
The
fair
value of other borrowings is estimated using discounted cash flow analysis
on
the Company’s current incremental borrowing rates for similar types of
instruments.
Accrued
Interest
The
carrying amounts of accrued interest approximate fair value.
Commitments
to Extend Credit, Standby Letters of Credit and Financial
Guarantees
The
fair
value of commitments to extend credit 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.
F-36
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are as follows:
|
December
31,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||
|
Financial
assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
78,406
|
$
|
78,406
|
$
|
103,134
|
$
|
103,134
|
|||||
|
Investment
securities
|
210,391
|
210,550
|
182,744
|
183,003
|
|||||||||
|
Loans,
net and loans held for sale
|
1,761,398
|
1,744,486
|
1,528,837
|
1,517,196
|
|||||||||
|
Accrued
interest receivable
|
11,760
|
11,760
|
9,112
|
9,112
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Deposits
|
1,706,715
|
1,633,483
|
1,473,289
|
1,403,000
|
|||||||||
|
Federal
funds purchased and securities
|
|||||||||||||
|
sold
under agreements to repurchase
|
203,105
|
203,105
|
150,163
|
150,163
|
|||||||||
|
Other
borrowings
|
90,416
|
90,928
|
144,257
|
144,933
|
|||||||||
|
Accrued
interest payable
|
8,918
|
8,918
|
4,244
|
4,244
|
|||||||||
|
Unrecognized
financial instruments:
|
|||||||||||||
|
Commitments
to extend credit
|
383,233
|
374,622
|
389,114
|
386,189
|
|||||||||
|
Standby
letters of credit and financial guarantees
|
10,697
|
10,697
|
7,499
|
7,499
|
|||||||||
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 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as
defined) to average assets (as defined). Management believes, at December
31,
2006 and 2005, 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 1 risk-based, and Tier 1 leverage ratios as
set
forth in the following tables. There are no conditions or events subsequent
to
the most recent examinations that management believes have changed the
institutions’ category.
F-37
Actual
capital amounts and ratios are also presented in the table
below:
|
Minimum
To Be Well
|
|||||||||||||||||||
|
Capitalized
Under
|
|||||||||||||||||||
|
Minimum
Capital
|
Prompt
Corrective
|
||||||||||||||||||
|
(Dollars
in thousands)
|
Actual
|
Requirement
|
Action
Provisions
|
||||||||||||||||
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||
|
December
31, 2006:
|
|||||||||||||||||||
|
Total
risk-based capital
|
|||||||||||||||||||
|
(to
risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
191,018
|
11.36
|
%
|
$
|
134,486
|
8.00
|
%
|
n/a
|
n/a
|
|||||||||
|
South
Carolina Bank and Trust, N.A.
|
166,528
|
11.18
|
%
|
119,201
|
8.00
|
%
|
149,001
|
10.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
21,348
|
11.12
|
%
|
15,360
|
8.00
|
%
|
19,200
|
10.00
|
%
|
||||||||||
|
Tier
1 capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
169,949
|
10.11
|
%
|
67,243
|
4.00
|
%
|
n/a
|
n/a
|
|||||||||||
|
South
Carolina Bank and Trust, N.A.
|
147,850
|
9.92
|
%
|
59,601
|
4.00
|
%
|
89,401
|
6.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
18,947
|
9.87
|
%
|
7,680
|
4.00
|
%
|
11,520
|
6.00
|
%
|
||||||||||
|
Tier
1 capital (to average assets):
|
|||||||||||||||||||
|
Consolidated
|
169,949
|
8.11
|
%
|
83,844
|
4.00
|
%
|
n/a
|
n/a
|
|||||||||||
|
South
Carolina Bank and Trust, N.A.
|
147,850
|
8.02
|
%
|
73,762
|
4.00
|
%
|
92,202
|
5.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
18,947
|
7.56
|
%
|
10,021
|
4.00
|
%
|
12,527
|
5.00
|
%
|
||||||||||
|
December
31, 2005:
|
|||||||||||||||||||
|
Total
risk-based capital
|
|||||||||||||||||||
|
(to
risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
$
|
171,888
|
11.45
|
%
|
$
|
120,120
|
8.00
|
%
|
n/a
|
n/a
|
|||||||||
|
South
Carolina Bank and Trust, N.A.
|
137,304
|
10.90
|
%
|
100,806
|
8.00
|
%
|
126,008
|
10.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
19,189
|
11.86
|
%
|
12,938
|
8.00
|
%
|
16,173
|
10.00
|
%
|
||||||||||
|
SunBank,
N.A.
|
12,764
|
15.96
|
%
|
6,399
|
8.00
|
%
|
7,999
|
10.00
|
%
|
||||||||||
|
Tier
1 capital (to risk-weighted assets):
|
|||||||||||||||||||
|
Consolidated
|
153,874
|
10.25
|
%
|
60,060
|
4.00
|
%
|
n/a
|
n/a
|
|||||||||||
|
South
Carolina Bank and Trust, N.A.
|
121,696
|
9.66
|
%
|
50,403
|
4.00
|
%
|
75,605
|
6.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
17,165
|
10.61
|
%
|
6,469
|
4.00
|
%
|
9,704
|
6.00
|
%
|
||||||||||
|
SunBank,
N.A.
|
11,762
|
14.70
|
%
|
3,199
|
4.00
|
%
|
4,799
|
6.00
|
%
|
||||||||||
|
Tier
1 capital (to average assets):
|
|||||||||||||||||||
|
Consolidated
|
153,874
|
8.58
|
%
|
71,745
|
4.00
|
%
|
n/a
|
n/a
|
|||||||||||
|
South
Carolina Bank and Trust, N.A.
|
121,696
|
7.88
|
%
|
61,779
|
4.00
|
%
|
77,224
|
5.00
|
%
|
||||||||||
|
South
Carolina Bank and Trust
|
|||||||||||||||||||
|
of
the Piedmont, N.A.
|
17,165
|
8.16
|
%
|
8,412
|
4.00
|
%
|
10,515
|
5.00
|
%
|
||||||||||
|
SunBank,
N.A.
|
11,762
|
12.96
|
%
|
3,629
|
4.00
|
%
|
4,536
|
5.00
|
%
|
||||||||||
F-38
Note
25 - Condensed Financial Statements of Parent Company
Financial
information pertaining only to SCBT Financial Corporation is as
follows:
Condensed
Balance Sheets
(Dollars
in thousands)
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|||||||
|
Cash
|
$ | 1,004 | $ |
971
|
|||
|
Investment
securities available for sale
|
956
|
888
|
|||||
|
Investment
in subsidiaries
|
199,976
|
186,391
|
|||||
|
Less
allowance for loan losses
|
(34
|
)
|
(29
|
)
|
|||
|
Premise
and equipment
|
--
|
5
|
|||||
|
Other
assets
|
1,342
|
1,626
|
|||||
|
Total
assets
|
$
|
203,244
|
$
|
189,852
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Liabilities
|
$
|
41,356
|
$
|
41,449
|
|||
|
Shareholders'
equity
|
161,888
|
148,403
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
203,244
|
$
|
189,852
|
|||
Condensed
Statements of Income
(Dollars
in thousands)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Income:
|
||||||||||
|
Dividends
from subsidiaries
|
$
|
5,981
|
$
|
5,531
|
$
|
5,728
|
||||
|
Operating
income
|
7
|
18
|
14
|
|||||||
|
Total
income
|
5,988
|
5,549
|
5,742
|
|||||||
|
Operating
expenses
|
2,977
|
1,908
|
572
|
|||||||
|
Income
before income tax benefit and equity in
|
||||||||||
|
undistributed
earnings of subsidiaries
|
3,011
|
3,641
|
5,170
|
|||||||
|
Applicable
income tax benefit
|
1,016
|
629
|
191
|
|||||||
|
Equity
in undistributed earnings of subsidiaries
|
15,778
|
12,385
|
8,655
|
|||||||
|
Net
income
|
$
|
19,805
|
$
|
16,655
|
$
|
14,016
|
||||
F-39
Condensed
Statements of Cash Flows
(Dollars
in thousands)
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$ | 19,805 | $ | 16,655 | $ |
14,016
|
|
Adjustments
to reconcile net income to net cash
|
||||||||||
|
provided
by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
39
|
10
|
11
|
|||||||
|
Provision
for loan losses
|
6
|
48
|
--
|
|||||||
|
Share-based
compensation
|
983
|
--
|
--
|
|||||||
|
Decrease
(increase) in other assets
|
110
|
(136
|
) |
110
|
||||||
|
(Decrease)
increase in other liabilities
|
59
|
(277
|
) |
(7
|
) | |||||
|
Undistributed
earnings of subsidiaries
|
(15,778
|
)
|
(12,385
|
)
|
(8,655
|
)
|
||||
|
Net
cash provided by operating activities
|
5,224
|
3,915
|
5,475
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchases
of investment securities available for sale
|
(100
|
)
|
--
|
(110
|
)
|
|||||
|
Payments
for investments in subsidiaries
|
--
|
(40,916
|
)
|
--
|
||||||
|
Recoveries
on loans previously charged off
|
17
|
15
|
16
|
|||||||
|
Purchases
of premises and equipment
|
--
|
--
|
(685
|
)
|
||||||
|
Other,
net
|
(18
|
)
|
623
|
--
|
||||||
|
Net
cash used in investing activities
|
(101
|
)
|
(40,278
|
)
|
(779
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of long-term debt
|
--
|
41,239
|
--
|
|||||||
|
Cash
dividends paid
|
(5,911
|
)
|
(5,527
|
)
|
(5,228
|
)
|
||||
|
Common
stock issuance
|
423
|
876
|
427
|
|||||||
|
Common
stock redeemed
|
(443
|
)
|
(252
|
)
|
(3,590
|
)
|
||||
|
Stock
options exercised
|
841
|
395
|
1,304
|
|||||||
|
Net
cash provided by (used in) financing activities
|
(5,090
|
)
|
36,731
|
(7,087
|
)
|
|||||
|
Net
increase (decrease) in cash and cash equivalents
|
33
|
368
|
(2,391
|
)
|
||||||
|
Cash
and cash equivalents at beginning of period
|
971
|
603
|
2,994
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
1,004
|
$
|
971
|
$
|
603
|
||||
Note
26 - Subsequent Event
On
January
18, 2007, the Board of Directors declared a 5% stock dividend payable on
March
23, 2007 to stockholders of record on March 9, 2007. Per-share
amounts in the accompanying financial statements have been restated for the
stock dividend.
F-40