Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to                              

 

Commission file number 001-12669

 

GRAPHIC

 

SCBT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

South Carolina

 

57-0799315

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification No.)

 

520 Gervais Street

 

 

Columbia, South Carolina

 

29201

(Address of principal executive offices)

 

(Zip Code)

 

(800) 277-2175

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer o

 

Accelerated Filer x

 

 

 

Non-Accelerated Filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of April 30, 2011

Common Stock, $2.50 par value

 

13,972,145

 

 

 



Table of Contents

 

SCBT Financial Corporation and Subsidiary

March 31, 2011 Form 10-Q

 

INDEX

 

 

 

Page

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2011, December 31, 2010 and March 31, 2010

1

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010

2

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2011 and 2010

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5-40

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41-59

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

60

 

 

 

Item 4.

Controls and Procedures

60

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

61

 

 

 

Item 1A.

Risk Factors

61

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 3.

Defaults Upon Senior Securities

61

 

 

 

Item 4.

(Removed and Reserved)

61

 

 

 

Item 5.

Other Information

61

 

 

 

Item 6.

Exhibits

62

 



Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

 

SCBT Financial Corporation and Subsidiary

Condensed Consolidated Balance Sheets

(Dollars in thousands, except par value)

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

 

 

(Unaudited)

 

(Note 1)

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

Cash and due from banks

 

$

129,293

 

$

83,449

 

$

60,675

 

Interest-bearing deposits with banks

 

1,325

 

416

 

171

 

Federal funds sold and securities purchased under agreements to resell

 

282,006

 

153,234

 

177,251

 

Total cash and cash equivalents

 

412,624

 

237,099

 

238,097

 

Investment securities:

 

 

 

 

 

 

 

Securities held to maturity (fair value of $20,189, $20,150 and $21,062, respectively)

 

19,730

 

19,941

 

20,403

 

Securities available for sale, at fair value

 

189,654

 

197,374

 

268,372

 

Other investments

 

23,823

 

20,597

 

22,181

 

Total investment securities

 

233,207

 

237,912

 

310,956

 

Loans held for sale

 

10,755

 

42,704

 

15,925

 

Loans:

 

 

 

 

 

 

 

Covered under FDIC loss share agreements

 

417,796

 

321,038

 

438,807

 

Not covered under FDIC loss share agreements

 

2,348,309

 

2,296,200

 

2,175,242

 

Less allowance for loan losses

 

(73,997

)

(47,512

)

(41,397

)

Loans, net

 

2,692,108

 

2,569,726

 

2,572,652

 

FDIC receivable for loss share agreements

 

303,795

 

212,103

 

277,158

 

Other real estate owned (covered of $77,286, $69,317, and $32,076, respectively; and non-covered of $19,816, $17,264, and $9,319, respectively)

 

97,102

 

86,581

 

41,395

 

Premises and equipment, net

 

87,326

 

87,381

 

72,079

 

Goodwill

 

62,888

 

62,888

 

62,888

 

Other assets

 

63,061

 

58,397

 

74,034

 

Total assets

 

$

3,962,866

 

$

3,594,791

 

$

3,665,184

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

606,135

 

$

484,838

 

$

457,412

 

Interest-bearing

 

2,713,415

 

2,519,310

 

2,537,702

 

Total deposits

 

3,319,550

 

3,004,148

 

2,995,114

 

Federal funds purchased and securities sold under agreements to repurchase

 

206,560

 

191,017

 

237,669

 

Other borrowings

 

46,587

 

46,978

 

62,929

 

Other liabilities

 

24,119

 

22,691

 

34,706

 

Total liabilities

 

3,596,816

 

3,264,834

 

3,330,418

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock - $.01 par value; authorized 10,000,000 shares; no shares issued and outstanding

 

 

 

 

Common stock - $2.50 par value; authorized 40,000,000 shares; 13,958,824, 12,793,823 and 12,750,774 shares issued and outstanding

 

34,897

 

31,985

 

31,877

 

Surplus

 

230,826

 

198,647

 

196,793

 

Retained earnings

 

103,262

 

103,117

 

106,713

 

Accumulated other comprehensive loss

 

(2,935

)

(3,792

)

(617

)

Total shareholders’ equity

 

366,050

 

329,957

 

334,766

 

Total liabilities and shareholders’ equity

 

$

3,962,866

 

$

3,594,791

 

$

3,665,184

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

1



Table of Contents

 

SCBT Financial Corporation and Subsidiary

Condensed Consolidated Statements of Income (unaudited)

(Dollars in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

36,828

 

$

34,173

 

Investment securities:

 

 

 

 

 

Taxable

 

1,858

 

2,514

 

Tax-exempt

 

216

 

265

 

Federal funds sold and securities purchased under agreements to resell

 

353

 

252

 

Total interest income

 

39,255

 

37,204

 

Interest expense:

 

 

 

 

 

Deposits

 

5,717

 

7,055

 

Federal funds purchased and securities sold under agreements to repurchase

 

160

 

165

 

Other borrowings

 

532

 

1,353

 

Total interest expense

 

6,409

 

8,573

 

Net interest income

 

32,846

 

28,631

 

Provision for loan losses

 

10,641

 

20,778

 

Net interest income after provision for loan losses

 

22,205

 

7,853

 

Noninterest income:

 

 

 

 

 

Gain on acquisition

 

5,528

 

98,081

 

Service charges on deposit accounts

 

5,030

 

4,523

 

Bankcard services income

 

2,659

 

1,799

 

Trust and investment services income

 

1,249

 

784

 

Mortgage banking income

 

863

 

844

 

Securities gains

 

323

 

 

Total other-than-temporary impairment losses

 

 

(5,586

)

Portion of impairment losses recognized in other comprehensive loss

 

 

 

Net impairment losses recognized in earnings

 

 

(5,586

)

Accretion (amortization) of FDIC indemnification asset

 

(401

)

369

 

Other

 

622

 

807

 

Total noninterest income

 

15,873

 

101,621

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

16,646

 

13,753

 

Net occupancy expense

 

2,576

 

2,373

 

OREO expense and loan related

 

2,533

 

(270

)

Information services expense

 

2,341

 

2,371

 

Furniture and equipment expense

 

1,957

 

1,636

 

FDIC assessment and other regulatory charges

 

1,479

 

1,323

 

Advertising and marketing

 

909

 

587

 

Amortization of intangibles

 

446

 

349

 

Professional fees

 

433

 

557

 

Federal Home Loan Bank advances prepayment fee

 

 

3,189

 

Merger-related expense

 

609

 

3,908

 

Other

 

4,295

 

2,804

 

Total noninterest expense

 

34,224

 

32,580

 

Earnings:

 

 

 

 

 

Income before provision for income taxes

 

3,854

 

76,894

 

Provision for income taxes

 

1,338

 

27,933

 

Net income

 

2,516

 

48,961

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.19

 

$

3.89

 

Diluted

 

$

0.19

 

$

3.86

 

Dividends per common share

 

$

0.17

 

$

0.17

 

Weighted-average common shares outstanding:

 

 

 

 

 

Basic

 

13,185

 

12,591

 

Diluted

 

13,273

 

12,696

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

2



Table of Contents

 

SCBT Financial Corporation and Subsidiary

Condensed Consolidated Statements of Changes in Shareholders’ Equity (unaudited)

Three Months Ended March 31, 2011 and 2010

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

 

Preferred Stock

 

Common Stock

 

 

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Surplus

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

 

$

 

12,739,533

 

$

31,849

 

$

196,437

 

$

59,915

 

$

(5,382

)

$

282,819

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

48,961

 

 

48,961

 

Change in net unrealized gain on securities available for sale, net of tax

 

 

 

 

 

 

 

4,892

 

4,892

 

Change in unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of tax

 

 

 

 

 

 

 

(127

)

(127

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,726

 

Cash dividends declared at $.17 per share

 

 

 

 

 

 

(2,163

)

 

(2,163

)

Stock options exercised

 

 

 

1,740

 

4

 

44

 

 

 

48

 

Restricted stock awards

 

 

 

11,171

 

28

 

(28

)

 

 

 

Common stock repurchased

 

 

 

(1,670

)

(4

)

(42

)

 

 

(46

)

Share-based compensation expense

 

 

 

 

 

382

 

 

 

382

 

Balance, March 31, 2010

 

 

$

 

12,750,774

 

$

31,877

 

$

196,793

 

$

106,713

 

$

(617

)

$

334,766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

 

$

 

12,793,823

 

$

31,985

 

$

198,647

 

$

103,117

 

$

(3,792

)

$

329,957

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

2,516

 

 

2,516

 

Change in net unrealized gain on securities available for sale, net of tax

 

 

 

 

 

 

 

777

 

777

 

Change in unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of tax

 

 

 

 

 

 

 

80

 

80

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,373

 

Cash dividends declared at $.17 per share

 

 

 

 

 

 

(2,371

)

 

(2,371

)

Stock options exercised

 

 

 

3,050

 

8

 

62

 

 

 

70

 

Restricted stock awards

 

 

 

37,106

 

92

 

(92

)

 

 

 

Common stock repurchased

 

 

 

(4,187

)

(10

)

(127

)

 

 

(137

)

Share-based compensation expense

 

 

 

 

 

474

 

 

 

474

 

Common stock issued in private placement offering

 

 

 

1,129,032

 

2,822

 

31,862

 

 

 

34,684

 

Balance, March 31, 2011

 

 

$

 

13,958,824

 

$

34,897

 

$

230,826

 

$

103,262

 

$

(2,935

)

$

366,050

 

 

The Accompanying Notes are an Integral Part of the Financial Statements

 

3



Table of Contents

 

SCBT Financial Corporation and Subsidiary

Condensed Consolidated Statements of Cash Flows (unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

2,516

 

$

48,961

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,481

 

1,887

 

Provision for loan losses

 

10,641

 

20,778

 

Deferred income taxes

 

937

 

31,096

 

Other-than-temporary impairment on securities

 

 

5,586

 

Gain on sale of securities

 

(323

)

 

Gain on acquisition

 

(5,528

)

(98,081

)

Share-based compensation expense

 

474

 

382

 

Loss on disposal of premises and equipment

 

31

 

42

 

Federal Home Loan Bank advances prepayment fee

 

 

3,189

 

(Accretion) amortization of FDIC indemnification asset

 

401

 

(369

)

Accretion on loans covered under FDIC loss share agreements

 

1,604

 

1,029

 

Net amortization of investment securities

 

398

 

171

 

Net change in:

 

 

 

 

 

Loans held for sale

 

31,949

 

1,639

 

Accrued interest receivable

 

726

 

121

 

Prepaid assets

 

844

 

467

 

FDIC loss share receivable

 

(4,675

)

 

Accrued interest payable

 

(1,848

)

(3,028

)

Accrued income taxes

 

374

 

(4,904

)

Miscellaneous assets and liabilities

 

3,225

 

(11,577

)

Net cash provided by (used in) operating activities

 

44,227

 

(2,611

)

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of investment securities available for sale

 

52,092

 

 

Proceeds from maturities and calls of investment securities held to maturity

 

210

 

1,135

 

Proceeds from maturities and calls of investment securities available for sale

 

18,859

 

14,828

 

Purchases of investment securities available for sale

 

(3,743

)

(8,315

)

Purchases of other investment securities

 

(630

)

 

Net (increase) decrease in customer loans

 

(7,174

)

31,784

 

Net cash received from acquisition

 

91,280

 

306,298

 

Purchases of premises and equipment

 

(1,969

)

(1,711

)

Net cash provided by investing activities

 

148,925

 

344,019

 

Cash flows from financing activities:

 

 

 

 

 

Net decrease in deposits

 

(25,247

)

(118,031

)

Net increase in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings

 

13,712

 

74,809

 

Repayment of FHLB advances

 

(38,338

)

(162,836

)

Common stock issuance

 

34,684

 

 

Common stock repurchased

 

(137

)

(46

)

Dividends paid on common stock

 

(2,371

)

(2,163

)

Stock options exercised

 

70

 

48

 

Net cash used in financing activities

 

(17,627

)

(208,219

)

Net increase in cash and cash equivalents

 

175,525

 

133,189

 

Cash and cash equivalents at beginning of period

 

237,099

 

104,908

 

Cash and cash equivalents at end of period

 

$

412,624

 

$

238,097

 

 

 

 

 

 

 

Supplemental Disclosures:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

7,281

 

$

11,601

 

Income taxes

 

$

 

$

4,871

 

 

The Accompanying Notes are an Integral Part of the Financial Statements.

 

4



Table of Contents

 

SCBT Financial Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

 

Note 1 — Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Certain prior period information has been reclassified to conform to the current period presentation, and these reclassifications had no impact on net income or equity as previously reported.  Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

 

The condensed consolidated balance sheet at December 31, 2010, has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements.

 

Note 2 — Summary of Significant Accounting Policies

 

The information contained in the consolidated financial statements and accompanying notes included in SCBT Financial Corporation’s (the “Company” or “SCBT”) Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2011,  should be referenced when reading these unaudited condensed consolidated financial statements.

 

Business Combinations, Method of Accounting for Loans Acquired, and FDIC Indemnification Asset

 

The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the purchase method of accounting.  All identifiable assets acquired, including loans, are recorded at fair value.  No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.  Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements and Disclosures, exclusive of the loss share agreements with the Federal Deposit Insurance Corporation (the “FDIC”).  The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.

 

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans.  Loans acquired in business combinations with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired.  Evidence of credit quality deterioration as of purchase dates may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages.  The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the amount deemed paid for the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable yield). The Company records a discount on these loans at acquisition to record them at their realizable cash flow.  In accordance with FASB ASC Topic 310-30, the Company aggregated loans that have common risk characteristics into pools within the following loan categories:  commercial loans greater than or equal to $1 million, commercial real estate, commercial real estate—construction and development, residential real estate, residential real estate junior lien, home equity, consumer, commercial and industrial, and single pay.

 

Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for under this guidance.  As a result, related discounts are recognized subsequently through accretion based on the expected cash flow of the acquired loans.

 

5



Table of Contents

 

Note 2 — Summary of Significant Accounting Policies (continued)

 

Pursuant to an AICPA letter dated December 18, 2009, the AICPA summarized the view of the SEC regarding the accounting in subsequent periods for discount accretion associated with loan receivables acquired in a business combination or asset purchase.  Regarding the accounting for such loan receivables, that in the absence of further standard setting, the AICPA understands that the SEC would not object to an accounting policy based on contractual cash flows (FASB ASC Topic 310-20 approach) or an accounting policy based on expected cash flows (FASB ASC Topic 310-30 approach). Management believes the approach using expected cash flows is a more appropriate option to follow in accounting for the fair value discount.

 

Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial investment in the loans should be accreted into interest income on a level-yield basis over the life of the loan.  Decreases in cash flows expected to be collected should be recognized as impairment through the provision for loan losses.  The FDIC indemnification asset will be adjusted in a similar, consistent manner with increases and decreases in expected cash flows.

 

The FDIC indemnification asset is measured separately from the related covered asset as it is not contractually embedded in the assets and is not transferable with the assets should the Company choose to dispose of them.  Fair value was estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages.  These expected reimbursements do not include reimbursable amounts related to future covered expenditures.  These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.

 

The Company incurs expenses related to the assets indemnified by the FDIC and, pursuant to the loss share agreement, certain costs are reimbursable by the FDIC and are included in monthly and quarterly claims made by the Company.  The estimates of reimbursements are netted against these covered expenses in the statements of income.

 

Note 3 — Recent Accounting Pronouncements

 

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) will result in expansive changes in many areas affecting the financial services industry in general and the Company in particular. The legislation provides broad economic oversight, consumer financial services protection, investor protection, rating agency reform and derivative regulatory reform. Various corporate governance requirements will result in expanded proxy disclosures and shareholder rights. Additional provisions address the mortgage industry in an effort to strengthen lending practices. Deposit insurance reform will result in permanent FDIC protection for up to $250,000 of deposits and will require the FDIC’s Deposit Insurance Fund to maintain 1.35 percent of insured deposits with the burden for closing any shortfall falling to banks with more than $10.0 billion in assets. Provisions within the Dodd-Frank Act will prohibit institutions that had more than $15 billion in assets on December 31, 2009 from including trust preferred securities (“TRUPs”) as Tier 1 capital beginning in 2013. One third will be phased out over the next two years ending in 2015. Financial institutions with less than $15 billion in total assets, such as the Company, may continue to count their pre-May 19, 2010, TRUPs as Tier 1 capital, but may not issue new capital TRUPs. Another provision of the legislation gives the Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10.0 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer. While SCBT would not be subject to the interchange fee restrictions, this provision could negatively impact non-interest income if the reductions that are required of larger banks cause industry-wide reductions of interchange fees.

 

Effective December 31, 2010, SCBT adopted certain of the key provisions of Accounting Standards Update (“ASU”) No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, (“ASU 2010-20”). ASU 2010-20 amends ASC 310 by requiring more robust and disaggregated disclosures about the credit quality of an entity’s financing receivables and its allowance for credit losses. The objective of enhancing these disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables and (2) the entity’s assessment of that risk in estimating its allowance for credit losses as well as changes in the allowance and reasons for those changes. Most of the new and amended disclosures in the ASU are effective December 31, 2010, and are included in Note 5 Loans and Allowance for Loan Losses. The disclosure for the activity in the allowance for credit losses for each period will be effective for the first quarter of 2011.  In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in ASU 2011-01 temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities.  The impact of adoption for SCBT is the inclusion of additional disclosures in SCBT’s consolidated financial statements.

 

6



Table of Contents

 

Note 4 — Mergers and Acquisitions

 

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values becomes available.

 

Habersham Bank Acquisition

 

On February 18, 2011, the Company’s wholly-owned subsidiary, SCBT, N.A. (the “Bank”), entered into a purchase and assumption (“P&A”) agreement with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of Habersham, a full service Georgia state-chartered community bank headquartered in Clarkesville, Georgia.  Habersham operated eight branches in the northeast region of Georgia.

 

Pursuant to the P&A agreement, the Bank received a discount of $38.3 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. Most of the loans and foreclosed real estate purchased are covered by a loss share agreement between the FDIC and the Bank. Under this loss share agreement, the FDIC has agreed to cover 80% of loan and foreclosed real estate losses. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial loans provides for FDIC loss sharing for five years and Bank reimbursement to the FDIC for eight years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the covered assets based on the credit adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreement. This discount will be accreted to non-interest income over future periods.

 

The Bank did not immediately acquire the real estate, banking facilities, furniture or equipment of Habersham as a part of the P&A agreement. However, the Bank has the option to purchase the real estate and furniture and equipment from the FDIC. The term of this option expires approximately 90 days from the date of the acquisition.

 

As of March 31, 2011, there have been no adjustments or changes to the initial fair values related to the Habersham acquisition. The purchase accounting adjustments and the loss sharing arrangement with the FDIC will significantly impact the effects of the acquired entity on the ongoing operations of the Company. Disclosure of pro forma financial information is also made more difficult by the troubled nature of Habersham prior to the date of the combination. The Company has omitted pro forma information related to the Habersham acquisition because of the pervasive federal assistance in the transaction.

 

As of March 31, 2011, noninterest income included a pre-tax gain of $5.5 million which resulted from the acquisition of Habersham. The amount of the gain was equal to the amount by which the fair value of assets acquired exceeded the fair value of liabilities assumed, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreement, both of which are attributable to the troubled nature of Habersham prior to the acquisition. The Company recognized $609,000 in merger-related expense during the three months ended March 31, 2011.

 

7



Table of Contents

 

Note 4 — Mergers and Acquisitions (continued)

 

The following table presents the assets acquired and liabilities assumed as of February 18, 2011, as recorded by Habersham on the acquisition date and as adjusted for purchase accounting adjustments.

 

 

 

 

 

Balances

 

Balances

 

 

 

 

 

 

 

As Recorded

 

Kept by

 

Acquired

 

Fair Value

 

As Recorded

 

(Dollars in thousands)

 

by Habersham

 

FDIC

 

from FDIC

 

Adjustments

 

by SCBT

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,924

 

$

(4

)

$

31,920

 

$

 

$

31,920

 

Investment securities

 

65,018

 

(3,582

)

61,436

 

(566

)(a)

60,870

 

Loans

 

212,828

 

9,039

 

221,867

 

(94,414

)(b)

127,453

 

Premises and equipment

 

16,915

 

(16,915

)

 

 

 

Intangible assets

 

 

 

 

3,262

(c)

3,262

 

FDIC receivable for loss sharing agreement

 

 

 

 

87,418

(d)

87,418

 

Other real estate owned and repossessed assets

 

42,024

 

(616

)

41,408

 

(26,915

)(e)

14,493

 

Other assets

 

14,446

 

(11,227

)

3,219

 

 

3,219

 

Total assets

 

$

383,155

 

$

(23,305

)

$

359,850

 

$

(31,215

)

$

328,635

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

76,205

 

$

(5

)

$

76,200

 

$

 

$

76,200

 

Interest-bearing

 

263,246

 

 

263,246

 

1,203

(f)

264,449

 

Total deposits

 

339,451

 

(5

)

339,446

 

1,203

 

340,649

 

Other borrowings

 

39,433

 

(6

)

39,427

 

344

(g)

39,771

 

Other liabilities

 

2,819

 

(1,710

)

1,109

 

 

1,109

 

Total liabilities

 

381,703

 

(1,721

)

379,982

 

1,547

 

381,529

 

Net assets acquired over liabilities assumed

 

$

1,452

 

$

(21,584

)

$

(20,132

)

$

(32,762

)

$

(52,894

)

Excess of assets acquired over liabilities assumed

 

$

1,452

 

$

(21,584

)

$

(20,132

)

 

 

 

 

Aggregate fair value adjustments

 

 

 

 

 

 

 

$

(32,762

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash received from the FDIC

 

 

 

 

 

 

 

 

 

$

59,360

 

Cash due to FDIC

 

 

 

 

 

 

 

 

 

(938

)

Total

 

 

 

 

 

 

 

 

 

58,422

 

Gain on acquisition (noninterest income)

 

 

 

 

 

 

 

 

 

$

5,528

 

 


Explanation of fair value adjustments

 

Adjustment reflects:

 

(a)—Adjustment reflects marking the available-for-sale portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.

(c)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

(d)—Adjustment reflects the estimated fair value of payments the Company will receive from the FDIC under the loss share agreements.

(e)—Adjustment reflects the fair value adjustments to OREO based on the Company’s evaluation of the acquired OREO portfolio.

(f)—Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

(g)—Adjustment reflects the prepayment fee paid when Federal Home Loan Bank (“FHLB”) advances were completely paid off in February 2011.

 

8



Table of Contents

 

Note 4 — Mergers and Acquisitions (continued)

 

Community Bank and Trust Acquisition

 

On January 29, 2010, the Bank entered into a P&A agreement, including loss share arrangements, with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of CBT, a full service Georgia state-chartered community bank headquartered in Cornelia, Georgia. CBT operated 38 locations, including 36 branches, one loan production office and one trust office in the northeast region of Georgia.

 

Pursuant to the P&A agreement, the Bank received a discount of $158.0 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. The loans and foreclosed real estate purchased are covered by a loss share agreement between the FDIC and the Bank. Under this loss share agreement, the FDIC has agreed to cover 80% of loan and foreclosed real estate losses up to $233.0 million and 95% of losses that exceed that amount. Gains and recoveries on covered assets will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. The loss sharing agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and Bank reimbursement to the FDIC for ten years. The loss share agreement applicable to commercial loans provides for FDIC loss sharing for five years and Bank reimbursement to the FDIC for eight years. The loss share agreement applicable to single family loans provides for FDIC loss sharing for ten years and Bank reimbursement to the FDIC for ten years. As of the date of acquisition, we calculated the amount of such reimbursements that we expect to receive from the FDIC using the present value of anticipated cash flows from the covered assets based on the credit adjustments estimated for each pool of loans and the estimated losses on foreclosed assets. In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value, and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferable with them in the event of disposal. The balance of the FDIC indemnification asset increases and decreases as the expected and actual cash flows from the covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are sold. There are no contractual interest rates on this contractual receivable from the FDIC; however, a discount was recorded against the initial balance of the FDIC indemnification asset in conjunction with the fair value measurement as this receivable will be collected over the term of the loss sharing agreements. This discount will be accreted to non-interest income over future periods.

 

The Bank did not immediately acquire the real estate, banking facilities, furniture or equipment of CBT as a part of the P&A agreement. However, the Bank had the option to purchase the real estate, furniture and equipment from the FDIC. The term of this option expired on April 29, 2010. On April 28, 2010, the Bank notified the FDIC that it planned to acquire seven bank facilities with an appraised value of approximately $10.9 million. In addition, the Bank notified the FDIC that it plans to purchase approximately $700,000 of furniture or equipment related to 27 locations being retained by the Bank. On October 27, 2010, the Bank settled the purchase of the assets above and settled other items that related to the January 29, 2010 acquisition, with a net payment to the FDIC of $3.9 million. There was no income statement or equity impact of this settlement on the financial statements of the Bank. These 27 banking facilities include both leased and owned locations. In late May and early June of 2010, the Bank closed 10 bank branches, 1 trust office, and converted the operating system of the acquired Georgia franchise.

 

There have been no adjustments or changes to the initial fair values related to the CBT acquisition within the one year time frame from the date of acquisition.  The purchase accounting adjustments and the loss sharing arrangement with the FDIC will significantly impact the effects of the acquired entity on the ongoing operations of the Company. Disclosure of pro forma financial information is also made more difficult by the troubled nature of CBT prior to the date of the combination. The Company has omitted pro forma information related to the CBT acquisition because of the pervasive federal assistance in the transaction.

 

As of December 31, 2010, noninterest income included a pre-tax gain of $98.1 million which resulted from the acquisition of CBT. The amount of the gain was equal to the amount by which the fair value of assets acquired exceeded the fair value of liabilities assumed, and resulted from the discount bid on the assets acquired and the impact of the FDIC loss share agreement, both of which are attributable to the troubled nature of CBT prior to the acquisition. The Company recognized $5.5 million in merger-related expense during the twelve months ended December 31, 2010.

 

9



Table of Contents

 

Note 4 — Mergers and Acquisitions (continued)

 

The following table presents the assets acquired and liabilities assumed as of January 29, 2010, as recorded by CBT on the acquisition date and as adjusted for purchase accounting adjustments.

 

 

 

 

 

Balances

 

Balances

 

 

 

 

 

 

 

As Recorded

 

Kept by

 

Acquired

 

Fair Value

 

As Recorded

 

(Dollars in thousands)

 

by CBT

 

FDIC

 

from FDIC

 

Adjustments

 

by SCBT

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

80,615

 

$

(12

)

$

80,603

 

$

 

$

80,603

 

Investment securities

 

116,270

 

(10,046

)

106,224

 

(613

)(a)

105,611

 

Loans

 

828,223

 

(56,725

)

771,498

 

(312,033

)(b)

459,465

 

Premises and equipment

 

24,063

 

(24,015

)

48

 

 

48

 

Intangible assets

 

 

 

 

8,535

(c)

8,535

 

FDIC receivable for loss sharing agreement

 

 

 

 

276,789

(d)

276,789

 

Other real estate owned and repossessed assets

 

46,271

 

4,852

 

51,123

 

(25,194

)(e)

25,929

 

Other assets

 

26,414

 

(18,541

)

7,873

 

 

7,873

 

Total assets

 

$

1,121,856

 

$

(104,487

)

$

1,017,369

 

$

(52,516

)

$

964,853

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

107,617

 

$

(11,602

)

$

96,015

 

$

 

$

96,015

 

Interest-bearing

 

907,288

 

311

 

907,599

 

4,892

(f)

912,491

 

Total deposits

 

1,014,905

 

(11,291

)

1,003,614

 

4,892

 

1,008,506

 

Other borrowings

 

80,250

 

 

80,250

 

2,316

(g)

82,566

 

Other liabilities

 

10,748

 

(3,614

)

7,134

 

194

(h)

7,328

 

Total liabilities

 

1,105,903

 

(14,905

)

1,090,998

 

7,402

 

1,098,400

 

Net assets acquired over liabilities assumed

 

$

15,953

 

$

(89,582

)

$

(73,629

)

$

(59,918

)

$

(133,547

)

Excess of assets acquired over liabilities assumed

 

$

15,953

 

$

(89,582

)

$

(73,629

)

 

 

 

 

Aggregate fair value adjustments

 

 

 

 

 

 

 

$

(59,918

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash received from the FDIC

 

 

 

 

 

 

 

 

 

$

225,695

 

Cash due from FDIC

 

 

 

 

 

 

 

 

 

5,933

 

Total

 

 

 

 

 

 

 

 

 

231,628

 

Gain on acquisition (noninterest income)

 

 

 

 

 

 

 

 

 

$

98,081

 

 


Explanation of fair value adjustments

 

Adjustment reflects:

(a)—Adjustment reflects marking the available-for-sale portfolio to fair value as of the acquisition date.

(b)—Adjustment reflects the fair value adjustments based on the Company’s evaluation of the acquired loan portfolio.

(c)—Adjustment reflects the recording of the core deposit intangible on the acquired deposit accounts.

(d)—Adjustment reflects the estimated fair value of payments the Company will receive from the FDIC under the loss share agreements.

(e)—Adjustment reflects the fair value adjustments to OREO based on the Company’s evaluation of the acquired OREO portfolio.

(f)—Adjustment arises since the rates on interest-bearing deposits are higher than rates available on similar deposits as of the acquisition date.

(g)—Adjustment reflects the prepayment penalty paid when FHLB advances were completely paid off in early February 2010.

(h)—Adjustment reflects the fair value of leases assumed.

 

10



Table of Contents

 

Note 5 — 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

 

March 31, 2011:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

19,730

 

$

459

 

$

 

$

20,189

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

19,941

 

$

227

 

$

(18

)

$

20,150

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

20,403

 

$

669

 

$

(10

)

$

21,062

 

 

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

 

March 31, 2011:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt *

 

$

56,987

 

$

646

 

$

(115

)

$

57,518

 

State and municipal obligations

 

38,688

 

1,139

 

(261

)

39,566

 

Mortgage-backed securities **

 

90,186

 

2,038

 

(235

)

91,989

 

Equity securities

 

443

 

138

 

 

581

 

 

 

$

186,304

 

$

3,961

 

$

(611

)

$

189,654

 

December 31, 2010:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt *

 

$

69,854

 

$

844

 

$

(164

)

$

70,534

 

State and municipal obligations

 

39,749

 

680

 

(425

)

40,004

 

Mortgage-backed securities **

 

83,045

 

1,752

 

(357

)

84,440

 

Trust preferred (collateralized debt obligations)

 

2,324

 

 

(290

)

2,034

 

Equity securities

 

256

 

106

 

 

362

 

 

 

$

195,228

 

$

3,382

 

$

(1,236

)

$

197,374

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt *

 

$

119,575

 

$

626

 

$

(182

)

$

120,019

 

State and municipal obligations

 

40,505

 

1,414

 

(363

)

41,556

 

Mortgage-backed securities **

 

95,575

 

4,538

 

(8

)

100,105

 

Trust preferred (collateralized debt obligations)

 

6,576

 

 

(280

)

6,296

 

Equity securities

 

285

 

114

 

(3

)

396

 

 

 

$

262,516

 

$

6,692

 

$

(836

)

$

268,372

 

 


* - Government-sponsored enterprises holdings are comprised of debt securities offered by Federal Home Loan Mortgage Corporation (“FHLMC”) or Freddie Mac, Federal National Mortgage Association (“FNMA”) or Fannie Mae, FHLB, and Federal Farm Credit Banks (“FFCB”).

** - All of the mortgage-backed securities are issued by government-sponsored enterprises; there are no private-label holdings.

 

11



Table of Contents

 

Note 5 — Investment Securities (continued)

 

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

 

March 31, 2011:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank stock

 

$

6,617

 

$

 

$

 

$

6,617

 

Federal Home Loan Bank stock

 

15,874

 

 

 

15,874

 

Investment in unconsolidated subsidiaries

 

1,332

 

 

 

1,332

 

 

 

$

23,823

 

$

 

$

 

$

23,823

 

December 31, 2010:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank stock

 

$

5,987

 

$

 

$

 

$

5,987

 

Federal Home Loan Bank stock

 

13,278

 

 

 

13,278

 

Investment in unconsolidated subsidiaries

 

1,332

 

 

 

1,332

 

 

 

$

20,597

 

$

 

$

 

$

20,597

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

Federal Reserve Bank stock

 

$

5,987

 

$

 

$

 

$

5,987

 

Federal Home Loan Bank stock

 

14,862

 

 

 

14,862

 

Investment in unconsolidated subsidiaries

 

1,332

 

 

 

1,332

 

 

 

$

22,181

 

$

 

$

 

$

22,181

 

 

The Company has determined that the investment in Federal Reserve Bank stock and FHLB stock is not other than temporarily impaired as of March 31, 2011 and ultimate recoverability of the par value of these investments is probable.  See “Other Investments” under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The amortized cost and fair value of debt securities at March 31, 2011 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

 

$

130

 

$

131

 

$

 

$

 

Due after one year through five years

 

260

 

262

 

6,389

 

6,475

 

Due after five years through ten years

 

6,680

 

6,849

 

43,174

 

43,535

 

Due after ten years

 

12,660

 

12,947

 

136,741

 

139,644

 

 

 

$

19,730

 

$

20,189

 

$

186,304

 

$

189,654

 

 

12



Table of Contents

 

Note 5 — Investment Securities (continued)

 

Information pertaining to the Company’s securities available for sale with gross unrealized losses at March 31, 2011, December 31, 2010 and March 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position is as follows:

 

 

 

Less Than Twelve Months

 

Twelve Months or More

 

 

 

Gross

 

 

 

Gross

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Losses

 

Value

 

Losses

 

Value

 

March 31, 2011:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

115

 

$

16,750

 

$

 

$

 

State and municipal obligations

 

113

 

4,535

 

148

 

1,398

 

Mortgage-backed securities

 

235

 

23,333

 

 

 

Equity securities

 

 

 

 

 

 

 

$

463

 

$

44,618

 

$

148

 

$

1,398

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

18

 

$

3,050

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

164

 

$

26,138

 

$

 

$

 

State and municipal obligations

 

229

 

12,402

 

196

 

1,350

 

Mortgage-backed securities

 

357

 

31,547

 

 

 

Trust preferred (collateralized debt obligations)

 

 

 

290

 

2,034

 

 

 

$

750

 

$

70,087

 

$

486

 

$

3,384

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

 

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

State and municipal obligations

 

$

 

$

 

$

10

 

$

812

 

 

 

 

 

 

 

 

 

 

 

Securities Available for Sale

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

182

 

$

12,272

 

$

 

$

 

State and municipal obligations

 

84

 

2,534

 

279

 

4,363

 

Mortgage-backed securities

 

8

 

3,162

 

 

 

Trust preferred (collateralized debt obligations)

 

 

 

280

 

2,361

 

Equity securities

 

3

 

166

 

 

 

 

 

$

277

 

$

18,134

 

$

559

 

$

6,724

 

 

13



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses

 

The following is a summary of non-acquired loans:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Non-acquired loans:

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

Construction and land development

 

$

403,149

 

422,041

 

$

442,566

 

Commercial non-owner occupied

 

318,597

 

306,381

 

294,147

 

Total commercial non-owner occupied real estate

 

721,746

 

728,422

 

736,713

 

Consumer real estate:

 

 

 

 

 

 

 

Consumer owner occupied

 

334,849

 

322,637

 

287,788

 

Home equity loans

 

263,331

 

263,994

 

250,651

 

Total consumer real estate

 

598,180

 

586,631

 

538,439

 

Commercial owner occupied real estate

 

593,363

 

565,155

 

483,450

 

Commercial and industrial

 

206,348

 

202,987

 

203,296

 

Other income producing property

 

131,909

 

124,431

 

133,949

 

Consumer

 

73,464

 

67,768

 

66,259

 

Other loans

 

23,299

 

20,806

 

13,136

 

Total loans

 

2,348,309

 

2,296,200

 

2,175,242

 

Less, allowance for loan losses

 

(48,164

)

(47,512

)

(41,397

)

Non-acquired loans, net

 

$

2,300,145

 

$

2,248,688

 

$

2,133,845

 

 

As permitted by FASB ASC Topic 310-30, the Company aggregated loans covered under loss share agreements that have common risk characteristics into pools within the following loan categories: commercial loans greater than or equal to $1 million, commercial real estate, commercial real estate—construction and development, residential real estate, residential real estate—junior lien, home equity, consumer, commercial and industrial, and single pay.

 

14



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The Company’s loans covered under loss share agreements portfolio is comprised of the following balances net of related discount:

 

 

 

March 31, 2011

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Loans covered under loss share agreements:

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

34,658

 

$

45,697

 

$

80,355

 

Commercial real estate

 

29,438

 

61,256

 

90,694

 

Commercial real estate—construction and development

 

38,453

 

23,044

 

61,497

 

Residential real estate

 

54,876

 

67,691

 

122,567

 

Residential real estate—junior lien

 

1,832

 

1,318

 

3,150

 

Home equity

 

285

 

697

 

982

 

Consumer

 

9,696

 

3,504

 

13,200

 

Commercial and industrial

 

13,287

 

21,114

 

34,401

 

Single pay

 

10,588

 

362

 

10,950

 

Total loans covered under loss share agreements

 

$

193,113

 

$

224,683

 

$

417,796

 

Less, allowance for loan losses

 

(25,833

)

 

(25,833

)

Loans covered under loss share agreements, net

 

$

167,280

 

$

224,683

 

$

391,963

 

 

 

 

December 31, 2010

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Loans covered under loss share agreements:

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

32,744

 

$

51,544

 

$

84,288

 

Commercial real estate

 

21,302

 

45,326

 

66,628

 

Commercial real estate—construction and development

 

15,262

 

17,050

 

32,312

 

Residential real estate

 

45,299

 

42,246

 

87,545

 

Residential real estate—junior lien

 

2,100

 

1,573

 

3,673

 

Home equity

 

496

 

1,023

 

1,519

 

Consumer

 

5,879

 

5,036

 

10,915

 

Commercial and industrial

 

10,821

 

13,921

 

24,742

 

Single pay

 

9,156

 

260

 

9,416

 

Total loans covered under loss share agreements

 

$

143,059

 

$

177,979

 

$

321,038

 

 

15



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

 

 

March 31, 2010

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Loans covered under loss share agreements:

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

49,937

 

$

56,863

 

$

106,800

 

Commercial real estate

 

30,328

 

52,183

 

82,511

 

Commercial real estate—construction and development

 

32,770

 

21,157

 

53,927

 

Residential real estate

 

65,992

 

51,658

 

117,650

 

Residential real estate—junior lien

 

2,293

 

2,350

 

4,643

 

Home equity

 

587

 

1,193

 

1,780

 

Consumer

 

11,349

 

9,228

 

20,577

 

Commercial and industrial

 

13,599

 

18,797

 

32,396

 

Single pay

 

17,416

 

1,107

 

18,523

 

Total loans covered under loss share agreements

 

$

224,271

 

$

214,536

 

$

438,807

 

 

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting fair values of loans covered under loss share agreements impaired and non-impaired at the acquisition date for Habersham (February 18, 2011) are as follows:

 

 

 

February 18, 2011

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Contractual principal and interest

 

$

132,386

 

$

135,500

 

$

267,886

 

Non-accretable difference

 

(68,996

)

(43,322

)

(112,318

)

Cash flows expected to be collected

 

63,390

 

92,178

 

155,568

 

Accretable yield

 

(8,747

)

(19,368

)

(28,115

)

Carrying value

 

$

54,643

 

$

72,810

 

$

127,453

 

 

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting fair values of loans covered under loss share agreement impaired and non-impaired at the acquisition date for CBT  (January 29, 2010—refined) are as follows:

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Contractual principal and interest

 

$

450,691

 

$

350,309

 

$

801,000

 

Non-accretable difference

 

(210,024

)

(102,274

)

(312,298

)

Cash flows expected to be collected

 

240,667

 

248,035

 

488,702

 

Accretable yield

 

(7,431

)

(21,806

)

(29,237

)

Carrying value

 

$

233,236

 

$

226,229

 

$

459,465

 

 

During 2010, the Company refined certain assumptions and loan pools which resulted in changes in the line items of the table above. The changes did not result in a change in the carrying value initially recorded.

 

Contractual loan payments receivable, estimates of amounts not expected to be collected, other fair value adjustments and the resulting fair values of loans covered under loss share agreements impaired and non-impaired as of March 31, 2011, December 31, 2010, and March 31, 2010 - refined are as follows:

 

 

 

March 31, 2011

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Contractual principal and interest

 

$

379,900

 

$

396,321

 

$

776,221

 

Non-accretable difference

 

(189,618

)

(101,067

)

(290,685

)

Cash flows expected to be collected

 

190,282

 

295,254

 

485,536

 

Accretable yield

 

(23,002

)

(70,571

)

(93,573

)

Carrying value

 

$

167,280

 

$

224,683

 

$

391,963

 

 

16



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

 

 

December 31, 2010

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Contractual principal and interest

 

$

301,080

 

$

303,153

 

$

604,233

 

Non-accretable difference

 

(140,723

)

(97,788

)

(238,511

)

Cash flows expected to be collected

 

160,357

 

205,365

 

365,722

 

Accretable yield

 

(17,298

)

(27,386

)

(44,684

)

Carrying value

 

$

143,059

 

$

177,979

 

$

321,038

 

 

 

 

March 31, 2010

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Contractual principal and interest

 

$

437,578

 

$

336,371

 

$

773,949

 

Non-accretable difference

 

(206,753

)

(102,275

)

(309,028

)

Cash flows expected to be collected

 

230,825

 

234,096

 

464,921

 

Accretable yield

 

(6,554

)

(19,560

)

(26,114

)

Carrying value

 

$

224,271

 

$

214,536

 

$

438,807

 

 

Income on loans covered under loss share agreement that are not impaired at the acquisition date is recognized in the same manner as loans impaired at the acquisition date. A portion of the fair value discount on acquired non-impaired loans has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining nonaccretable difference represents cash flows not expected to be collected.

 

The unpaid principal balance for acquired loans was $673.7 million at March 31, 2011, $519.2 million at December 31, 2010 and $750.8 million at March 31, 2010.

 

The following are changes in the carrying value of loans covered under loss share agreements at the acquisition date during the periods ended March 31, 2011 and 2010:

 

 

 

 

 

Loans

 

 

 

 

 

Loans Impaired

 

Not Impaired

 

 

 

(Dollars in thousands)

 

at Acquisition

 

at Acquisition

 

Total

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

143,059

 

$

177,979

 

$

321,038

 

Fair value of acquired loans

 

54,643

 

72,810

 

127,453

 

Reductions for payments and foreclosures

 

(30,422

)

(26,106

)

(56,528

)

Balance, March 31, 2011

 

$

167,280

 

$

224,683

 

$

391,963

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

$

 

$

 

$

 

Fair value of acquired loans

 

233,236

 

226,229

 

459,465

 

Reductions for payments and foreclosures

 

(8,965

)

(11,693

)

(20,658

)

Balance, March 31, 2010

 

$

224,271

 

$

214,536

 

$

438,807

 

 

17



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following are changes in the carrying amount of accretable yield for purchased impaired and non-impaired loans for the period ended March 31, 2011:

 

(Dollars in thousands)

 

 

 

 

 

 

 

Beginning balance December 31, 2010

 

$

44,684

 

Additions from Habersham acquisition

 

28,115

 

Interest income

 

(7,127

)

Improved cash flows affecting nonaccretable difference

 

36,200

 

Other changes, net

 

(8,299

)

Ending balance, March 31, 2011

 

$

93,573

 

 

On December 13, 2006, the OCC, Federal Reserve, FDIC, 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 based upon estimates 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 regularly 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 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 an appropriate level.

 

The allowance consists of general and specific reserves. The general reserves are determined by applying loss percentages to the portfolio that are based on historical loss experience and management’s evaluation and “risk grading” of the loan portfolio. Additionally, the general economic and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal and external credit reviews and results from external bank regulatory examinations are included in this evaluation. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of our exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. These are loans classified by management 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. Generally, the need for a specific reserve is evaluated on impaired loans greater than $250,000 of all non-homogenous commercial loans. Loans for which specific reserves are provided are excluded from the calculation of the general reserves.

 

In determining the acquisition date fair value of purchased loans, and in subsequent accounting, SCBT generally aggregates purchased loans into pools of loans with common risk characteristics. Expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows of the pool is reasonably estimable. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses. Evidence of credit quality deterioration for the loan pools may include information such as increased past-due and nonaccrual levels and migration in the pools to lower loan grades. Offsetting the impact of the provision established for the loan, the receivable from the FDIC is adjusted to reflect the indemnified portion of the post-acquisition exposure with a corresponding credit to the provision for loan losses. (For further discussion of the Company’s allowance for loan losses on acquired loans, see Note 1—Summary of Significant Accounting Policies, Note 4—Mergers and Acquisitions and Note 6—Loans and Allowance for Loan Losses to the consolidated financial statements.)

 

An aggregated analysis of the changes in allowance for loan losses for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Non-acquired

 

Acquired

 

 

 

(Dollars in thousands)

 

Loans

 

Loans

 

Total

 

March 31, 2011:

 

 

 

 

 

 

 

Balance at beginning of period

 

$

47,512

 

$

 

$

47,512

 

Loans charged-off

 

(9,322

)

 

(9,322

)

Recoveries of loans previously charged off

 

625

 

 

625

 

Net charge-offs

 

(8,697

)

 

(8,697

)

Provision for loan losses

 

9,349

 

25,833

 

35,182

 

Benefit attributable to FDIC loss share agreements

 

 

(24,541

)

(24,541

)

Total provision for loan losses charged to operations

 

9,349

 

1,292

 

10,641

 

Provision for loan losses recorded through the FDIC loss share receivable

 

 

24,541

 

24,541

 

Balance at end of period

 

$

48,164

 

$

25,833

 

$

73,997

 

 

 

 

 

 

 

 

 

March 31, 2010:

 

 

 

 

 

 

 

Balance at beginning of period

 

$

37,488

 

$

 

$

37,488

 

Loans charged-off

 

(17,370

)

 

(17,370

)

Recoveries of loans previously charged off

 

501

 

 

501

 

Net charge-offs

 

(16,869

)

 

(16,869

)

Provision for loan losses

 

20,778

 

 

20,778

 

Balance at end of period

 

$

41,397

 

$

 

$

41,397

 

 

18



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following tables present a disaggregated analysis of activity in the allowance for loan losses and loan balances for non-acquired loans for the periods ended March 31, 2011, December 31, 2010, and March 31, 2010.

 

 

 

Construction

 

Commercial

 

Commerical

 

Consumer

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

& Land

 

Non-owner

 

Owner

 

Owner

 

Home

 

Commercial

 

Producing

 

 

 

Other

 

 

 

(Dollars in thousands)

 

Development

 

Occupied

 

Occupied

 

Occupied

 

Equity

 

& Industrial

 

Property

 

Consumer

 

Loans

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

14,242

 

$

6,428

 

$

7,814

 

$

6,060

 

$

4,424

 

$

4,313

 

$

2,834

 

$

1,191

 

$

206

 

$

47,512

 

Charge-offs

 

(4,538

)

(1,236

)

(729

)

(1,314

)

(511

)

(229

)

(499

)

(105

)

(161

)

(9,322

)

Recoveries

 

90

 

20

 

1

 

34

 

58

 

79

 

134

 

40

 

169

 

625

 

Provision

 

4,336

 

1,105

 

890

 

1,408

 

506

 

232

 

718

 

142

 

12

 

9,349

 

Balance, March 31, 2011

 

$

14,130

 

$

6,317

 

$

7,976

 

$

6,188

 

$

4,477

 

$

4,395

 

$

3,187

 

$

1,268

 

$

226

 

$

48,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

594

 

$

866

 

$

446

 

$

21

 

$

 

$

 

$

163

 

$

 

$

 

$

2,090

 

Loans collectively evaluated for impairment

 

$

13,536

 

$

5,451

 

$

7,530

 

$

6,167

 

$

4,477

 

$

4,395

 

$

3,024

 

$

1,268

 

$

226

 

$

46,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

23,107

 

$

11,882

 

$

10,314

 

$

1,997

 

$

 

$

1,117

 

$

1,239

 

$

 

$

 

$

49,656

 

Loans collectively evaluated for impairment

 

380,042

 

306,715

 

583,049

 

332,852

 

263,331

 

205,231

 

130,670

 

73,464

 

23,299

 

2,298,653

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans

 

$

403,149

 

$

318,597

 

$

593,363

 

$

334,849

 

$

263,331

 

$

206,348

 

$

131,909

 

$

73,464

 

$

23,299

 

$

2,348,309

 

 

 

 

Construction

 

Commercial

 

Commerical

 

Consumer

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

& Land

 

Non-owner

 

Owner

 

Owner

 

Home

 

Commercial

 

Producing

 

 

 

Other

 

 

 

(Dollars in thousands)

 

Development

 

Occupied

 

Occupied

 

Occupied

 

Equity

 

& Industrial

 

Property

 

Consumer

 

Loans

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

$

9,169

 

$

5,792

 

$

5,978

 

$

4,635

 

$

3,751

 

$

4,330

 

$

2,375

 

$

1,258

 

$

200

 

$

37,488

 

Charge-offs

 

(19,150

)

(3,011

)

(2,625

)

(7,285

)

(2,490

)

(9,138

)

(338

)

(2,780

)

 

(46,817

)

Recoveries

 

785

 

29

 

126

 

149

 

45

 

713

 

6

 

706

 

 

2,559

 

Provision

 

23,438

 

3,618

 

4,335

 

8,561

 

3,118

 

8,408

 

791

 

2,007

 

6

 

54,282

 

Balance, December 31, 2010

 

$

14,242

 

$

6,428

 

$

7,814

 

$

6,060

 

$

4,424

 

$

4,313

 

$

2,834

 

$

1,191

 

$

206

 

$

47,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,718

 

$

1,444

 

$

830

 

$

80

 

$

 

$

36

 

$

28

 

$

 

$

 

$

4,136

 

Loans collectively evaluated for impairment

 

$

12,524

 

$

4,984

 

$

6,984

 

$

5,980

 

$

4,424

 

$

4,277

 

$

2,806

 

$

1,191

 

$

206

 

$

43,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

23,081

 

$

10,948

 

$

10,747

 

$

1,540

 

$

 

$

1,144

 

$

3,153

 

$

 

$

 

$

50,613

 

Loans collectively evaluated for impairment

 

398,960

 

295,433

 

554,408

 

321,097

 

263,994

 

201,843

 

121,278

 

67,768

 

20,806

 

2,245,587

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans

 

$

422,041

 

$

306,381

 

$

565,155

 

$

322,637

 

$

263,994

 

$

202,987

 

$

124,431

 

$

67,768

 

$

20,806

 

$

2,296,200

 

 

19



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

 

 

Construction

 

Commercial

 

Commerical

 

Consumer

 

 

 

 

 

Other Income

 

 

 

 

 

 

 

 

 

& Land

 

Non-owner

 

Owner

 

Owner

 

Home

 

Commercial

 

Producing

 

 

 

Other

 

 

 

(Dollars in thousands)

 

Development

 

Occupied

 

Occupied

 

Occupied

 

Equity

 

& Industrial

 

Property

 

Consumer

 

Loans

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

$

9,169

 

$

5,792

 

$

5,978

 

$

4,635

 

$

3,751

 

$

4,330

 

$

2,375

 

$

1,258

 

$

200

 

$

37,488

 

Charge-offs

 

(5,662

)

(577

)

(975

)

(1,759

)

(1,004

)

(6,435

)

(516

)

(442

)

 

(17,370

)

Recoveries

 

207

 

3

 

1

 

5

 

4

 

89

 

 

192

 

 

501

 

Provision

 

7,130

 

784

 

1,997

 

2,432

 

1,553

 

5,907

 

563

 

279

 

133

 

20,778

 

Balance, March 31, 2010

 

$

10,844

 

$

6,002

 

$

7,001

 

$

5,313

 

$

4,304

 

$

3,891

 

$

2,422

 

$

1,287

 

$

333

 

$

41,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,684

 

$

1,196

 

$

204

 

$

 

$

 

$

 

$

185

 

$

 

$

 

$

3,269

 

Loans collectively evaluated for impairment

 

$

9,160

 

$

4,806

 

$

6,797

 

$

5,313

 

$

4,304

 

$

3,891

 

$

2,237

 

$

1,287

 

$

333

 

$

38,128

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

17,321

 

$

5,879

 

$

4,807

 

$

 

$

 

$

2,565

 

$

2,037

 

$

 

$

 

$

32,609

 

Loans collectively evaluated for impairment

 

425,245

 

288,268

 

478,643

 

287,788

 

250,651

 

200,731

 

131,912

 

66,259

 

13,136

 

2,142,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans

 

$

442,566

 

$

294,147

 

$

483,450

 

$

287,788

 

$

250,651

 

$

203,296

 

$

133,949

 

$

66,259

 

$

13,136

 

$

2,175,242

 

 

The following tables present a disaggregated analysis of activity in the allowance for loan losses and loan balances for acquired loans for the period ended March 31, 2011. As of December 31, 2010 and March 31, 2010, no provision had been made for loans covered under loss share agreements.

 

 

 

Commercial

 

 

 

Commerical

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Greater

 

 

 

Real Estate-

 

 

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

Than or Equal

 

Commercial

 

Construction and

 

Residential

 

Real Estate-

 

 

 

 

 

Commercial

 

 

 

 

 

(Dollars in thousands)

 

to $1 Million

 

Real Estate

 

Development

 

Real Estate

 

Junior Lien

 

Home Equity

 

Consumer

 

and Industrial

 

Single Pay

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses before benefit attibutable to FDIC loss share agreements

 

19,084

 

 

 

 

462

 

 

 

1,234

 

5,053

 

25,833

 

Benefit attributable to FDIC loss share agreements

 

(18,130

)

 

 

 

(439

)

 

 

(1,172

)

(4,800

)

(24,541

)

Total provision for loan losses charged to operations

 

954

 

 

 

 

23

 

 

 

62

 

253

 

1,292

 

Provision for loan losses recorded through the FDIC loss share receivable

 

18,130

 

 

 

 

439

 

 

 

1,172

 

4,800

 

24,541

 

Balance, March 31, 2011

 

$

19,084

 

$

 

$

 

$

 

$

462

 

$

 

$

 

$

1,234

 

$

5,053

 

$

25,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Loans collectively evaluated for impairment

 

$

19,084

 

$

 

$

 

$

 

$

462

 

$

 

$

 

$

1,234

 

$

5,053

 

$

25,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

Loans collectively evaluated for impairment

 

80,355

 

90,694

 

61,497

 

122,567

 

3,150

 

982

 

13,200

 

34,401

 

10,950

 

417,796

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans covered under loss share agreements

 

$

80,355

 

$

90,694

 

$

61,497

 

$

122,567

 

$

3,150

 

$

982

 

$

13,200

 

$

34,401

 

$

10,950

 

$

417,796

 

 

20



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the weighted-average risk grade, (ii) the level of classified loans, (iii) net charge-offs, (iv) non-performing loans (see details below) and (v) the general economic conditions of the markets that we serve.

 

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:

 

·                  Pass—These loans range from minimal credit risk to lower than average however still acceptable credit risk.

 

·                  Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

 

·                  Substandard—A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

·                  Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

 

The following table presents the credit risk profile by risk grade of commercial loans for non-acquired loans:

 

 

 

Construction & Development

 

Commercial Non-owner Occupied

 

Commercial Owner Occupied

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

303,236

 

$

314,762

 

$

308,638

 

$

253,775

 

$

244,876

 

$

243,566

 

$

508,098

 

$

489,935

 

$

403,028

 

Special mention

 

44,319

 

40,463

 

46,638

 

37,797

 

37,487

 

30,147

 

45,187

 

38,204

 

50,608

 

Substandard

 

55,594

 

66,816

 

85,465

 

27,025

 

24,018

 

20,209

 

39,767

 

36,785

 

29,682

 

Doubtful

 

 

 

1,825

 

 

 

225

 

311

 

231

 

132

 

 

 

$

403,149

 

$

422,041

 

$

442,566

 

$

318,597

 

$

306,381

 

$

294,147

 

$

593,363

 

$

565,155

 

$

483,450

 

 

 

 

Commercial & Industrial

 

Other Income Producing Property

 

Commercial Total

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

194,491

 

$

190,608

 

$

189,311

 

$

108,768

 

$

101,441

 

$

106,764

 

$

1,368,368

 

$

1,341,622

 

$

1,251,307

 

Special mention

 

4,475

 

8,104

 

5,326

 

11,637

 

10,074

 

9,076

 

143,415

 

134,332

 

141,795

 

Substandard

 

7,382

 

4,275

 

8,659

 

11,453

 

12,872

 

17,965

 

141,221

 

144,766

 

161,980

 

Doubtful

 

 

 

 

51

 

44

 

144

 

362

 

275

 

2,326

 

 

 

$

206,348

 

$

202,987

 

$

203,296

 

$

131,909

 

$

124,431

 

$

133,949

 

$

1,653,366

 

$

1,620,995

 

$

1,557,408

 

 

21



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following table presents the credit risk profile by risk grade of consumer loans for non-acquired loans at March 31:

 

 

 

Consumer Owner Occupied

 

Home Equity

 

Consumer

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

297,224

 

$

286,335

 

$

259,670

 

$

248,567

 

$

248,294

 

$

237,812

 

$

72,276

 

$

66,775

 

$

65,388

 

Special mention

 

18,123

 

17,919

 

10,597

 

9,628

 

7,794

 

5,655

 

757

 

532

 

265

 

Substandard

 

19,502

 

18,383

 

16,848

 

5,136

 

7,906

 

6,999

 

431

 

461

 

592

 

Doubtful

 

 

 

673

 

 

 

185

 

 

 

14

 

 

 

$

334,849

 

$

322,637

 

$

287,788

 

$

263,331

 

$

263,994

 

$

250,651

 

$

73,464

 

$

67,768

 

$

66,259

 

 

 

 

Other

 

Consumer Total

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

23,299

 

$

20,806

 

$

13,136

 

$

641,366

 

$

622,210

 

$

576,006

 

Special mention

 

 

 

 

28,508

 

26,245

 

16,517

 

Substandard

 

 

 

 

25,069

 

26,750

 

24,439

 

Doubtful

 

 

 

 

 

 

872

 

 

 

$

23,299

 

$

20,806

 

$

13,136

 

$

694,943

 

$

675,205

 

$

617,834

 

 

The following table presents the credit risk profile by risk grade of total non-acquired loans at March 31:

 

 

 

Total Non-acquired Loans

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Pass

 

$

2,009,734

 

$

1,963,832

 

$

1,827,313

 

Special mention

 

171,923

 

160,577

 

158,312

 

Substandard

 

166,290

 

171,516

 

186,419

 

Doubtful

 

362

 

275

 

3,198

 

 

 

$

2,348,309

 

$

2,296,200

 

$

2,175,242

 

 

At March 31, 2011, the aggregate amount of non-acquired substandard and doubtful loans totaled $166.7 million. When these loans are combined with non-acquired OREO of $19.8 million, our non-acquired classified assets (as defined by our primary federal regulator, the Office of the Comptroller of the Currency (the “OCC”)) were $187.1 million. At March 31, 2010, the amounts were $189.6 million, $9.3 million, and $202.9 million, respectively.

 

22



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following table presents the credit risk profile by risk grade loans covered under loss share agreements net of the related discount at March 31:

 

 

 

Commercial Loans Greater Than

 

 

 

Commercial Real Estate—

 

 

 

or Equal to $1 million

 

Commercial Real Estate

 

Construction and Development

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

23,391

 

$

26,395

 

$

44,917

 

$

53,096

 

$

29,506

 

$

55,906

 

$

33,304

 

$

11,897

 

$

28,996

 

Special mention

 

7,056

 

10,317

 

8,068

 

12,901

 

10,048

 

5,600

 

3,598

 

3,218

 

4,650

 

Substandard

 

49,109

 

46,952

 

53,232

 

24,697

 

26,696

 

20,920

 

24,510

 

16,877

 

19,690

 

Doubtful

 

799

 

624

 

583

 

 

378

 

85

 

85

 

320

 

591

 

 

 

$

80,355

 

$

84,288

 

$

106,800

 

$

90,694

 

$

66,628

 

$

82,511

 

$

61,497

 

$

32,312

 

$

53,927

 

 

 

 

 

 

Residential Real Estate—

 

 

 

 

 

Residential Real Estate

 

Junior Lien

 

Home Equity

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

74,755

 

$

42,807

 

$

79,867

 

$

1,830

 

$

2,219

 

$

3,681

 

$

664

 

$

1,069

 

$

1,698

 

Special mention

 

12,420

 

10,470

 

5,895

 

118

 

93

 

63

 

109

 

156

 

 

Substandard

 

34,934

 

33,112

 

24,435

 

931

 

1,112

 

850

 

209

 

294

 

82

 

Doubtful

 

458

 

1,156

 

7,453

 

271

 

249

 

49

 

 

 

 

 

 

$

122,567

 

$

87,545

 

$

117,650

 

$

3,150

 

$

3,673

 

$

4,643

 

$

982

 

$

1,519

 

$

1,780

 

 

 

 

Consumer

 

Commercial & Industrial

 

Single Pay

 

 

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

10,463

 

$

7,401

 

$

17,462

 

$

20,375

 

$

10,482

 

$

22,823

 

$

373

 

$

258

 

$

1,352

 

Special mention

 

419

 

528

 

352

 

3,097

 

3,389

 

923

 

88

 

65

 

83

 

Substandard

 

2,235

 

2,828

 

2,150

 

10,703

 

10,503

 

8,002

 

10,019

 

8,877

 

16,188

 

Doubtful

 

83

 

158

 

613

 

226

 

368

 

648

 

470

 

216

 

900

 

 

 

$

13,200

 

$

10,915

 

$

20,577

 

$

34,401

 

$

24,742

 

$

32,396

 

$

10,950

 

$

9,416

 

$

18,523

 

 

The risk grading of acquired loans is determined utilizing a loan’s contractual balance, while the amount recorded in the financial statements and reflected above is the carrying value. In an FDIC assisted acquisition, acquired loans are recorded at their fair value, including a credit discount due to the high concentration of substandard and doubtful loans. In addition to the credit discount, the Company’s risk of loss is mitigated because of the FDIC loss share arrangement.

 

An aging analysis of past due loans, segregated by class for non-acquired loans, as of March 31, 2011 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

5,668

 

$

1,165

 

$

26

 

$

6,859

 

$

29,409

 

$

366,881

 

$

403,149

 

Commercial non-owner occupied

 

921

 

436

 

236

 

1,593

 

11,956

 

305,048

 

318,597

 

Commercial owner occupied

 

747

 

339

 

 

1,086

 

12,326

 

579,951

 

593,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

781

 

220

 

35

 

1,036

 

8,397

 

325,416

 

334,849

 

Home equity loans

 

437

 

174

 

40

 

651

 

2,226

 

260,454

 

263,331

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

274

 

410

 

2

 

686

 

1,420

 

204,242

 

206,348

 

Other income producing property

 

550

 

 

 

550

 

4,188

 

127,171

 

131,909

 

Consumer

 

202

 

45

 

 

247

 

116

 

73,101

 

73,464

 

Other loans

 

 

 

 

 

 

23,299

 

23,299

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,580

 

$

2,789

 

$

339

 

$

12,708

 

$

70,038

 

$

2,265,563

 

$

2,348,309

 

 

23



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

An aging analysis of past due loans, segregated by class for non-acquired loans, as of December 31, 2010 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

3,304

 

$

1,133

 

$

 

$

4,437

 

$

28,390

 

$

389,214

 

$

422,041

 

Commercial non-owner occupied

 

779

 

240

 

 

1,019

 

10,073

 

295,289

 

306,381

 

Commercial owner occupied

 

1,063

 

453

 

 

1,516

 

13,056

 

550,583

 

565,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,626

 

1,086

 

16

 

2,728

 

7,176

 

312,733

 

322,637

 

Home equity loans

 

725

 

79

 

14

 

818

 

2,517

 

260,659

 

263,994

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

622

 

98

 

 

720

 

1,282

 

200,985

 

202,987

 

Other income producing property

 

806

 

103

 

18

 

927

 

6,356

 

117,676

 

124,959

 

Consumer

 

597

 

175

 

33

 

805

 

176

 

66,259

 

67,240

 

Other loans

 

35

 

16

 

37

 

88

 

 

20,718

 

20,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,557

 

$

3,383

 

$

118

 

$

13,058

 

$

69,026

 

$

2,214,116

 

$

2,296,200

 

 

An aging analysis of past due loans, segregated by class for non-acquired loans, as of March 31, 2010 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

4,446

 

$

2,535

 

$

 

$

6,981

 

$

22,851

 

$

412,734

 

$

442,566

 

Commercial non-owner occupied

 

839

 

1,092

 

 

1,931

 

7,012

 

285,204

 

294,147

 

Commercial owner occupied

 

1,985

 

779

 

 

2,764

 

7,341

 

473,345

 

483,450

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,614

 

386

 

 

2,000

 

7,509

 

278,279

 

287,788

 

Home equity loans

 

655

 

187

 

 

842

 

713

 

249,096

 

250,651

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

753

 

1,387

 

38

 

2,178

 

3,204

 

197,914

 

203,296

 

Other income producing property

 

1,778

 

1,551

 

 

3,329

 

4,655

 

125,965

 

133,949

 

Consumer

 

304

 

99

 

1

 

404

 

345

 

65,510

 

66,259

 

Other loans

 

40

 

28

 

68

 

136

 

100

 

12,900

 

13,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

12,414

 

$

8,044

 

$

107

 

$

20,565

 

$

53,730

 

$

2,100,947

 

$

2,175,242

 

 

24



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

An aging analysis of past due loans, segregated by type for loans covered under loss share agreements, as of March 31, 2011 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

728

 

$

 

$

34,494

 

$

35,222

 

$

 

$

45,133

 

$

80,355

 

Commercial real estate

 

6,004

 

1,449

 

12,450

 

19,903

 

 

70,791

 

90,694

 

Commercial real estate—construction and development

 

3,179

 

2,732

 

27,021

 

32,932

 

 

28,565

 

61,497

 

Residential real estate

 

4,384

 

1,442

 

17,745

 

23,571

 

 

98,996

 

122,567

 

Residential real estate—junior lien

 

86

 

64

 

683

 

833

 

 

2,317

 

3,150

 

Home equity

 

13

 

29

 

104

 

146

 

 

836

 

982

 

Consumer

 

506

 

123

 

1,010

 

1,639

 

 

11,561

 

13,200

 

Commercial and industrial

 

384

 

1,913

 

7,200

 

9,497

 

 

24,904

 

34,401

 

Single pay

 

5

 

76

 

9,967

 

10,048

 

 

902

 

10,950

 

 

 

$

15,289

 

$

7,828

 

$

110,674

 

$

133,791

 

$

 

$

284,005

 

$

417,796

 

 

An aging analysis of past due loans, segregated by type for loans covered under loss share agreements, as of December 31, 2010 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

3,993

 

$

 

$

30,220

 

$

34,213

 

$

 

$

50,075

 

$

84,288

 

Commercial real estate

 

1,067

 

458

 

14,240

 

15,765

 

 

50,864

 

66,629

 

Commercial real estate—construction and development

 

1,197

 

499

 

10,915

 

12,611

 

 

19,702

 

32,313

 

Residential real estate

 

2,508

 

1,397

 

20,077

 

23,982

 

 

63,563

 

87,545

 

Residential real estate—junior lien

 

165

 

59

 

863

 

1,087

 

 

2,586

 

3,673

 

Home equity

 

15

 

56

 

101

 

172

 

 

1,346

 

1,518

 

Consumer

 

614

 

323

 

1,303

 

2,240

 

 

8,675

 

10,915

 

Commercial and industrial

 

1,533

 

470

 

6,986

 

8,989

 

 

15,752

 

24,741

 

Single pay

 

 

 

8,900

 

8,900

 

 

516

 

9,416

 

 

 

$

11,092

 

$

3,262

 

$

93,605

 

$

107,959

 

$

 

$

213,079

 

$

321,038

 

 

An aging analysis of past due loans, segregated by type for loans covered under loss share agreement, as of March 31, 2010 was as follows:

 

 

 

 

 

 

 

90+ Days

 

Total

 

 

 

 

 

 

 

 

 

30-59 Days

 

60-89 Days

 

Past Due

 

Past

 

 

 

 

 

Total

 

(Dollars in thousands)

 

Past Due

 

Past Due

 

and Accruing

 

Due

 

Nonaccruals

 

Current

 

Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial loans greater than or equal to $1 million

 

$

3,697

 

$

2,267

 

$

52,162

 

$

58,126

 

$

 

$

48,674

 

$

106,800

 

Commercial real estate

 

4,485

 

791

 

19,654

 

24,930

 

 

57,581

 

82,511

 

Commercial real estate—construction and development

 

2,961

 

273

 

19,138

 

22,372

 

 

31,555

 

53,927

 

Residential real estate

 

6,847

 

2,370

 

23,410

 

32,627

 

 

85,023

 

117,650

 

Residential real estate—junior lien

 

174

 

39

 

891

 

1,104

 

 

3,539

 

4,643

 

Home equity

 

7

 

28

 

60

 

95

 

 

1,685

 

1,780

 

Consumer

 

941

 

190

 

2,037

 

3,168

 

 

17,409

 

20,577

 

Commercial and industrial

 

1,940

 

610

 

7,394

 

9,944

 

 

22,452

 

32,396

 

Single pay

 

55

 

228

 

16,281

 

16,564

 

 

1,959

 

18,523

 

 

 

$

21,107

 

$

6,796

 

$

141,027

 

$

168,930

 

$

 

$

269,877

 

$

438,807

 

 

25



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following is a summary of information pertaining to impaired non-acquired loans:

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

Unpaid

 

Recorded

 

Recorded

 

 

 

 

 

 

 

 

 

Contractual

 

Investment

 

Investment

 

Total

 

 

 

Average

 

 

 

Principal

 

With No

 

With

 

Recorded

 

Related

 

Recorded

 

(Dollars in thousands)

 

Balance

 

Allowance

 

Allowance

 

Investment

 

Allowance

 

Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

30,829

 

$

10,468

 

$

12,639

 

$

23,107

 

$

594

 

$

20,080

 

Commercial non-owner occupied

 

14,102

 

9,528

 

2,354

 

11,882

 

866

 

8,881

 

Commercial owner occupied

 

11,537

 

5,544

 

4,770

 

10,314

 

446

 

7,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

2,257

 

437

 

1,560

 

1,997

 

21

 

999

 

Home equity loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

1,146

 

1,117

 

 

1,117

 

 

1,841

 

Other income producing property

 

1,360

 

340

 

899

 

1,239

 

163

 

1,773

 

Consumer

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

Total impaired loans

 

$

61,231

 

$

27,434

 

$

22,222

 

$

49,656

 

$

2,090

 

$

41,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

29,656

 

$

13,362

 

$

9,719

 

$

23,081

 

$

1,718

 

$

20,338

 

Commercial non-owner occupied

 

12,902

 

5,824

 

5,124

 

10,948

 

1,444

 

8,752

 

Commercial owner occupied

 

11,279

 

5,353

 

5,394

 

10,747

 

830

 

8,913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

1,725

 

 

1,540

 

1,540

 

80

 

1,143

 

Home equity loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

1,145

 

 

1,144

 

1,144

 

36

 

1,040

 

Other income producing property

 

4,402

 

2,246

 

907

 

3,153

 

28

 

2,477

 

Consumer

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

Total impaired loans

 

$

61,109

 

$

26,785

 

$

23,828

 

$

50,613

 

$

4,136

 

$

42,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

23,953

 

$

10,678

 

$

6,374

 

$

17,052

 

$

1,683

 

$

13,677

 

Commercial non-owner occupied

 

6,604

 

2,861

 

3,018

 

5,879

 

1,197

 

3,745

 

Commercial owner occupied

 

5,323

 

1,029

 

3,778

 

4,807

 

204

 

2,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

 

 

 

 

 

1,262

 

Home equity loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

8,363

 

2,565

 

 

2,565

 

 

1,283

 

Other income producing property

 

2,618

 

1,204

 

1,102

 

2,306

 

185

 

1,428

 

Consumer

 

 

 

 

 

 

 

Other loans

 

 

 

 

 

 

 

Total impaired loans

 

$

46,861

 

$

18,337

 

$

14,272

 

$

32,609

 

$

3,269

 

$

23,923

 

 

Loans covered under loss share agreements are accounted for in pools as shown on page 31 rather than being individually evaluated for impairment; therefore, the table above only pertains to non-acquired loans.

 

26



Table of Contents

 

Note 6 — Loans and Allowance for Loan Losses (continued)

 

The following is a summary of information pertaining to non-acquired nonaccrual loans by class, including restructured loans:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

Construction and land development

 

$

25,236

 

$

27,207

 

$

22,851

 

Commercial non-owner occupied

 

10,918

 

8,407

 

7,012

 

Commercial owner occupied real estate

 

8,718

 

10,499

 

7,341

 

Total commercial non-owner occupied real estate

 

44,872

 

46,113

 

37,204

 

Consumer real estate:

 

 

 

 

 

 

 

Consumer owner occupied

 

6,948

 

6,865

 

7,509

 

Home equity loans

 

2,226

 

2,517

 

713

 

Total consumer real estate

 

9,174

 

9,382

 

8,222

 

Commercial and industrial

 

1,420

 

1,282

 

3,204

 

Other income producing property

 

3,288

 

5,708

 

4,655

 

Consumer

 

116

 

176

 

345

 

Other loans

 

 

 

100

 

Restructured loans

 

11,168

 

6,365

 

 

Total loans on nonaccrual status

 

$

70,038

 

$

69,026

 

$

53,730

 

 

Loans covered under loss share agreements that are past due continue to accrue accretable yield under the accretion method of accounting and therefore are not considered to be nonaccrual.

 

Note 7—Receivable from FDIC for Loss Share Agreements

 

The following table provides changes in the receivable from the FDIC for the periods ended March 31, 2011 and March 31, 2010:

 

(Dollars in thousands)

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

212,103

 

FDIC loss share receivable recorded for Habersham agreement

 

87,418

 

Benefit attributable to FDIC loss share agreements

 

24,541

 

Claimable losses on OREO covered under loss share agreements

 

12,014

 

Reimbursable expenses claimed

 

2,013

 

Accretion of discounts and premiums, net

 

(401

)

Reimbursements from FDIC

 

(33,893

)

Balance, March 31, 2011

 

$

303,795

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Balance, December 31, 2009

 

$

 

FDIC loss share receivable recorded for CBT agreement

 

276,789

 

Accretion of discounts and premiums, net

 

369

 

Reimbursable expenses claimed

 

 

Reimbursements from FDIC

 

 

Balance, March 31, 2010

 

$

277,158

 

 

27



Table of Contents

 

Note 7—Receivable from FDIC for Loss Share Agreements (continued)

 

The FDIC receivable for loss share agreements is measured separately from the related covered assets and is recorded at fair value. The fair value was estimated using projected cash flows related to the loss share agreements based on the expected reimbursements for losses and the applicable loss share percentages. At March 31, 2011, the Company estimated that $17.2 million was currently receivable from the FDIC.

 

Note 8—Other Real Estate Owned

 

The following is a summary of information pertaining to OREO at March 31, 2011 and March 31, 2010:

 

(Dollars in thousands)

 

OREO

 

Covered
OREO

 

Total

 

Balance, December 31, 2010

 

$

17,264

 

$

69,317

 

$

86,581

 

Acquired in Habersham acquisition

 

 

14,493

 

14,493

 

Additions, net

 

7,867

 

1,365

 

9,232

 

Writedowns

 

(2,276

)

(2,113

)

(4,389

)

Sold

 

(3,039

)

(5,776

)

(8,815

)

 

 

 

 

 

 

 

 

Balance, March 31, 2011

 

$

19,816

 

$

77,286

 

$

97,102

 

 

(Dollars in thousands)

 

OREO

 

Covered
OREO

 

Total

 

Balance, December 31, 2009

 

$

3,102

 

$

 

$

3,102

 

Acquired in CBT Acquisition

 

 

25,876

 

25,876

 

Additions

 

8,579

 

7,496

 

16,075

 

Writedowns

 

(59

)

 

(59

)

Sold

 

(2,303

)

(1,296

)

(3,599

)

 

 

 

 

 

 

 

 

Balance, March 31, 2010

 

$

9,319

 

$

32,076

 

$

41,395

 

 

The covered OREO above is covered pursuant to the FDIC loss share agreements which is discussed in Note 2—Mergers and Acquisitions.

 

Note 9 — Deposits

 

The Company’s total deposits are comprised of the following:

 

 

 

March 31,

 

December 31,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,103,438

 

$

1,129,892

 

$

1,333,890

 

Interest-bearing demand deposits

 

1,316,879

 

1,186,260

 

1,003,320

 

Demand deposits

 

606,135

 

484,838

 

457,412

 

Savings deposits

 

291,573

 

202,054

 

199,286

 

Other time deposits

 

1,525

 

1,104

 

1,206

 

Total deposits

 

$

3,319,550

 

$

3,004,148

 

$

2,995,114

 

 

The aggregate amounts of time deposits in denominations of $100,000 or more at March 31, 2011, December 31, 2010, and March 31, 2010 were $511.4 million, $530.8 million and $626.6 million, respectively.  In July of 2010, the Dodd-Frank Act permanently increased the insurance limit on deposit accounts from $100,000 to $250,000.  At March 31, 2011 and December 31, 2010, SCBT had $185.4 million and $177.5 million in certificates of deposits greater than $250,000, respectively.  The Company did not have brokered certificates of deposit at March 31, 2011, December 31, 2010, and March 31, 2010.

 

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Table of Contents

 

Note 10 — Retirement Plans

 

The Company and the Bank provide certain retirement benefits to their employees in the form of a non-contributory defined benefit pension plan and an employees’ savings plan.  The non-contributory defined benefit pension plan covers all employees hired on or before December 31, 2005, who have attained age 21, and who have completed one year of eligible service.  Employees hired on or after January 1, 2006 are not eligible to participate in the non-contributory defined benefit pension 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.

 

Effective July 1, 2009, the Company suspended the accrual of benefits for pension plan participants under the non-contributory defined benefit plan.  The pension plan remained suspended as of March 31, 2011.

 

The components of net periodic pension expense recognized during the three months ended March 31 are as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Service cost

 

$

 

$

 

Interest cost

 

274

 

270

 

Expected return on plan assets

 

(400

)

(377

)

Amortization of prior service cost

 

 

 

Recognized net actuarial loss

 

137

 

65

 

Net periodic pension expense (benefit)

 

$

11

 

$

(42

)

 

The Company contributed $228,000 to the pension plan for the three months ended March 31, 2011 and anticipates making similar additional quarterly contributions during the remainder of the year.

 

Electing employees are eligible to participate in the employees’ savings plan, under the provisions of Internal Revenue Code Section 401(k), after attaining age 21.  Plan participants elect to contribute portions of their annual base compensation as a before tax contribution.  The Company matched 50% of these contributions up to a 6% employee contribution for employees hired before January 1, 2006 who were age 45 and higher with five or more vesting years of service.  The Company matched 100% of these contributions up to a 6% employee contribution for current employees under age 45 or with less than five years of service.  Employees hired on January 1, 2006 or thereafter will not participate in the defined benefit pension plan, but are eligible to participate in the employees’ savings plan, and until April 1, 2009, the Company matched 100% of the employees’ contributions up to 6% of salary.  Effective April 1, 2009, the Company temporarily suspended the employer match contribution to all participants in the plan.  Effective January 1, 2010, the Company reinstated an employer match so that participating employees, as defined above, would receive a 50% match of their 401(k) plan contributions, up to 4% of salary.

 

Employees can enter the savings plan on or after the first day of each month.  The employee may enter into a salary deferral agreement at any time to select an alternative deferral amount or to elect not to defer in the plan.  If the employee does not elect an investment allocation, the plan administrator will select a retirement-based portfolio according to the employee’s number of years until normal retirement age.  The plan’s investment valuations are generally provided on a daily basis.

 

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Table of Contents

 

Note 11 — Earnings Per Share

 

Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted-average shares of common stock outstanding during each period, excluding non-vested shares.  The Company’s diluted earnings per share are based on the weighted-average shares of common stock outstanding during each period plus the maximum dilutive effect of common stock issuable upon exercise of stock options or vesting of restricted shares.  The weighted-average number of shares and equivalents are determined after giving retroactive effect to stock dividends and stock splits.

 

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars and shares in thousands)

 

2011

 

2010

 

Basic earnings per share:

 

 

 

 

 

Net income available to common shareholders

 

$

2,516

 

$

48,961

 

 

 

 

 

 

 

Weighted-average basic shares

 

13,185

 

12,591

 

Basic earnings per share

 

$

0.19

 

$

3.89

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Net income available to common shareholders

 

$

2,516

 

$

48,961

 

 

 

 

 

 

 

Weighted-average basic shares

 

13,185

 

12,591

 

Effect of dilutive securities

 

88

 

105

 

Weighted-average dilutive shares

 

13,273

 

12,696

 

Diluted earnings per share

 

$

0.19

 

$

3.86

 

 

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 period as follows:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Number of shares

 

217,873

 

150,519

 

Range of exercise prices

 

$26.01 - $40.99

 

$26.01 - $39.74

 

 

Note 12 — 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.

 

Stock Options

 

With the exception of non-qualified stock 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 pro 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 661,500 shares registered under the 2004 plan.

 

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Table of Contents

 

Note 12 — Share-Based Compensation (continued)

 

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.

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

Options

 

Shares

 

Price

 

Life (Yrs.)

 

Value (000’s)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2011

 

386,207

 

$

29.02

 

 

 

 

 

Granted

 

25,142

 

32.46

 

 

 

 

 

Exercised

 

(3,050

)

22.94

 

 

 

 

 

Expired/Forfeited

 

(1

)

11.39

 

 

 

 

 

Outstanding at March 31, 2011

 

408,298

 

29.28

 

5.09

 

$

1,967

 

 

 

 

 

 

 

 

 

 

 

Exercisable at March 31, 2011

 

322,770

 

28.57

 

4.12

 

$

1,797

 

 

 

 

 

 

 

 

 

 

 

Weighted-average fair value of options granted during the year

 

$

11.85

 

 

 

 

 

 

 

 

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:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Dividend yield

 

2.20%

 

2.00%

 

Expected life

 

6 years

 

6 years

 

Expected volatility

 

44%

 

49%

 

Risk-free interest rate

 

2.37%

 

2.74%

 

 

As of March 31, 2011, there was $933,000 of total unrecognized compensation cost related to nonvested stock option grants under the plans.  The cost is expected to be recognized over a weighted-average period of 1.75 years as of March 31, 2011.  The total fair value of shares vested during the three months ended March 31, 2011 was $419,000.

 

Restricted Stock

 

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 restricted stock awarded is established as the fair market value of the stock at the time of the grant.  The Company recognizes expenses, equal to the total value of such awards, ratably over the vesting period of the stock grants.  Grants to employees have typically vested over a 48-month period, and beginning in 2007, some grants cliff vest after four years.  Also, some grants issued during 2008 to certain employees cliff vest after ten years.  Grants to non-employee directors typically vest within a 12-month period.

 

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Table of Contents

 

Note 12 — Share-Based Compensation (continued)

 

Nonvested restricted stock for the three months ended March 31, 2011 is summarized in the following table.  All information has been retroactively adjusted for stock dividends and stock splits.

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant-Date

 

Restricted Stock

 

Shares

 

Fair Value

 

 

 

 

 

 

 

Nonvested at January 1, 2011

 

150,629

 

$

30.74

 

Granted

 

37,106

 

32.46

 

Vested

 

(16,225

)

37.24

 

Forfeited

 

 

 

Nonvested at March 31, 2011

 

171,510

 

30.49

 

 

As of March 31, 2011, there was $3.9 million of total unrecognized compensation cost related to nonvested restricted stock granted under the plans.  This cost is expected to be recognized over a weighted-average period of 4.5 years as of March 31, 2011.  The total fair value of shares vested during the three months ended March 31, 2011 was $604,000.

 

Note 13 — Commitments and Contingent Liabilities

 

In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements.  The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit.  At March 31, 2011, commitments to extend credit and standby letters of credit totaled $606.0 million.  The Company does not anticipate any material losses as a result of these transactions.

 

Note 14 — Fair Value

 

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements.  FASB ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  Available for sale securities and derivative financial instruments are recorded at fair value on a recurring basis.  Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.  These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

FASB ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:

 

Level 1

Observable inputs such as quoted prices in active markets;

Level 2

Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3

Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following is a description of valuation methodologies used for assets recorded at fair value.

 

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Table of Contents

 

Note 14 — Fair Value (continued)

 

Investment Securities

 

Securities available for sale are valued on a recurring basis at quoted market prices where available.  If quoted market prices are not available, fair values are based on quoted market prices of comparable securities.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities.  Securities classified as Level 3 include asset-backed securities in less liquid markets.  Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale.  The carrying value of Federal Reserve Bank stock and FHLB stock approximates fair value based on their redemption provisions.

 

Pooled trust preferred securities were Level 3 securities under the three-tier fair value hierarchy because of an absence of observable inputs for these and similar securities in the debt markets.  The Company determined that (1) there were few observable transactions and market quotations available and they were not reliable for purposes of determining fair value at December 31, 2010 and March 31, 2010, and (2) an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs was equally or more representative of fair value than the market approach valuation technique used at prior measurement dates.  This income valuation approach require numerous steps in determining fair value.  These steps included estimating credit quality of the collateral, generating asset defaults, forecasting cash flows for underlying collateral, and determining losses given default assumption.

 

Mortgage Loans Held for Sale

 

Mortgage loans held for sale are carried at the lower of cost or market value.  The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics.  As such, the fair value adjustments for mortgage loans held for sale is nonrecurring Level 2.

 

Loans

 

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using estimated fair value methodologies. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the impaired loans were evaluated based on the fair value of the collateral because such loans were considered collateral dependent. Impaired loans, where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3.

 

Other Real Estate Owned (“OREO”)

 

Typically non-covered OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2).  However, both non-covered and covered OREO would be considered Level 3 in the fair value hierarchy because management has qualitatively applied a discount due to the size and over supply of inventory in north Georgia and the incremental discounts applied to the appraisals in other markets.  At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.  Gains or losses on sale and generally any subsequent adjustments to the value are recorded as a component of OREO expense.

 

Derivative Financial Instruments

 

Fair value is estimated using pricing models of derivatives with similar characteristics, thus classifying the derivatives within Level 2 of the fair value hierarchy (see Note 16—Derivative Financial Instruments for additional information).

 

33



Table of Contents

 

Note 14 — Fair Value (continued)

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis.

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

57,518

 

$

 

$

57,518

 

$

 

State and municipal obligations

 

39,566

 

 

39,566

 

 

Mortgage-backed securities

 

91,989

 

 

91,989

 

 

Corporate stocks

 

581

 

556

 

25

 

 

Total securities available for sale

 

$

189,654

 

$

556

 

$

189,098

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

510

 

$

 

$

510

 

$

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

70,534

 

$

 

$

70,534

 

$

 

State and municipal obligations

 

40,004

 

 

40,004

 

 

Mortgage-backed securities

 

84,440

 

 

84,440

 

 

Trust preferred (collateralized debt obligations)

 

2,034

 

 

 

2,034

 

Corporate stocks

 

362

 

337

 

25

 

 

Total securities available for sale

 

$

197,374

 

$

337

 

$

195,003

 

$

2,034

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

635

 

$

 

$

635

 

$

 

 

34



Table of Contents

 

Note 14 — Fair Value (continued)

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

120,019

 

$

 

$

120,019

 

$

 

State and municipal obligations

 

41,556

 

 

41,556

 

 

Mortgage-backed securities

 

100,105

 

 

100,105

 

 

Trust preferred (collateralized debt obligations)

 

6,296

 

 

 

6,296

 

Corporate stocks

 

396

 

361

 

35

 

 

Total securities available for sale

 

$

268,372

 

$

361

 

$

261,715

 

$

6,296

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

218

 

$

 

$

218

 

$

 

 

Changes in Level 1, 2 and 3 Fair Value Measurements

 

There were no transfers between the fair value hierarchy levels during the three months ended March 31, 2011.

 

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.  However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the three months ended March 31, 2011 is as follows:

 

 

 

Pooled Trust

 

(Dollars in thousands)

 

Preferred Securities

 

 

 

 

 

Fair value, January 1, 2011

 

$

2,034

 

Change in unrealized loss recognized in other comprehensive income

 

95

 

Other-than-temporary impairment losses recognized in income

 

 

Sales

 

(2,129

)

Transfers in and/or out of level 3

 

 

Fair value, March 31, 2011

 

$

 

 

 

 

 

Total unrealized gains (losses), net of tax, included in accumulated other comprehensive income related to level 3 financial assets and liabilities still on the consolidated balance sheet at March 31, 2011

 

$

 

 

35



Table of Contents

 

Note 14 — Fair Value (continued)

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a nonrecurring basis.

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Covered under FDIC loss share agreements:

 

 

 

 

 

 

 

 

 

OREO

 

$

77,286

 

$

 

$

 

$

77,286

 

 

 

 

 

 

 

 

 

 

 

Non-acquired:

 

 

 

 

 

 

 

 

 

Impaired loans

 

33,357

 

 

18,671

 

14,686

 

OREO

 

19,816

 

 

 

19,816

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

December 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Covered under FDIC loss share agreements:

 

 

 

 

 

 

 

 

 

OREO

 

$

69,317

 

$

 

$

 

$

69,317

 

 

 

 

 

 

 

 

 

 

 

Non-acquired:

 

 

 

 

 

 

 

 

 

Impaired loans

 

33,740

 

 

18,525

 

15,215

 

OREO

 

17,264

 

 

 

17,264

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

Significant

 

 

 

 

 

 

 

Markets

 

Other

 

Significant

 

 

 

Fair Value

 

for Identical

 

Observable

 

Unobservable

 

 

 

March 31,

 

Assets

 

Inputs

 

Inputs

 

(Dollars in thousands)

 

2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Covered under FDIC loss share agreements:

 

 

 

 

 

 

 

 

 

OREO

 

$

32,076

 

$

 

$

 

$

32,076

 

 

 

 

 

 

 

 

 

 

 

Non-acquired:

 

 

 

 

 

 

 

 

 

Impaired loans

 

30,080

 

 

20,282

 

9,798

 

OREO

 

9,319

 

 

9,319

 

 

 

36



Table of Contents

 

Note 14 — Fair Value (continued)

 

Fair Value of Financial Instruments

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for 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 models are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2011, December 31, 2010 and March 31, 2010. Such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value.

 

Investment Securities — Securities held to maturity are valued at quoted market prices or dealer quotes.  The carrying value of Federal Reserve Bank stock and FHLB stock approximates fair value based on their redemption provisions.  The carrying value of the Company’s investment in unconsolidated subsidiaries approximates fair value.  See Note 5—Investment Securities for additional information, as well as page 21 regarding fair value.

 

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 estimated using discounted cash flow analyses based on the Company’s current rates offered for new loans of the same type, structure and credit quality. 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 by the Company 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.

 

FDIC Receivable for Loss Share Agreements — The fair value is estimated based on discounted future cash flows using current discount rates.

 

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 carrying amount 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 values of commitments to extend credit are 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 values of guarantees and letters of credit are based on fees currently charged for similar agreements or on the estimated costs to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

 

37



Table of Contents

 

Note 14 — Fair Value (continued)

 

The estimated fair value, and related carrying amount, of the Company’s financial instruments are as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(Dollars in thousands)

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

412,624

 

$

412,624

 

$

237,099

 

$

237,099

 

$

238,097

 

$

238,097

 

Investment securities

 

233,207

 

233,666

 

237,912

 

238,121

 

310,956

 

311,664

 

Loans, net of allowance for loan losses, and loans held for sale

 

2,702,863

 

2,627,759

 

2,612,430

 

2,551,032

 

2,588,577

 

2,544,010

 

FDIC receivable for loss share agreements

 

303,795

 

221,456

 

212,103

 

212,103

 

277,158

 

277,158

 

Accrued interest receivable

 

12,003

 

12,003

 

11,711

 

11,711

 

15,880

 

15,880

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

3,319,550

 

3,331,789

 

3,004,148

 

3,014,795

 

2,995,114

 

3,008,077

 

Federal funds purchased and securities sold under agreements to repurchase

 

206,560

 

206,560

 

191,017

 

191,017

 

237,669

 

237,669

 

Other borrowings

 

46,587

 

46,587

 

46,978

 

46,978

 

62,929

 

55,671

 

Accrued interest payable

 

3,986

 

3,986

 

4,858

 

4,858

 

7,055

 

7,055

 

Off balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

 

 

(16,528

)

 

(13,787

)

 

(9,651

)

Standby letters of credit and financial guarantees

 

 

 

 

 

 

 

 

Note 15 — Accumulated Other Comprehensive Income (Loss)

 

The components of the change in other comprehensive income (loss) and the related tax effects were as follows:

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net of

 

 

 

 

 

Net of

 

 

 

Pre-tax

 

Tax

 

Tax

 

Pre-tax

 

Tax

 

Tax

 

(Dollars in thousands)

 

Amount

 

Effect

 

Amount

 

Amount

 

Effect

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on securities available for sale

 

$

1,203

 

$

(426

)

777

 

$

7,585

 

$

(2,693

)

$

4,892

 

Noncredit portion of other-than-temporary impairment losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

 

 

 

(5,586

)

1,983

 

(3,603

)

Less, reclassification adjustment for portion included in net income

 

 

 

 

5,586

 

(1,983

)

3,603

 

Net noncredit portion of other-than-temporary impairment losses

 

 

 

 

 

 

 

Change in unrealized losses on derivative financial instruments qualifying as cash flow hedges

 

125

 

(45

)

80

 

(197

)

70

 

(127

)

Other comprehensive income

 

$

1,328

 

$

(471

)

$

857

 

$

7,388

 

$

(2,623

)

$

4,765

 

 

38



Table of Contents

 

Note 15 — Accumulated Other Comprehensive Income (Loss) (continued)

 

The components of accumulated other comprehensive income (loss), net of tax, were as follows:

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

(Losses) Gains

 

 

 

 

 

 

 

 

 

on Securities

 

 

 

 

 

 

 

Benefit

 

Available

 

Cash Flow

 

 

 

(Dollars in thousands)

 

Plans

 

for Sale

 

Hedges

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

$

(4,816

)

$

1,433

 

$

(409

)

$

(3,792

)

Change in net unrealized gain on securities available for sale

 

 

777

 

 

777

 

Reclassification of noncredit other-than-temporary impairment losses on available-for-sale securities

 

 

 

 

 

Change in unrealized losses on derivative financial instruments qualifying as cash flow hedges

 

 

 

80

 

80

 

Balance at March 31, 2011

 

$

(4,816

)

$

2,210

 

$

(329

)

$

(2,935

)

 

Note 16 — Derivative Financial Instruments

 

The Company is exposed to interest rate risk in the course of its business operations and manages a portion of this risk through the use of a derivative financial instrument, in the form of an interest rate swap (cash flow hedge). The Company accounts for its interest rate swap in accordance with FASB ASC 815, Derivatives and Hedging, which requires that all derivatives be recognized as assets or liabilities in the balance sheet at fair value. For more information regarding the fair value of the Company’s derivative financial instruments, see Note 15 to these financial statements. The only type of derivative currently used by the Company is an interest rate swap agreement.

 

The Company utilizes the interest rate swap agreement to essentially convert a portion of its variable-rate debt to a fixed rate (cash flow hedge). For derivatives designated as hedging exposure to variable cash flows of a forecasted transaction (cash flow hedge), the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. The ineffective portion of the gain or loss is reported in earnings immediately. For derivatives that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

 

In applying hedge accounting for derivatives, the Company establishes a method for assessing the effectiveness of the hedging derivative and a measurement approach for determining any ineffective aspect of the hedge upon the inception of the hedge.

 

Cash Flow Hedge of Interest Rate Risk

 

During 2009, the Company entered into a forward starting interest rate swap agreement with a notional amount of $8.0 million to manage interest rate risk due to periodic rate resets on its junior subordinated debt issued by SCBT Capital Trust II, an unconsolidated subsidiary of the Company established for the purpose of issuing trust preferred securities. The Company hedges the variable rate cash flows of subordinated debt against future interest rate increases by using an interest rate swap to effectively fix the rate on the debt beginning on June 15, 2010, at which time the debt contractually converted from a fixed interest rate to a variable interest rate. This hedge expires on June 15, 2019. The notional amount on which the interest payments are based will not be exchanged. This derivative contract calls for the Company to pay a fixed rate of 4.06% on $8.0 million notional amount and receive a variable rate of three-month LIBOR on the $8.0 million notional amount.

 

The Company recognized an after-tax unrealized loss on its cash flow hedge in other comprehensive income of $329,000 and $127,000 for the three months ended March 31, 2011 and 2010, respectively. The Company recognized a $510,000 and a $218,000 cash flow hedge liability in other liabilities on the balance sheet at March 31, 2011 and 2010, respectively. There was no ineffectiveness in the cash flow hedge during the three months ended March 31, 2011 and 2010.

 

39



Table of Contents

 

Note 16 — Derivative Financial Instruments (continued)

 

Credit risk related to the derivative arises when amounts receivable from the counterparty (derivative dealer) exceed those payable. The Company controls the risk of loss by only transacting with derivative dealers that are national market makers whose credit ratings are strong. Each party to the interest rate swap is required to provide collateral in the form of cash or securities to the counterparty when the counterparty’s exposure to a mark-to-market replacement value exceeds certain negotiated limits. These limits are typically based on current credit ratings and vary with ratings changes. As of March 31, 2011, SCBT was required to provide $150,000 of collateral. As of March 31, 2010, neither party was required to post any cash collateral.  Also, the Company has a netting agreement with the counterparty.

 

40



Table of Contents

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the financial statements contained in this Quarterly Report beginning on page 1.  For further information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Annual Report on Form 10-K for the year ended December 31, 2010.

 

Overview

 

We are a bank holding company headquartered in Columbia, South Carolina, and were incorporated under the laws of South Carolina in 1985.  We provide a wide range of banking services and products to our customers through our wholly-owned bank subsidiary, SCBT, N.A. (the “bank”), a national bank that opened for business in 1934.  We operate as NCBT, a division of the bank, in Mecklenburg County of North Carolina, Community Bank & Trust (“CBT”), a division of the bank, in northeast Georgia, and Habersham Bank (“Habersham”), a division of the bank, in northeast Georgia.  During the second quarter of 2011 and along with the system conversion of the operations of Habersham to our operating platform, the Georgia franchise will operate as CBT, a division of SCBT, N.A.  We do not engage in any significant operations other than the ownership of our banking subsidiary.

 

At March 31, 2011, we had approximately $4.0 billion in assets and 1,101 full-time equivalent employees.  Through the Bank, 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, business loans, agriculture loans, real estate loans, personal use loans, home improvement loans, automobile loans, 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.

 

We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisition of select financial institutions, branches, or failed bank assets and liabilities in certain market areas.

 

The following discussion describes our results of operations for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010 and also analyzes our financial condition as of March 31, 2011 as compared to December 31, 2010 and March 31, 2010.    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 may pay interest.  Consequently, one of the key measures of our success is the amount of our 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 (sometimes referred to as “ALLL”) to absorb 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.

 

Recent Events

 

Purchase and Assumption Agreement

 

On February 18, 2011, the Bank entered into a purchase and assumption (“P&A”) agreement with loss share arrangements with the FDIC to purchase certain assets and assume substantially all of the deposits and certain liabilities of Habersham Bank, a full service Georgia state-chartered community bank headquartered in Clarkesville, Georgia.

 

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Table of Contents

 

Habersham Bank operates eight branches in the northeast region of Georgia. The Company acquired $359.9 million in total assets from the FDIC, including loans of $221.9 million, and $380.0 million in total liabilities, including $339.4 million in deposits, based on balances as recorded by Habersham as of February 18, 2011.

 

Pursuant to the P&A agreement, the Bank received a discount of $38.3 million on the assets acquired and did not pay the FDIC a premium to assume all customer deposits. Most of the loans and foreclosed real estate purchased are covered by a loss share agreement between the FDIC and the Bank. Under this loss share agreement, the FDIC has agreed to cover 80% of loan and foreclosed real estate losses.

 

The loss sharing agreement applicable to single family residential mortgage loans provides for loss sharing with the FDIC for up to ten years, and for commercial loans and other covered assets provides for loss sharing for up to five years with the FDIC.

 

The Company did not immediately acquire the real estate, banking facilities, furniture or equipment of Habersham Bank as a part of the P&A agreement. However, the Company has the option to purchase the real estate and furniture and equipment from the FDIC. The term of this option expires approximately 90 days from the date of the acquisition.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed will be recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding estimates and assumptions used to calculate estimated fair values. Accordingly, the initial accounting for the acquisition of Habersham is complete, however the fair values recorded are preliminary and subject to refinement for up to one year after the closing date of the acquisition. The Company recorded an acquisition gain in connection with the transaction during the three months ended March 31, 2011.  The impact of the purchase accounting adjustments in an FDIC-assisted deal is also integral to accurately assessing the impact of the acquired entity on the operations of the Company. Disclosure of pro forma financial information is also made more difficult by the troubled nature of Habersham Bank prior to the date of the combination. Therefore, pro forma financial information is not considered meaningful or currently possible for purposes of these consolidated financial statements. Please reference Note 4 — Mergers and Acquisitions in the unaudited condensed consolidated financial statements within PART I, Item 1 Financial Statements.

 

Private Placement

 

The Company entered into a Securities Purchase Agreement, effective as of February 18, 2011 (the “Purchase Agreement”), with accredited institutional investors (collectively, the “Purchasers”), pursuant to which the Company sold a total of 1,129,032 shares of its common stock at a purchase price of $31.00 per share (the “Private Placement”). The proceeds to the Company from the Private Placement were $34.7 million, net of approximately $315,000 in issuance costs. The Private Placement was completed on February 18, 2011 and was contingent on a successful bid for Habersham.

 

The Private Placement was made pursuant to the Purchase Agreement and was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof and Rule 506 of Regulation D promulgated there under. All purchasers in the Private Placement were accredited investors, as defined in Rule 501(a) of Regulation D.

 

Government Actions

 

For information on recent government actions, please reference PART II, Item 1A, Risk Factors on page 51 of this Form 10-Q and the caption “Government Actions” within PART I, Item 1 Business in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Critical Accounting Policies

 

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements.  Significant accounting policies are described in Note 1 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010.  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.

 

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Allowance for Loan Losses

 

The allowance for loan losses reflects the estimated losses that will result from the inability of our bank’s 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 “Note 6 — Loans and Allowance for Loan Losses” in this 10-Q, “Provision for Loan Losses and Nonperforming Assets” in this MD&A and “Allowance for Loan Losses” in Note 1 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2010 for further detailed descriptions of our estimation process and methodology related to the allowance for loan losses.

 

 

Goodwill and Other Intangible Assets

 

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.  As of March 31, 2011, December 31, 2010 and March 31, 2010, the balance of goodwill was $62.9 million.  Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.  An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

 

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.  Management has determined that the Company has one reporting unit.

 

Our stock price has historically traded above its book value and tangible book value.  The lowest trading price during the first three months of 2011 was $30.10 per share, and the stock price closed on March 31, 2011 at $33.28, which is above book value and tangible book value.  In the event our stock were to trade below its book value at any time during the reporting period, we would perform an evaluation of the carrying value of goodwill as of the reporting date.  Such a circumstance would be one factor in our evaluation that could result in an eventual goodwill impairment charge.  We evaluated the carrying value of goodwill as of April 30, 2011, our annual test date, and determined that no impairment charge was necessary.  Additionally, should our future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required.

 

Core deposit intangibles, included in other assets in the condensed consolidated balance sheets, consist of costs that resulted from the acquisition of deposits from other commercial banks or the estimated fair value of these assets acquired through business combinations.  Core deposit intangibles 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.

 

Income Taxes and Deferred Tax Assets

 

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 subsidiary.

 

The Company recognizes interest and penalties accrued relative to unrecognized tax benefits in its respective federal or state income taxes accounts. As of December 31, 2010, there were no accruals for uncertain tax positions and no accruals for interest and penalties. The Company and its subsidiary file a consolidated United States federal income tax return, as well as income tax returns for its subsidiary in the state of South Carolina, Georgia, and North Carolina. The Company’s filed income tax returns are no longer subject to examination by taxing authorities for years before 2007.

 

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Other-Than-Temporary Impairment (“OTTI”)

 

We evaluate securities for other-than-temporary impairment at least on a quarterly 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 outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value.  For further discussion of the Company’s evaluation of securities for other-than-temporary impairment, see Note 5 to the unaudited condensed consolidated financial statements.

 

Other Real Estate Owned (“OREO”)

 

OREO, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses.

 

Subsequent declines in the fair value of OREO below the new cost basis are recorded through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of other real estate, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of other real estate. Management reviews the value of other real estate each quarter and adjusts the values as appropriate. Revenue and expenses from OREO operations as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO expense and loan related expense, a component of non-interest expense.

 

Business Combinations, Method of Accounting for Loans Acquired, and FDIC Indemnification Asset

 

We account for acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting.  All identifiable assets acquired, including loans, are recorded at fair value.  No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

 

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans.  Loans acquired in business combinations with evidence of credit deterioration are considered impaired.  Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance.

 

In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferrable with them in the event of disposal.

 

For further discussion of the Company’s loan accounting and acquisitions, see Note 2—Summary of Significant Accounting Policies, Note 4—Mergers and Acquisitions to the unaudited condensed consolidated financial statements and Note 6—Loans and Allowance for Loan Losses.

 

Results of Operations

 

We reported consolidated net income available to common shareholders of $2.5 million, or diluted earnings per share (“EPS”) of $0.19, for the first quarter of 2011 as compared to consolidated net income available to common shareholders of $49.0 million, or diluted EPS of $3.86, in the comparable period of 2010.  This $46.5 million decrease was the net result of the following items:

 

·                  A decrease in pre-tax gains from FDIC-assisted acquisitions of Habersham to $5.5 million compared to the $98.1 million pre-tax gain from the acquisition of CBT in the first quarter of 2010;

·                  Increase in non-interest expenses by $1.6 million, with $1.0 million of this from the addition of Habersham; $2.4 million in salaries and benefits; $2.8 million related to OREO and loan related expenses; offset by a $3.2 million decline related to FHLB prepayment fee and a decline in merger related cost of $3.3 million; offset by

·                  Improved net interest income of $4.2 million due primarily to the improved yields of covered loans and reduced interest expense in both deposits and other borrowings;

·                  Improved provision for loan losses which decreased by $10.1 million over the comparable quarter as the non-covered SCBT loan portfolio loan losses declined by $11.4 million and the covered loan portfolio loan losses increased by $1.3 million, net of the expected reimbursement from the FDIC; and

·                  Improvement in non-interest income by $6.8 million, including securities gains/losses of $5.9 million, which result from losses recorded in the first quarter of 2010, and $604,000 from the addition of Habersham in the Georgia franchise.  This improvement excludes the gains on acquisition.

 

We believe our asset quality related to non-acquired loans continues to be at manageable levels despite the increase of nonperforming assets in total dollars to $90.8 million at March 31, 2011 from $86.5 million at year-end December 31, 2010, and from 63.2 million at March 31, 2010.  As a percentage of total assets (excluding covered assets) total nonperforming assets increased to

 

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2.29% at March 31, 2011 compared to 1.72% at March 31, 2010.   Nonperforming assets not covered under FDIC loss share agreements increased 43.7% from the first quarter of 2010.  Net charge-offs as a percentage of average loans decreased to 1.53% in the first quarter of 2011 from 3.13% in the first quarter of 2010 and 1.71% in the fourth quarter of 2010.  The allowance for loan losses was 2.05% of total loans at March 31, 2011 compared to 1.90% at March 31, 2010, and 2.07% at December 31, 2010.  Our allowance provides 0.68 times coverage of nonperforming loans at March 31, 2011, lower from 0.77 times at March 31, 2010, and 0.69 times at December 31, 2010.    During the first quarter of 2011, our OREO not covered under FDIC loss share agreements increased by $10.5 million from the first quarter of 2010, and by $2.6 million from December 31, 2010.

 

Accounting for Acquired Loans

 

The Company performs ongoing assessments of the estimated cash flows of its acquired loan portfolios.  Increases in cash flow expectations result in a favorable adjustment to interest income over the remaining life of the related loans, and decreases in cash flow expectations result in an immediate recognition of a provision for loans losses, in both cases, net of any adjustments to the receivable from the FDIC for loss sharing.  These ongoing assessments of the acquired CBT loan portfolio resulted in a positive impact to interest income from a reduction in expected credit losses, which was largely offset by a charge to noninterest income for the impact of reduced cash flows from the FDIC under the loss share agreement.  Additionally, our estimates of loans with a reduction in estimated cash flows resulted in a $1.3 million provision for loan losses, net of the recovery from the FDIC under the loss share agreement.  Below are the specifics relative to the review of the acquired loan portfolio during the first quarter of 2011 and the related impact on the indemnification asset:

 

·                  The review of the performance of the CBT acquired loan portfolio resulted in a minor reduction in the overall loss expectation for these loans; however, there were significant changes within the accounting pools;

·                  Several pools experienced increased loss expectations that totaled approximately $26 million;

·                  The remaining pools experienced improved credit loss expectations totaling $36 million;

·                  Under the accounting model for acquired loans, a provision for loan losses of approximately $1.3 million (SCBT’s 5% loss share amount on $26.0 million), net of the FDIC reimbursement, was recorded for those pools where loss expectations increased;

·                  The $36 million in improved credit loss expectations was transferred into accretable yield and will be recognized prospectively over the expected remaining terms of the loan pools;

·                  As a result, there was approximately a $1.4 million increase in the loan yield for the quarter causing the rate on covered loans to reach 8.35% up from 6.35% in the prior quarter; and

·                  With the reduction in the credit loss expectations for certain pools (the $36 million), the impact on the receivable from the FDIC is a reduction in expected cash flows;

·                  The reduced cash flow on this asset caused accretion to turn negative in an amount which substantially offsets the interest income benefit above.

 

Compared to the first quarter of 2010, our loan portfolio has increased 5.8% to $2.8 billion, driven by growth in all loan categories except construction / land development, other income producing property and acquired loans.  Acquired loans grew by $127.5 million from the Habersham acquisition and CBT acquired loans declined by $106.4 million during the past year.  Excluding the acquisition of Habersham and the acquired loan portfolio, our loans grew by 8.0% or $173.1 million from the first quarter of 2010.  The largest increases within the non-acquired loan portfolio occurred in commercial owner occupied by $109.9 million, or 22.7%, consumer real estate by $47.1 million, or $16.4%, and home equity loans by $12.7 million, or 5.1%.  For the three months ended March 31, 2011, mortgage loans in the secondary market declined by $31.9 million as refinancing activity slowed and home sales slowed seasonally.

 

Non-taxable equivalent net interest income for the quarter increased 14.7%.  Non-taxable equivalent net interest margin increased by 28 basis points to 4.13% from the first quarter of 2010 of 3.85% and by 10 basis points from the most recent quarter December 31, 2010, due to improved expected cash flows of interest income on acquired loans over the expected remaining life of these loans and reduced interest expense on both time deposits and other borrowings.  Excess liquidity resulting from the FDIC-assisted acquisition of Habersham and continued gathering of core deposits continues to compress the net interest margin.  The effect (reduction) on our net interest margin was estimated to be 29 basis points during the first quarter of 2011 compared to 19 basis points in the fourth quarter of 2010.  Our quarterly efficiency ratio decreased to 70.1% compared to 74.8% in the fourth quarter of 2010.  The decrease in the efficiency ratio reflects higher noninterest income from the gain on the Habersham acquisition and improved interest income while expenses remained relatively flat.

 

Diluted EPS decreased to $0.19 for the first quarter of 2011 from $3.86 for the comparable period in 2010.  Basic EPS decreased to $0.19 for the first quarter of 2011 from $3.89 for the comparable period in 2010.  The decrease in both diluted and basic

 

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EPS reflects the decrease in noninterest income from the pre-tax gain from the FDIC-assisted acquisition on CBT in 2010 compared to the pre-tax gain from the FDIC-assisted acquisition of Habersham in 2011, which declined by $92.6 million on a pre-tax basis.

 

 

 

Three Months Ended

 

 

 

March 31,

 

Selected Figures and Ratios

 

2011

 

2010

 

 

 

 

 

 

 

Return on average assets (annualized)

 

0.27

%

5.72

%

Return on average equity (annualized)

 

2.94

%

56.93

%

Return on average tangible equity (annualized)*

 

4.15

%

71.89

%

Dividend payout ratio **

 

424.00

%

142.65

%

Equity to assets ratio

 

9.24

%

9.13

%

Average shareholders’ equity (in thousands)

 

$

347,176

 

$

336,314

 

 


* - Ratio is a non-GAAP financial measure.  The section titled “Reconciliation of Non-GAAP to GAAP” below provides a table that reconciles non-GAAP measures to GAAP measures.

** - See explanation of the change in dividend payout ratio below.

 

·                  For the three months ended March 31, 2011, return on average assets (“ROAA”), return on average equity (“ROAE”) and return on average tangible equity decreased compared to the same quarter in 2010.  The decrease was driven by a 94.9% decline in net income available to common shareholders from the comparable quarter in 2010 and an increase in average assets due to the acquisition of Habersham.

·                  Dividend payout ratio increased to 424.0% for the three months ended March 31, 2011 compared with 121.6% for the three months ended December 31, 2010 and 142.7% for the three months ended March 31, 2010.  The increase in the ratio reflects the lower net income in the fourth quarter of 2010 generated by the net result of an increase in the provision for loan losses, an increase in noninterest expense related to OREO and loan related expenses and the addition of CBT, offset by an increase in net interest income, and an increase in noninterest income due to the acquisition of CBT and within legacy SCBT.   We pay cash dividends on common shares out of earnings generated in the preceding quarter; therefore, the dividend payout ratio is calculated by dividing total dividends paid during the first quarter of 2011 by the total net income reported in the fourth quarter of 2010.

·                  Equity to assets ratio increased to 9.24% at March 31, 2011 compared with 9.18% at December 31, 2010 and 9.13% at March 31, 2010.  The increase in the equity to assets ratio reflects an 8.1% increase in assets as a result of the Habersham acquisition compared to the 9.3% increase in equity as a result of the private placement and Habersham acquisition.

·                  Average shareholders’ equity increased $10.9 million, or 3.2%, from first quarter ended March 31, 2010 driven by the increase in shareholders’ equity related to the private placement and the gain on the Habersham acquisition.

 

Reconciliation of Non-GAAP to GAAP

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Return on average tangible equity (non-GAAP)

 

4.15

%

71.89

%

Effect to adjust for intangible assets

 

-1.21

%

-14.96

%

Return on average equity (GAAP)

 

2.94

%

56.93

%

 

 

 

 

 

 

Adjusted average shareholders’ equity (non-GAAP)

 

$

274,112

 

$

265,001

 

Average intangible assets

 

73,064

 

71,313

 

Average shareholders’ equity (GAAP)

 

$

347,176

 

$

336,314

 

 

 

 

 

 

 

Adjusted net income (non-GAAP)

 

$

2,807

 

$

49,183

 

Amortization of intangibles

 

(446

)

(349

)

Tax effect

 

155

 

127

 

Net income (GAAP)

 

$

2,516

 

$

48,961

 

 

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The return on average tangible equity is a non-GAAP financial measure. It excludes the effect of the average balance of intangible assets and adds back the after-tax amortization of intangibles to GAAP basis net income.  Management believes that this non-GAAP tangible measure provides additional useful information, particularly since this measure is widely used by industry analysts following companies with prior merger and acquisition activities. Non-GAAP measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the company.   Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of our results or financial condition as reported under GAAP.

 

Net Interest Income and Margin

 

Summary

 

Our taxable equivalent (“TE”) net interest margin grew from the first quarter of 2010 and from the fourth quarter of 2010.  This increase resulted from improved yields of covered loans and reduced interest expense in both deposits and other borrowings.  The improved yield was substantially offset by the negative accretion on the indemnification asset recognized in noninterest income, from reduced cash flows under the loss share agreements.  Management utilized $38.3 million in excess liquidity to pay down FHLB advances acquired in the Habersham acquisition.  TE net interest margin increased by 11 basis points from the quarter ended December 31, 2010 and by 29 basis points from the first quarter of 2010.  Non-TE and TE net interest margin decreased by 7 basis points and 6 basis points, respectively, from the quarter ended September 30, 2009.

 

SCBT remained in an excess liquidity position during the first quarter of 2011, which had the effect of dampening the net interest margin by an estimated 29 basis points compared to 19 basis points for the fourth quarter of 2010.  The improvement in link quarter net interest margin was also the result of reducing the pricing of funding faster than the decline in interest earning assets.  The yield earned on interest earning assets declined by 10 basis points from the end of 2010, while the rate on interest bearing liabilities declined by 23 basis points.  While the average balance of total loans - nonacquired (excluding mortgage loans held for sale) increased $72.4 million from the first quarter of 2010 and by $30.1 million from the fourth quarter of 2010, the rate earned on these assets declined by 3 basis points.

 

Net interest income increased from the first quarter of 2010 and was driven primarily by reduced yield on interest bearing liabilities including deposits and other borrowings.  Certificates of deposit average rate declined by 54 basis points compared to the same quarter one year ago, and declined by 30 basis points from the fourth quarter of 2010.  The result was a decline in interest expense of $2.2 million.  Non-TE net interest income increased from the first quarter of 2010 as a result of a volume increase in interest-earning assets to more than offset the 6 basis point decrease in the average yield.  Loan volume was up and partially offset by investment securities.  The increase in interest income was $2.1 million driven by the increase in loan volume from both the Habersham acquisition and organic loan growth.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Non-TE net interest income

 

$

32,846

 

$

28,631

 

Non-TE yield on interest-earning assets

 

4.94

%

5.00

%

Non-TE rate on interest-bearing liabilities

 

0.90

%

1.29

%

Non-TE net interest margin

 

4.13

%

3.85

%

TE net interest margin

 

4.18

%

3.89

%

 

Non-TE net interest income increased $4.2 million, or 14.7%, in the first quarter of 2011 compared to the same period in 2010.  Some key highlights are outlined below:

 

·                  Average interest-earning assets increased 6.9% to $3.2 billion in the first quarter of 2011 compared to the same period last year due largely to the acquisition of Habersham.

·                  Non-TE yield on interest-earning assets for the first quarter of 2011 decreased 6 basis points from the comparable period in 2010, and decreased by 10 basis points from the fourth quarter of 2010.  The yield on a portion of our earning assets adjusts simultaneously, but to varying degrees of magnitude, with changes in the general level of interest rates.

 

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·                  The average cost of interest-bearing liabilities for the first quarter of 2011 decreased 39 basis points from the same period in 2010, and increased by 23 basis points compared to the fourth quarter of 2010.  The decrease since the first quarter of 2010 and the fourth quarter 2010 is a reflection of the impact of average yields on certificates of deposits repricing lower and the payoff of FHLB advances during the first quarter of 2010.

·                  TE net interest margin increased by 29 basis points in the first quarter of 2011, compared to the first quarter of 2010.  Compared to the fourth quarter of 2010, TE net interest margin increased by 11 basis points.

 

Loans

 

Total loans, net of deferred loan costs and fees, (excluding mortgage loans held for sale) increased by $152.1 million, or 5.8%, at March 31, 2011 as compared to the same period in 2010.  Loans covered under FDIC loss share agreements decreased by $21.0 million.  The increase from the addition of loans covered under the loss share agreement in the Habersham acquisition was offset by the decline in CBT loans covered under the loss share agreement.  Non-covered loans or legacy SCBT loans increased by $173.1 million, or 8.0%, at March 31, 2011 as compared to the same period in 2010.  The increase was driven by loan growth in commercial owner occupied loans of $109.9 million, consumer real estate loans of $47.1 million, commercial non-owner occupied of $24.4 million, home equity loans of $12.7 million, other loans of $10.2 million, consumer non-real estate of $7.2 million, and commercial and industrial of $3.1 million.  Offsetting the growth were reductions in construction and land development loans of $39.4 million and other income producing property of $2.0 million.

 

The following table presents a summary of the loan portfolio by category:

 

 

 

March 31,

 

% of

 

December 31,

 

% of

 

March 31,

 

% of

 

(Dollars in thousands)

 

2011

 

Total

 

2010

 

Total

 

2010

 

Total

 

Loans covered under loss share agreements

 

$

417,796

 

15.1

%

$

321,038

 

12.3

%

$

438,807

 

16.8

%

Loans not covered under loss share agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial non-owner occupied real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction and land development

 

403,149

 

14.6

%

422,041

 

16.1

%

442,566

 

16.9

%

Commercial non-owner occupied

 

318,597

 

11.5

%

306,381

 

11.7

%

294,147

 

11.3

%

Total commercial non-owner occupied real estate

 

721,746

 

26.1

%

728,422

 

27.8

%

736,713

 

28.2

%

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer owner occupied

 

334,849

 

12.1

%

322,637

 

12.3

%

287,788

 

11.0

%

Home equity loans

 

263,331

 

9.5

%

263,994

 

10.1

%

250,651

 

9.6

%

Total consumer real estate

 

598,180

 

21.6

%

586,631

 

22.4

%

538,439

 

20.6

%

Commercial owner occupied real estate

 

593,363

 

21.5

%

565,155

 

21.6

%

483,450

 

18.5

%

Commercial and industrial

 

206,348

 

7.5

%

202,987

 

7.8

%

203,296

 

7.8

%

Other income producing property

 

131,909

 

4.8

%

124,431

 

4.8

%

133,949

 

5.1

%

Consumer non real estate

 

73,464

 

2.7

%

67,768

 

2.6

%

66,259

 

2.5

%

Other

 

23,299

 

0.7

%

20,806

 

0.7

%

13,136

 

0.4

%

Total loans not covered under loss share agreements

 

2,348,309

 

84.9

%

2,296,200

 

87.7

%

2,175,242

 

83.2

%

Total loans (net of unearned income)

 

$

2,766,105

 

100.0

%

$

2,617,238

 

100.0

%

$

2,614,049

 

100.0

%

 

Note: Loan data excludes mortgage loans held for sale.

 

Loans are our largest category of earning assets.  During 2010 and the first quarter of 2011, we acquired loans covered under FDIC loss share agreements that equate to 14.1% of the total loan portfolio.  Due to the addition of covered loans, the percentage of all the other loan categories decreased even though most loan portfolio’s increased in dollars, such as commercial owner-occupied, consumer owner occupied loans and home equity loans.  Non-covered commercial non-owner occupied real estate loans represented 26.1% of total loans as of March 31, 2011, a decrease from 28.2% of total loans at the end of the same period for 2010 and 27.8% of total loans at year ended December 31, 2010.  At March 31, 2011, non-covered construction and land development loans represented 14.6% of our total loan portfolio, a decrease from 16.9% of our total loan portfolio at March 31, 2010.  At March 31, 2011, non-covered construction and land development loans consisted of $246.4 million in land and lot loans and $156.7 million in construction loans, which represented 10.5% and 6.7%, respectively, of our total non-covered loan portfolio.  At December 31, 2010, non-covered construction and land development loans consisted of $253.0 million in land and lot loans and $169.4 million in construction loans, which represented 11.0% and 7.4%, respectively, of our total non-covered loan portfolio.

 

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Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Average total loans

 

$

2,666,581

 

$

2,487,843

 

Interest income on total loans

 

36,828

 

34,052

 

Non-TE yield

 

5.58

%

5.55

%

 

Interest earned on loans increased $2.7 million, or 7.8%, in the first quarter of 2011 compared to the first quarter of 2010.  Some key highlights for the quarter ended March 31, 2011 are outlined below:

 

·                  Our non-TE yield on total loans increased 3 basis points during the first quarter of 2011 while average total loans increased 7.2%, as compared to the first quarter of 2010.  The increase in average total loans was a result of the growth in both non-covered loans and covered loans, as we acquired Habersham during the first quarter of 2011.  The covered loan portfolio effective yield improved due to improved cash flows and reduced credit loss expectations.  This resulted in a yield of 8.12%, compared to approximately 5.1% one year ago.

·                  Loans covered under loss share agreements had a balance of $417.8 million at the end of the first quarter of 2011 compared to $438.8 million in 2010.

·                  Construction and land development loans decreased $39.4 million, or 8.9%, to $403.1 million from the ending balance at March 31, 2011.  We have continued to reduce the level of these loans in our portfolio given the current economic environment and the risk involved.

·                  Commercial non-owner occupied loans increased $24.4 million, or 8.3%, to $318.6 million from the ending balance at March 31, 2010.

·                  Consumer real estate loans increased $59.7 million, or 11.1%, to $598.2 million from the ending balance at March 31, 2011.  The increase resulted from a $47.0 million, or 16.4%, in consumer owner occupied loans and a $12.7 million, or 5.1%, increase in home equity lines of credit (“HELOCs”) from the balance at March 31, 2010.

·                  Commercial owner occupied loans increased $109.9 million, or 22.7%, to $593.4 million from the ending balance at March 31, 2010.

·                  Other income producing property loans decreased $2.0 million, or 1.5%, to $131.9 million from the ending balance at March 31, 2010.

·                  Consumer non real estate loans increased $7.2 million, or 10.9%, to $73.5 million from the ending balance at March 31, 2010.

·                  Commercial loans and HELOCs with interest rate floors locked in above 5.00% had a balance of $304.8 million which has helped keep our non-TE yield up even as interest rates have declined since March 31, 2010.

 

The balance of mortgage loans held for sale decreased $26.2 million from December 31, 2010 to $19.3 million at March 31, 2011 as compared to the balance of mortgage loans held for sale at March 31, 2010 of $12.1 million.  This decrease from the end of the year primarily reflects the seasonality of home buying in the first quarter of the year and modest rise in mortgage interest rates.  The increase over the prior year is a reflection of increased customer demand for mortgage refinancing that has resulted from the low interest rates in the mortgage market which was more predominant during the last half of 2010.

 

Investment Securities

 

We use investment securities, our second largest category of 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.  At March 31, 2011, the composition of the portfolio changed somewhat from the composition at March 31, 2010.  At March 31, 2011, investment securities totaled $233.2 million, compared to $237.9 million at December 31, 2010 and $311.0 million at March 31, 2010.  The decrease in investment securities was primarily the result of the sale of $44.7 million in securities during the fourth quarter of 2010 and resulted in average and period-end balances decreasing by 12.0% and 25.0%, respectively, from March 31, 2010.

 

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Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Average investment securities

 

$

247,984

 

$

281,885

 

Interest income on investment securities

 

2,074

 

2,779

 

Non-TE yield

 

3.32

%

4.00

%

 

Interest earned on investment securities decreased 25.4% in the first quarter of 2011 compared to the first quarter of 2010.  The decrease resulted from a 12.0% decrease in balances of average investment securities resulting largely from the sale of $44.7 million in GSE debt, mortgage-backed securities, and seven of the eight pooled trust preferred securities in the fourth quarter of 2010, and maturing or called securities that were purchased in higher interest rate environments.

 

Our holdings of GSE debt, state and municipal obligations, mortgage-backed securities, and equity securities at March 31, 2011 had fair market values that, on a net basis, exceeded their book values and result in an unrealized gain.  During the first quarter of 2011, we sold our position in MMCAPs I A, our remaining trust preferred security (collateralized debt obligations) for a realized loss of $194,000.  The following table provides a summary of the credit ratings for our investment portfolio (including held-to-maturity and available-for-sale securities) at the end of the first quarter of 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Other-Than-

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

Comprehensive

 

Temporary

 

 

 

 

 

BB or

 

 

 

(Dollars in thousands)

 

Cost

 

Value

 

Income

 

Impairment *

 

AAA - A

 

BBB

 

Lower

 

Not Rated

 

March 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises debt

 

$

56,987

 

$

57,518

 

$

531

 

$

 

$

56,987

 

$

 

$

 

$

 

State and municipal obligations

 

58,418

 

59,755

 

1,337

 

 

54,833

 

2,415

 

 

1,170

 

Mortgage-backed securities **

 

90,186

 

91,990

 

1,804

 

 

 

 

 

 

Equity securities

 

443

 

581

 

138

 

 

 

 

 

443

 

 

 

$

206,034

 

$

209,844

 

$

3,810

 

$

 

$

111,820

 

$

2,415

 

$

 

$

1,613

 

 


* - Represents the total other-than-temporary impairment recognized life to date.

** - Agency mortgage-backed securities (“MBS”) are guaranteed by the issuing GSE as to the timely payments of principal and interest.   Except for Government National Mortgage Association (“GNMA”) securities, which have the full faith and credit backing of the United States Government, the GSE alone is responsible for making payments on this guaranty.  While the rating agencies have not rated any of the MBS issued, senior debt securities issued by GSEs are rated consistently as “Triple-A.”  Most market participants consider agency MBS as carrying an implied AAA rating because of the guarantees of timely payments and selection criteria of mortgages backing the securities.  We do not own any private label mortgage-backed securities.

 

At March 31, 2011, we had twenty-nine securities available for sale in an unrealized loss position, which totaled $611,000.

 

During the first quarter of 2011 as compared to the first quarter of 2010, the total number of securities with an unrealized loss position increased by five securities, while the total dollar amount of the unrealized loss decreased by $225,000.

 

All securities available for sale in an unrealized loss position as of March 31, 2011 continue to perform as scheduled.  We have evaluated the cash flows and determined that all contractual cash flows should be received; therefore impairment is temporary because we have the ability and intent to hold these securities within the portfolio until the maturity or until the value recovers.  We continue to monitor all of these securities with a high degree of scrutiny.  There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of these securities are other than temporarily impaired, which would require a charge to earnings in such periods.  Any charges for OTTI related to securities available-for-sale would not impact cash flow, tangible capital or liquidity.

 

Although 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 management generally holds 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.

 

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Table of Contents

 

Other Investments

 

Other investment securities include primarily our investments in 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 all these securities are equal at March 31, 2011.  As of March 31, 2011, the investment in FHLB stock represented approximately $15.9 million, or 0.4% as a percentage of total assets.  The following factors have been evaluated and considered in determining the carrying amount of the FHLB stock:

 

·                  We evaluate ultimate recoverability of the par value.

·                  We currently have sufficient liquidity or have access to other sources of liquidity to meet all operational needs in the foreseeable future, and would not have the need to dispose of this stock below the recorded amount.

·                  Historically, the FHLB does not allow for discretionary purchases or sales of this stock.  Redemptions of the stock occur at the discretion of the FHLB, subsequent to the maturity or redemption of outstanding advances held by the member institutions.  During the third quarter of 2010, the FHLB redeemed approximately $1.1 million of our investment, at par value.

·                  We have reviewed the assessments by rating agencies, which concluded that debt ratings are unlikely to change and that the FHLB has the ability to absorb economic losses, given the expectation that the various FHLBanks have a very high degree of government support.

·                  The unrealized losses related to the securities owned by the FHLBs are manageable given the capital levels of these organizations.

·                  All of the FHLBs are meeting their debt obligations.

·                  Our holdings of FHLB stock are not intended for the receipt of dividends or stock growth, but for the purpose and right to receive advances, or funding.  We deem the FHLB’s process of determining after each quarter end whether it will pay a dividend and, if so, the amount, as essentially similar to standard practice by most dividend-paying companies.  Based on the FHLB’s performance over the past eight consecutive quarters, starting with the second quarter 2009, the FHLB has announced a dividend payment after each quarter’s performance, with the most recent dividend payment of 0.79% on March 29, 2011 related to the fourth quarter 2010.

·                  Subsequent to March 31, 2011, the FHLB also redeemed $1.6 million of our FHLB stock at par value on April 8, 2011.

 

For the reasons above, we have concluded that our holdings of FHLB stock are not other than temporarily impaired as of March 31, 2011 and ultimate recovery of the par value of this investment is probable.

 

Interest-Bearing Liabilities

 

Interest-bearing liabilities include interest-bearing transaction accounts, savings deposits, CDs, other time deposits, federal funds purchased, and other borrowings.  Interest-bearing transaction accounts include NOW, HSA, IOLTA, and Market Rate checking accounts.

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Average interest-bearing liabilities

 

$

2,886,572

 

$

2,689,819

 

Interest expense

 

6,409

 

8,573

 

Average rate

 

0.90

%

1.29

%

 

The average balance of interest-bearing liabilities increased in the first quarter of 2011 compared to the first quarter of 2010.  The decrease in interest expense was largely driven by a decline in the average rates on CDs and other time deposits.  Overall, we experienced a 39 basis point decrease in the average rate on all interest-bearing liabilities.  Some key highlights are outlined below:

 

·                  Average interest-bearing deposits for the three months ended March 31, 2011 grew 12.9% from the same period in 2010.

·                  Interest-bearing deposits grew 6.9% to $2.7 billion at March 31, 2011 from the period end balance at March 31, 2010, resulting largely from a $216.7 million, or 8.0%, increase related to the CBT acquisition.  Excluding the acquisition, interest-bearing deposits decreased by $41.0 million resulting largely from the increase in money market deposits of $220.7 million, and offset by decreases in both small and large denomination CDs by a total of $313.5 million.

·                  The average rate on transaction and money market account deposits for the three months ended March 31, 2011 decreased 4 basis points from the comparable period in 2010, which contributed to a decrease of $554,000 in interest expense for the first

 

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quarter of 2011.  The impact of the decrease in rates was partially offset by an increase in volume as the average balance increased $373.3 million to $1.3 billion at March 31, 2011 compared to the same quarter in 2010.

·                  Average certificates and other time deposits decreased 10.5%, down $131.5 million from the average balance in the first quarter of 2010.  Interest expense on certificates and other time deposits decreased $2.0 million mainly as a result of a 54 basis point decrease in the interest rate for the three months ended March 31, 2011 as compared to the same period in 2010.

·                  Other borrowings decreased 66.7%, down $97.9 million from the average balance in the first quarter of 2010.  We repaid the entire balance of FHLB advances near the end of the first quarter of 2010.  We also repaid the subordinated term loan in the fourth quarter of 2010.

·                  A decline in interest rates contributed significantly to a $2.2 million, or 0.9%, reduction in interest expense on average interest-bearing liabilities for the three months ended March 31, 2011 from the comparable period in 2010.

 

Noninterest-Bearing Deposits

 

Noninterest-bearing deposits (or demand deposits) are transaction accounts that provide our bank with “interest-free” sources of funds.  Average noninterest-bearing deposits increased $115.7 million, or 27.3%, to $539.3 million in the first quarter of 2011 compared to $423.6 million at March 31, 2010.  From the fourth quarter of 2010, average noninterest-bearing deposits grew $44.8 million, or 9.1%.  Excluding deposits acquired in the Habersham acquisition, period end noninterest-bearing deposits increased $88.0 million, or 19.2%, from the balance at March 31, 2010.

 

Provision for Loan Losses and Nonperforming Assets

 

We have established an allowance for loan losses through a provision for loan losses charged to expense.  The ALLL represents an amount we believe will be adequate to absorb probable losses on existing loans that may become uncollectible.  We assess the adequacy of the ALLL by using an internal risk rating system, independent credit reviews, and regulatory agency examinations—all of which evaluate the quality of the loan portfolio and seek to identify problem loans.  Based on this analysis, management and the board of directors consider the current allowance to be adequate.  Nevertheless, our evaluation is inherently subjective as it requires estimates that are susceptible to significant change.  Actual losses may vary from our estimates, and there is a possibility that charge-offs in future periods could exceed the ALLL as estimated at any point in time.

 

In addition, regulatory agencies, as an integral part of the examination process, periodically review our bank’s ALLL.  Such agencies may require additions to the ALLL based on their judgments about information available to them at the time of their examination.

 

Loans acquired in the CBT and Habersham acquisitions were recorded at their acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses.  Our initial estimates of credit losses on loans acquired in the Habersham acquisition continue to be adequate, and there is no evidence of additional credit deterioration that would require additional loan loss reserves as of March 31, 2011.  We established a loan loss reserve of $25.8 million on four CBT loan pools due to evidence of additional credit deterioration, subsequent to initial fair valuation. Under current accounting principles, information regarding our estimate of loan fair values may be adjusted for a period of up to one year as we continue to refine our estimate of expected future cash flows in the acquired portfolio. As we determine that losses arose after the acquisition date, the additional losses will be reflected as a provision for loan losses. See Note 2 in the notes to the unaudited condensed consolidated financial statements for further discussion of the method of accounting for acquired loans.

 

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Table of Contents

 

The following table presents a summary of the changes in the ALLL for the three months ended March 31, 2011 and 2010:

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

Non-acquired

 

Acquired

 

 

 

 

 

(Dollars in thousands)

 

Loans

 

Loans

 

Total

 

Total *

 

Balance at beginning of period

 

$

47,512

 

$

 

$

47,512

 

$

37,488

 

Loans charged-off

 

(9,322

)

 

(9,322

)

(17,370

)

Recoveries of loans previously charged off

 

625

 

 

625

 

501

 

Net charge-offs

 

(8,697

)

 

(8,697

)

(16,869

)

Provision for loan losses on non-acquired loans

 

9,349

 

25,833

 

35,182

 

20,778

 

Benefit attributable to FDIC loss share agreements

 

 

(24,541

)

(24,541

)

 

Total provision for loan losses charged to operations

 

9,349

 

1,292

 

10,641

 

20,778

 

Provision for loan losses recorded through the FDIC loss share receivable

 

 

24,541

 

24,541

 

 

Balance at end of period

 

$

48,164

 

$

25,833

 

$

73,997

 

$

41,397

 

 

 

 

 

 

 

 

 

 

 

Total non-acquired loans:

 

 

 

 

 

 

 

 

 

At period end

 

$

2,348,309

 

 

 

 

 

$

2,175,242

 

Average

 

2,310,586

 

 

 

 

 

2,185,190

 

As a percentage of average non-acquired loans (annualized):

 

 

 

 

 

 

 

 

 

Net charge-offs

 

1.53

%

 

 

 

 

3.13

%

Provision for loan losses

 

1.64

%

 

 

 

 

3.86

%

Allowance for loan losses as a percentage of period end non-acquired loans

 

2.05

%

 

 

 

 

1.90

%

Allowance for loan losses as a percentage of period end non-performing non-acquired loans (“NPLs”)

 

68.44

%

 

 

 

 

76.89

%

 


* As of March 31, 2010, there was no allowance for loans covered under loss share agreements.

 

The provision for loan losses as a percent of average non-acquired loans reflects an increase due primarily to the increase in our nonperforming assets during the first quarter of 2011 compared to the same quarter in 2010.  Forty-five percent of the charge-off amount for the first quarter of 2011 is comprised of 10 loans ranging from approximately $209,000 to $1.0 million.  The remainder of the charge-offs were less than $209,000 per loan for the quarter.  Of the total net charge-offs during the quarter, 51.2% or $4.5 million were construction and land development loans, 8.4% or $728,000 were commercial owner-occupied loans, 19.9% or $1.7 million were consumer owner-occupied loans (including home equity loans), 1.7% or $151,000 were commercial and industrial loans, 13.9% or $1.2 million were commercial non-owner occupied loans, and 4.2% or $365,000 were other income producing property loans.  We remain aggressive in charging off loans resulting from the decline in the appraised value of the underlying collateral (real estate) and the overall concern that borrowers will be unable to meet the contractual payments of principal and interest.  Additionally, there continues to be concern about the economy as a whole and the market conditions throughout certain regions of the Southeast.  Excluding covered assets, nonperforming loans increased by $1.2 million during the first quarter compared to the fourth quarter of 2010.  The ratio of the ALLL to cover these loans decreased from 77% at March 31, 2010 to 68% at March 31, 2011.

 

We increased the ALLL compared to the first quarter of 2010 due to the increase in risk within the overall loan portfolio.  On a general basis, we consider three-year historical loss rates on all loan portfolios, except residential lot loans where two-year historical loss rates are applied.  We also consider economic risk, model risk and operational risk when determining the ALLL.  All of these factors are reviewed and adjusted each reporting period to account for management’s assessment of loss within the loan portfolio.  Overall, the general reserve increased $7.9 million and $2.7 million compared to the balance at March 31, 2010 and at December 31, 2010, respectively.

 

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The historical loss rates on an overall basis increased from March 31, 2010 due to the increase in loan losses in the first quarter of 2011 when compared to the removal of much lower historical loss rates in our rolling averages.  This resulted in an increase of 55 basis points in the ALLL, given the rise in losses throughout the portfolio.  Compared to the fourth quarter of 2010, the increase was 11 basis points.

 

Economic risk decreased by 2 basis points during the first quarter of 2011 as compared to 2010 due to the decline in unemployment and improved home sales.  Compared to the fourth quarter of 2010, we reduced the factor related to unemployment by 1 basis point.

 

Model risk declined 1 basis point compared to the first quarter of 2010, and was the same as the fourth quarter of 2010.  This risk comes from the fact that our ALLL model is not all-inclusive.  Risk inherent with new products, new markets, and timeliness of information are examples of this type of exposure.  Management has reduced this factor since our model has been used for over two and a half years, and we believe more adequately addresses this inherent risk in our loan portfolio.

 

Operational risk consists of the underwriting, documentation, closing and servicing associated with any loan.  This risk is managed through policies and procedures, portfolio management reports, best practices and the approval process.  The risk factors evaluated include the following:  exposure outside our deposit footprint, changes in underwriting standards, levels of past due loans, loan growth, supervisory loan to value exceptions, results of external loan reviews, our centralized loan documentation process and significant loan concentrations.  We believe that the overall operational risk has declined by 20 basis points during the first quarter of 2011 compared to the first quarter of 2010, and by 2 basis points from the fourth quarter of 2010.   This improvement was due primarily to the decrease in 30-89 days past due loans, improved level of classified assets, reduced exposure outside of the depository footprint, lower exposure to certain loan concentrations and supervisory loan to value exceptions given the increase in capital thus far in 2011.

 

On a specific reserve basis, the allowance for loan losses decreased by $2.1 million from December 31 2010, and decreased by approximately $1.2 million from March 31, 2010.  The loan balances being evaluated for specific reserves grew from $32.6 million at March 31, 2010 to $49.7 million at March 31, 2011.  Our practice, generally, is that once a specific reserve is established for a loan, a charge off of that amount occurs in the quarter subsequent to the establishment of the specific reserve.

 

In terms of the conditions and how the allowance has changed since December 31, 2010, we continue to build the allowance for loan losses by increasing the provision for loan losses faster than the net charge offs recorded.  Offsetting these increases are declines in the 30-89 days past due level and improvement in classified assets.

 

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Table of Contents

 

During the three months ended March 31, 2011, the growth in our total nonperforming assets (“NPAs”) was reflective of the continued pressure on the real estate market and economy, along with NPAs covered under FDIC loss share agreements.  The table below summarizes our NPAs.

 

 

 

March 31,

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

2010

 

2010

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans (1)

 

$

58,870

 

$

62,661

 

$

66,964

 

$

75,313

 

$

53,730

 

Accruing loans past due 90 days or more

 

339

 

118

 

319

 

582

 

107

 

Restructured loans

 

11,168

 

6,365

 

3,479

 

 

 

Total nonperforming loans

 

70,377

 

69,144

 

70,762

 

75,895

 

53,837

 

Other real estate owned (“OREO”) (2)

 

19,816

 

17,264

 

15,657

 

9,803

 

9,319

 

Other nonperforming assets (3)

 

575

 

50

 

12

 

159

 

19

 

Total nonperforming assets excluding covered assets

 

90,768

 

86,458

 

86,431

 

85,857

 

63,175

 

Covered OREO

 

77,286

 

69,317

 

47,365

 

31,750

 

32,076

 

Other covered nonperforming assets

 

308

 

19

 

9

 

34

 

 

Total nonperforming assets including covered assets

 

$

168,362

 

$

155,794

 

$

133,805

 

$

117,641

 

$

95,251

 

 

 

 

 

 

 

 

 

 

 

 

 

Excluding Covered Assets

 

 

 

 

 

 

 

 

 

 

 

Total NPAs as a percentage of total loans and repossessed assets (4)

 

3.83

%

3.74

%

3.80

%

3.84

%

2.89

%

Total NPAs as a percentage of total assets

 

2.29

%

2.41

%

2.39

%

2.37

%

1.98

%

Total NPLs as a percentage of total loans (4)

 

3.00

%

3.01

%

3.13

%

3.41

%

2.47

%

 

 

 

 

 

 

 

 

 

 

 

 

Including Covered Assets

 

 

 

 

 

 

 

 

 

 

 

Total NPAs as a percentage of total loans and repossessed assets (4)

 

5.88

%

5.76

%

4.97

%

4.38

%

3.59

%

Total NPAs as a percentage of total assets

 

4.25

%

4.33

%

3.70

%

3.25

%

2.60

%

Total NPLs as a percentage of total loans (4)

 

2.54

%

2.64

%

2.69

%

2.87

%

2.06

%

 


(1) Loans covered under loss share agreements that were acquired in the CBT acquisition are considered to be performing due to the application of the accretion method under FASB ASC Topic 310-30. (For further discussion of the Company’s application of the accretion method, see Business Combinations, Method of Accounting for Loans Acquired, and FDIC Indemnification Asset under Note 2—Summary of Significant Accounting Policies.) Excludes the loans covered under loss agreements that are contractually past due 90 days or more totaling $110.7 million, $93.6 million, $102.9 million, $105.8 million, and $141.0 million as of March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010, and March 31, 2010, respectively, including the valuation discount.

(2) Includes certain real estate acquired as a result of foreclosure and property not intended for bank use.

(3) Consist of non-real estate foreclosed assets, such as repossessed vehicles.

(4) Loan data excludes mortgage loans held for sale.

 

Excluding the loans covered by loss share agreements, total nonaccrual loans, including restructured loans, were $70.0 million, or 3.00% of total loans, an increase of $16.5 million, or 30.7%, from March 31, 2010. The increase in nonaccrual loans was driven by an increase in commercial nonaccrual loans of $11.4 million and an increase in consumer nonaccrual loans of $4.9 million.  Excluding covered properties, OREO increased $10.5 million from March 31, 2010.

 

Nonaccrual non-acquired loans and restructured loans increased by approximately $1.0 million during the first quarter of 2011 from the level at December 31, 2010.  This was the result of three large loans moving into nonaccrual status totaling $9.8 million.  This increase is offset by both charge offs and transfers to OREO through the foreclosure process as seen in the table above.

 

At March 31, 2011, non-covered OREO increased by $2.6 million from December 31, 2010.  At March 31, 2011, non-covered OREO consisted of 72 properties with an average value of $275,000 an increase of $28,000 from December 31, 2010, when we had 70 properties.  In the first quarter of 2011, we added 19 properties with an aggregate value of $7.9 million into non-covered OREO, and we sold 17 properties with a basis of $3.0 million in that same quarter.  We recorded a net loss of $45,000 for the quarter.  Our non-covered OREO balance of $19.8 million, at March 31, 2011, is comprised of 10% in the Low Country region, 19% in the

 

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Georgetown/Myrtle Beach region, 38% in the Beaufort (Hilton Head) region, 13% in the Charlotte region and 11% in the Upstate (Greenville) region.

 

Overall, we continue to believe that the loan portfolio remains manageable in terms of charge-offs and NPAs as a percentage of total loans.  Given the industry-wide rise in credit costs, we have taken additional proactive measures to identify problem loans including in-house and independent review of larger transactions.  Our policy for evaluating problem loans includes obtaining new certified real estate appraisals as needed.  We continue to monitor and review frequently the overall asset quality within the loan portfolio.

 

Potential Problem Loans

 

Potential problem loans (excluding covered loans), which are not included in nonperforming loans, amounted to approximately $12.8 million, or 0.55%, of total non-covered loans outstanding at March 31, 2011, compared to $28.7 million, or 1.32%, of total non-covered loans outstanding at March 31, 2010 and compared to $19.6 million, or 0.85% of total non-covered loans outstanding at December 31, 2010.  Potential problem loans represent those loans where information about possible credit problems of the borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms.

 

Noninterest Income

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Gain on acquisition

 

$

5,528

 

$

98,081

 

Service charges on deposit accounts

 

5,030

 

4,523

 

Bankcard services income

 

2,659

 

1,799

 

Trust and investment services income

 

1,249

 

784

 

Mortgage banking income

 

863

 

844

 

Securities gains

 

323

 

 

Total other-than-temporary impairment losses

 

 

(5,586

)

Portion of impairment losses recognized in other comprehensive loss

 

 

 

Net impairment losses recognized in earnings

 

 

(5,586

)

Accretion on FDIC indemnification asset

 

(401

)

369

 

Other

 

622

 

807

 

Total noninterest income

 

$

15,873

 

$

101,621

 

 

Noninterest income decreased 84.4% in the first quarter of 2011 as compared to the same period in 2010.  The quarterly decrease in total noninterest income primarily resulted from the following:

 

·                  The pre-tax gain from the FDIC-assisted acquisition of Habersham was $5.5 million compared to the $98.1 million pre-tax gain from the FDIC-assisted acquisition of CBT in the first quarter of 2010.

·                  Service charges on deposit accounts increased $507,000, primarily resulting from a $430,000 increase in legacy SCBT service charges, due primarly to a larger number of accounts.

·                  Bankcard services income increased 47.8%, largely driven by an increase in debit card and surcharge ATM income from legacy SCBT.  Legacy SCBT bankcard services income increased 44.9%, or $807,000, due primarly to a larger customer base than in 2010.

·                  Trust and investment services income increased 59.3%, mostly driven by a $400,000 increase in investment services fees generated from legacy SCBT, due to additional wealth management personnel and a larger customer base.

·                  Securities gains of $517,000 from the sale of most of the securities acquired in the Habersham transaction were partially offset by $194,000 loss resulting from the sale of the MMCAPs I A security, the Company’s only remaining pooled trust preferred collateralized debt obligation.

·                  No impairment losses were recognized in earnings during the first quarter of 2011, compared to the same quarter in 2010, when a $5.6 million impairment loss was recorded.

·                  Accretion on the FDIC indemnification asset decreased $770,000, resulting from a decrease in expected cash flows.  The decrease in expected cash flows was driven by improvement in the cash flows in certain loan pools during the quarter.

 

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Noninterest Expense

 

 

 

Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

16,646

 

$

13,753

 

Net occupancy expense

 

2,576

 

2,373

 

OREO expense and loan related

 

2,533

 

(270

)

Information services expense

 

2,341

 

2,371

 

Furniture and equipment expense

 

1,957

 

1,636

 

FDIC assessment and other regulatory charges

 

1,479

 

1,323

 

Advertising and marketing

 

909

 

587

 

Business development and staff related

 

805

 

807

 

Amortization of intangibles

 

446

 

349

 

Professional fees

 

433

 

557

 

Federal Home Loan Bank advances prepayment fee

 

 

3,189

 

Merger-related expense

 

609

 

3,908

 

Other

 

3,490

 

1,997

 

Total noninterest expense

 

$

34,224

 

$

32,580

 

 

Noninterest expense increased 5.1% in the first quarter of 2011 as compared to the same period in 2010.  The quarterly increase in total noninterest expense primarily resulted from the following:

 

·                  Salaries and employee benefits expense increased 17.7%, driven mainly by $2.4 million increase in legacy SCBT expenses.

·                  OREO expense and loan related expense increased 1,038.1%, mostly driven by a $1.9 million increase in writedowns of legacy SCBT property to appraised values during the first quarter of 2011 and a gain on a property sold in legacy SCBT during the first quarter of 2010.

·                  Furniture and equipment expense increased by 19.6%, driven primarily by the depreciation on furniture and equipment purchased from the FDIC related to the CBT acquisition in April of 2010.

·                  Advertising and marketing expense increased 54.6%, driven largely by a $197,000, or 62.9%, increase in advertising expense and a $123,000, or 39.0%, increase in public relations expense.

·                  Other expense increased 70.6%, driven mainly by $1.4 million increase in legacy SCBT expenses.

·                  Partially offsetting these increases were decreases in merger-related expenses of 84.4%, or $3.3 million, and a decline of $3.2 million related to the FHLB prepayment fee paid in the first quarter of 2010.

 

Income Tax Expense

 

Our effective income tax rate decreased to 34.7% for at March 31, 2011, as compared to 36.3% at March 31, 2010.  The lower effective tax rate in 2011 is attributable to lower pre-tax earnings driven by the $5.5 million pre-tax acquisition gain recorded on the Habersham acquisition in comparison to the $98.1 million pre-tax acquisition gain recorded on the CBT acquisition.  This causes tax exempt income to become a greater proportion of net income than last year.

 

Capital Resources

 

Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends and additional common equity raised during 2011.  As of March 31, 2011, shareholders’ equity was $366.0 million, an increase of $36.1 million, or 10.9%, from $330.0 million at December 31, 2010, and an increase of $31.3 million or 9.3% from $334.8 at March 31, 2010.  The increase in shareholders’ equity largely resulted from $34.7 million proceeds from the Private Placement during the first quarter of 2011.  Our equity-to-assets ratio increased to 9.24% at March 31, 2011 from 9.18% at the end of the fourth quarter of 2010 and 9.13% at the end of the comparable period of 2010.

 

We are subject to certain risk-based capital guidelines. Certain ratios measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The values of both balance sheet and off-balance sheet items are adjusted to reflect credit risk. Under the guidelines promulgated by the Board of Governors of the Federal Reserve System, which are substantially similar to those of the OCC, Tier 1 risk-based capital must be at least 4% of risk-weighted assets, while total risk-based capital must be at least 8% of risk-weighted assets.

 

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In conjunction with the risk-based capital ratios, the regulatory agencies have also prescribed a leverage capital ratio for assessing capital adequacy.

 

The Company’s capital adequacy ratios for the following periods are reflected below:

 

 

 

March 31,

 

December 31,

 

March 31,

 

Capital Adequacy Ratios

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

13.35

%

13.34

%

13.51

%

Total risk-based capital

 

14.62

%

14.60

%

15.42

%

Tier 1 leverage

 

9.04

%

8.48

%

8.94

%

 

Compared to December 31, 2010, our Tier 1 risk-based capital, total risk-based capital, and Tier 1 leverage ratio have increased due primarily to the impact of the proceeds from the Private Placement and the gain related to the FDIC-assisted acquisition of Habersham, and the relatively modest growth of risk weighted assets.  Compared to March 31, 2010, our Tier 1 risk-based capital ratio has decreased primarily due to the increase in assets resulting from the Habersham acquisition as well as other organic loan growth.  Total risk-based capital ratio has decreased due to the increase in assets and the impact of repaying $14.8 million of subordinated indebtedness that qualified as total capital.  Tier 1 leverage ratio increased as compared to March 31, 2010 due primarily to the impact of the capital raise and the gain related to the FDIC-assisted acquisition of Habersham, and the relatively modest growth of average risk weighted assets.

 

These fluctuations are consistent with what management expected given the CBT and Habersham acquisitions.  The Tier 1 leverage ratio covers the average assets from the Habersham acquisition for approximately half of the first quarter, therefore this ratio is expected to decline.  Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classification.

 

Liquidity

 

Liquidity refers to our ability to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses.  Our Asset Liability Management Committee (“ALCO”) is charged with monitoring these policies, which are designed to ensure acceptable composition of asset/liability mix.  Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.  We have employed our funds in a manner to provide liquidity from 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.  Management has policies and procedures governing the length of time to maturity on loans and investments.  Normally, changes in the earning asset mix are of a longer-term nature and are not utilized for day-to-day corporate liquidity needs.

 

Our liabilities provide liquidity on a day-to-day basis.  Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings.  We engage in routine activities to retain deposits intended to enhance our liquidity position.  These routine activities include various measures, such as the following:

 

·                  Emphasizing relationship banking to new and existing customers, where borrowers are encouraged and normally expected to maintain deposit accounts with our Bank,

·                  Pricing deposits, including certificates of deposit, at rate levels that will attract and/or retain balances of deposits that will enhance our Bank’s asset/liability management and net interest margin requirements, and

·                  Continually working to identify and introduce new products that will attract customers or enhance our Bank’s appeal as a primary provider of financial services.

 

On February 18, 2011, we acquired Habersham Bank in an FDIC-assisted deal which provided approximately $91.3 million in cash and cash equivalents.  Deposits in the amount of $340.0 million were also assumed. Of this amount, $76.2 million were in the form of highly liquid transaction accounts. Certificates of deposit and interest-bearing deposits comprised $264.4 million of total deposits, or 77.6%. In accordance with the P&A Agreement and the desire to lower our cost of funds, we decided to lower rates on all time deposits for depositors who had no other relationship with us other than their time deposit products.  As anticipated, we experienced approximately $68.4 million in run-off of time deposit account balances between the acquisition date and March 31, 2011.  Our liquidity position could continue to be affected by potential run-off of deposits in these northeast Georgia markets.

 

The FDIC-assisted acquisition of Habersham and the subsequent sale of most of the investment securities was the largest contributing factor in the increase in our liquidity position at March 31, 2011 from our position at March 31, 2010.  On February 18, 2011, we acquired $31.9 million in cash and cash equivalents, excluding cash paid by the FDIC to consummate the acquisition, as well as $60.9 million of investment securities.  Total cash received from the FDIC was $59.4 million which included $20.1 million paid to our Bank to compensate for the liabilities assumed in excess of assets acquired and the $38.3 million asset discount bid.  We received $59.4 million in cash from the FDIC on February 22, 2011 and recorded a $938,000 payable to the FDIC which will be a part of the final settlement with the FDIC later in 2011.  We have sold most of the acquired investment securities subsequent to the acquisition date; and recorded a gain of approximately $517,000 during the first quarter of 2011 related to interest rate changes.  The remaining securities provide periodic cash flows in the form of principal and interest payments.

 

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security of $1.0 million was called on February 19, 2010 at par.  The remaining securities provide periodic cash flows in the form of principal and interest payments.

 

Excluding the Habersham acquisition, our legacy SCBT loan portfolio increased by approximately $173.1 million, or about 8.0%.  We also increased our liquidity position in February 2011 with the sale of 1,129,032 shares of our common stock in the Private Placement, resulting in net proceeds of $34.7 million.  Total cash and cash equivalents were $412.6 million at March 31, 2011 as compared to $237.1 million at December 31, 2010 and $238.1 million at March 31, 2010.

 

At March 31, 2011 and 2010, we had no brokered deposits.  Total deposits increased $324.4 million, or 10.8%, to $3.3 billion resulting primarily from the Habersham acquisition; excluding Habersham, total deposits increased $47.0 million, or 1.6%.  Excluding Habersham, we increased our noninterest-bearing deposit balance by $88.0 million, or 19.2%, at March 31, 2011 as compared to the balance at March 31, 2010.  Federal funds purchased and securities sold under agreements to repurchase decreased $31.1 million, or 13.1%, from the balance at March 31, 2010; and increased $15.5 million, or 8.1%, from the balance at December 31, 2010.  Other borrowings declined by $16.3 million, or 26.0%, from March 31, 2010 due primarily to the repayment of the $15.0 million subordinated term loan.  During the first quarter of 2011, we repaid the FHLB $38.3 million for the FHLB advances acquired in the FDIC-assisted acquisition of Habersham.  To the extent that we employ other types of non-deposit funding sources, typically to accommodate retail and correspondent customers, we continue to emphasize shorter maturities of such funds.  Our approach may provide an opportunity to sustain a low funding rate or possibly lower our cost of funds but could also increase our cost of funds if interest rates rise.

 

Our ongoing philosophy is to remain in a liquid position as reflected by such indicators as the composition of our earning assets, typically including some level of federal funds sold, balances at the Federal Reserve Bank, reverse repurchase agreements, and/or other short-term investments; asset quality; well-capitalized position; and profitable operating results.  Cyclical and other economic trends and conditions can disrupt our bank’s desired liquidity position at any time.  We expect that these conditions would generally be of a short-term nature.  Under such circumstances, our bank’s federal funds sold position, or balances at the Federal Reserve Bank, if any, serves as the primary source of immediate liquidity.  At March 31, 2011, our bank had total federal funds credit lines of $244.0 million with no outstanding advances.  If additional liquidity were needed, the bank would turn to short-term borrowings as an alternative immediate funding source and would consider other appropriate actions such as promotions to increase core deposits or the sale of a portion of our investment portfolio.  At March 31, 2011, our bank had $53.8 million of credit available at the Federal Reserve Bank’s Discount Window, but had no outstanding advances as of the end of the quarter.  In addition, we could draw on additional alternative immediate funding sources from lines of credit extended to us from our correspondent banks and/or the FHLB.  At March 31, 2011, our bank had a total FHLB credit facility of $209.5 million with total outstanding letters of credit consuming $136.3 million and no outstanding advances.  We believe that our liquidity position continues to be adequate and readily available.

 

Our contingency funding plan incorporates several potential stages based on liquidity levels.  Also, we review on at least an annual basis our liquidity position and our contingency funding plans with our principal banking regulator.  The Bank maintains various wholesale sources of funding.  If our deposit retention efforts were to be unsuccessful, our Bank would utilize these alternative sources of funding.  Under such circumstances, depending on the external source of funds, our interest cost would vary based on the range of interest rates charged to our Bank.  This could increase our Bank’s cost of funds, impacting net interest margins and net interest spreads.

 

Deposit and Loan Concentrations

 

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% of total loans to a multiple number of borrowers engaged in similar business activities. As of March 31, 2011, 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

 

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 represent 25% of total risk-based capital, or $92.1 million at March 31, 2011.  Based on these criteria, we had five such credit concentrations at March 31, 2011, including loans to borrowers engaged in other activities related to real estate, loans to religious organizations, loans to lessors of nonresidential buildings (except mini-warehouses), and loans to lessors of residential buildings, loans to physicians (except mental health specialists).

 

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Cautionary Note Regarding Any Forward-Looking Statements

 

Statements included in Management’s Discussion and Analysis of Financial Condition and Results of Operations which are not historical in nature are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 21E of the Securities and Exchange Act of 1934.  The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.  We caution readers that forward-looking statements are estimates reflecting our judgment based on current information, and are subject to certain risks and uncertainties that could cause actual results to differ materially from anticipated results.  Such risks and uncertainties include, among others, the matters described in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010,  and the following:

 

·                  Credit risk associated with an obligor’s failure to meet the terms of any contract with the Bank or otherwise fail to perform as agreed;

·                  Interest rate risk involving the effect of a change in interest rates on both the Bank’s earnings and the market value of the portfolio equity;

·                  Liquidity risk affecting our Bank’s ability to meet its obligations when they come due;

·                  Price risk focusing on changes in market factors that may affect the value of financial instruments which are “marked-to-market”periodically;

·                  Transaction risk arising from problems with service or product delivery;

·                  Compliance risk involving risk to earnings or capital resulting from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards;

·                  Regulatory change risk resulting from new laws, rules, regulations, prescribed practices or ethical standards, including changes related to the Dodd-Frank Act;

·                  Strategic risk resulting from adverse business decisions or improper implementation of business decisions;

·                  Reputation risk that adversely affects earnings or capital arising from negative public opinion;

·                  Terrorist activities risk that result in loss of consumer confidence and economic disruptions;

·                  Merger integration risk including potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the integration of CBT and Habersham, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters;

·                  Noninterest income risk resulting from the effect of final rules amending Regulation E that prohibit financial institutions from charging consumer fees for paying overdrafts on ATM and one-time debit card transactions, unless the consumer consents or opts-in to the overdraft service for those types of transactions; and

·                  Economic downturn risk resulting in changes in the credit markets, greater than expected non-interest expenses, excessive loan losses and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have no material changes in our quantitative and qualitative disclosures about market risk as of March 31, 2011 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 4.  CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, 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 our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Management necessarily applied its judgment in the process of reviewing these controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.  Based upon this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

 

There have been no significant changes in our internal controls over financial reporting that occurred during the first quarter of 2011 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.  There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

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PART II — OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

To the best of our knowledge, 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.

 

Item 1A.  RISK FACTORS

 

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as well as cautionary statements contained in this Form 10-Q, including those under the caption “Cautionary Note Regarding Any Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q and risks and matters described elsewhere in this Form 10-Q and in our other filings with the SEC.

 

Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) and (b) not applicable

 

(c) Issuer Purchases of Registered Equity Securities:

 

In February 2004, we announced a stock repurchase program with no formal expiration date to repurchase up to 250,000 shares of our common stock.  There are 147,872 shares that may yet be purchased under that program.  The following table reflects share repurchase activity during the first quarter of 2011:

 

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

 

 

 

 

 

 

 

 

 

 

 

January 1 - January 31

 

4,189

*

$

32.72

 

 

147,872

 

February 1 - February 28

 

 

 

 

147,872

 

March 1 - March 31

 

 

 

 

147,872

 

 

 

 

 

 

 

 

 

 

 

Total

 

4,189

 

 

 

 

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 are not purchased under the plan to repurchase 250,000 shares announced in February 2004.

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

Item 4.  (REMOVED AND RESERVED)

 

Item 5.  OTHER INFORMATION

 

Not applicable.

 

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Item 6.  EXHIBITS

 

Exhibit 2.1

 

Purchase and Assumption Agreement, dated February 18, 2011 (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on February 25, 2011)

 

 

 

Exhibit 10.1

 

Securities Purchase Agreement, dated February 8, 2011, by and among the Registrant and the accredited institutional investors named therein

 

 

 

Exhibit 10.2

 

Registration Rights Agreement, dated February 8, 2011, by and among the Registrant and the accredited institutional investors named therein

 

 

 

Exhibit 10.3

 

Employment and Non-competition Agreement for Renee R. Brooks, effective January 27, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on February 2, 2011)

 

 

 

Exhibit 31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

 

 

 

Exhibit 31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

 

 

 

Exhibit 32

 

Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer

 

Pursuant to the requirements 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.

 

 

SCBT FINANCIAL CORPORATION

 

(Registrant)

 

 

 

 

Date: May 10, 2011

/s/ Robert R. Hill, Jr.

 

Robert R. Hill, Jr.

 

President and Chief Executive Officer

 

 

Date: May 10, 2011

/s/ Donald E. Pickett

 

Donald E. Pickett

 

Executive Vice President and

 

Chief Financial Officer

 

 

Date: May 10, 2011

/s/ Karen L. Dey

 

Karen L. Dey

 

Senior Vice President and

 

Controller (Principal Accounting Officer)

 

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Table of Contents

 

Exhibit Index

 

Exhibit No.

 

Description

 

 

 

Exhibit 2.1

 

Purchase and Assumption Agreement, dated February 18, 2011 (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on February 25, 2011)

 

 

 

Exhibit 10.1

 

Securities Purchase Agreement, dated February 8, 2011, by and among the Registrant and the accredited institutional investors named therein

 

 

 

Exhibit 10.2

 

Registration Rights Agreement, dated February 8, 2011, by and among the Registrant and the accredited institutional investors named therein

 

 

 

Exhibit 10.3

 

Employment and Non-competition Agreement for Renee R. Brooks, effective January 27, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on February 2, 2011)

 

 

 

Exhibit 31.1

 

Rule 13a-14(a) Certification of Principal Executive Officer

 

 

 

Exhibit 31.2

 

Rule 13a-14(a) Certification of Principal Financial Officer

 

 

 

Exhibit 32

 

Section 1350 Certifications of Principal Executive Officer and Principal Financial Officer

 

63