| SCBT FINANCIAL CORP Item 1A Risk Factors These are general risk factors affecting SCBT Financial Corporation |
| Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect our business operations |
| Any of these risks could materially and adversely affect the business, financial condition or results of operation |
| In such cases, you may lose all or part of your investment |
| Risks Affecting SCBT Financial Corporation SCBT Financial Corporation is exposed to interest payments made on deposits and borrowings relative to interest earned on assets and other investments; net interest income may decrease |
| The profitability of the Company is largely dependent on net interest income |
| This is determined by the differences in volume yields or interest rates on and difference in income earning products such as interest-earning assets and interest bearing liabilities |
| The Company is exposed to changes in general interest rate levels and other economic factors beyond its control |
| Conditions in which net interest income may be reduced can occur if more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining or more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising |
| The Company is also exposed to the difference in short and long-term interest rates |
| If the difference between short-term and long-term interest rates shrink or disappear, the difference between rates paid on deposits and received on loans could narrow significantly, thus decreasing our net interest income |
| In addition to these factors, if market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thus reducing the Company’s net interest income |
| Also, certain adjustable rate loans reprice based on lagging interest rate indices |
| This lagging effect may also negatively affect our net interest income when general interest rates continue to rise periodically |
| SCBT Financial Corporation is exposed to reduced profitability from increases in some loan prepayments and some prepayments of loans underlying mortgage backed securities |
| Prepayment rates are affected by consumer behavior, conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate and adjustable-rate mortgage loans |
| Changes in prepayment rates are therefore difficult to predict |
| Recognition of deferred loan origination costs and premiums paid in originating these loans are normally recognized over the contractual life of each loan |
| As prepayments occur, the rate at which net deferred loan origination costs and premiums are expensed accelerates |
| The effect of the acceleration of deferred costs and premium amortization may be mitigated by prepayment penalties paid by the borrower when the loan is paid in full within a certain period of time, which varies between loans |
| If prepayment occurs after the period of time when the loan is subject to a prepayment penalty, the effect of the acceleration of premium and deferred cost amortization is no longer mitigated |
| The Company recognizes premiums it pays on mortgage-backed securities as an adjustment from interest income over the life of the security based on the rate of repayment of the securities |
| Acceleration of prepayments on the loans underlying a mortgage-backed security shortens the life of the security, increases the rate at which premiums are expensed and further reduces interest income |
| The Company may not be able to reinvest loan and security prepayments at rates comparable to the prepaid instrument particularly in period of declining interest rates |
| SCBT Financial Corporation is exposed to changes in interest rates |
| The Company is unable to predict changes in market interest rates, which are affected by many factors beyond its control including but not limited to inflation, recession, unemployment, money supply, monetary policy, and other changes that affect financial markets both domestic and foreign |
| Our net interest income is affected not only by the level and direction of interest rates, but also by the shape of the yield curve and relationships between interest sensitive instruments and key driver rates, as well as balance sheet growth, client loan and deposit preferences and the timing of changes in these variables |
| In the event rates increase, the Company’s interest costs on liabilities may increase more rapidly than its income on interest earning assets and a deterioration of net interest margins could ensue |
| As such, fluctuations in interest rates could have significant adverse effects on our financial condition and results of operations, including, without limitation, by decreasing the value of mortgage servicing rights |
| The initial and ongoing valuation and amortization of mortgage servicing rights is significantly impacted by interest rates, prepayment experience and the credit performance such items |
| 8 _________________________________________________________________ SCBT Financial Corporation is exposed to loss from adjustable rate loans and loans with optional payment characteristics |
| The Company’s loan portfolio currently contains approximately one-third optional payment characteristics |
| These loans provide the consumer with several payment options each month and may result in monthly payments being lower than the amount of interest due on the loan |
| Any unpaid monthly interest is added to the loan balance and results in negative amortization and as a corollary, an increased loan balance |
| Loans such as these provide the consumer with the ability to reduce their initial loan payment and limit the amount of annual increase in the required monthly payment |
| If a loan negatively amortizes in the initial years the consumer must make the payments up in the later years of the loan |
| A potential repayment risk ensues if the consumer is unable to meet the higher payment or repay the loan through refinancing or sale of the underlying property |
| Periodically the Company may sell these loans in the secondary market |
| Secondary market illiquidity could have an adverse effect on our earnings |
| Currently, there are no regulatory limitations on this type of loan product |
| Any regulatory limitation may affect the mortgage and residential real estate markets |
| If this were to happen, the ability to grow our portfolio at historic rates may be impacted |
| SCBT Financial Corporation is exposed to the possibility of having inadequate allowance for loan losses, which would reduce its earnings |
| The Company is exposed to the risk that its customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment |
| Credit losses are inherent in the lending business and could have a material adverse effect on the Company’s operating results and its ability to meet obligations |
| The volatility and deterioration in foreign and domestic markets may also increase our risk for credit losses |
| The Company’s loan portfolio composition, with loans primarily secured by real estate, reduces loss exposure |
| The Company evaluates the collectibility of its loan portfolio and provides an allowance for loan losses that is believed to be adequate based on a variety of factors including but not limited to: the risk characteristics of various classifications of loans, previous loan loss experience, specific loans that have loss potential, delinquency trends, estimated fair market value of the collateral, current economic conditions, the views of the Company’s regulators, and geographic and industry loan concentrations |
| If the evaluation is incorrect and borrower defaults cause losses exceeding the allowance for loan losses, the Company’s earnings could be significantly and adversely affected |
| No assurance can be given that the allowance will be adequate to cover loan losses inherent to our portfolio |
| The Company may experience losses in its loan portfolios or perceive adverse conditions and trends that may require the Company to significantly increase its allowance for loan losses in the future, a decision that would reduce earnings |
| SCBT Financial Corporation is exposed to higher credit risk by commercial real estate, commercial business, and construction lending |
| Commercial real estate, commercial business and construction lending usually involve higher credit risks than that of single-family residential lending |
| These types of loans involve larger loan balances to a single borrower or groups of related borrowers |
| Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers |
| These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity |
| A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner |
| Risk of loss on a construction loan depends largely upon whether the Company’s initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest) and the availability of permanent take-out financing |
| During the construction phase, a number of factors can result in delays and cost overruns |
| If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral |
| Commercial business loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses |
| Such loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself |
| In addition, the collateral securing the loans may depreciate over time, be difficult to appraise and liquidate and fluctuate in value based on the success of the business |
| Commercial real estate, commercial business and construction loans are more susceptible to a risk of loss during a downturn in the business cycle |
| The underwriting, review and monitoring performed by the Company’s employees, officers, and directors cannot eliminate all of the risks related to these loans |
| 9 _________________________________________________________________ SCBT Financial Corporation is exposed to the effect of negative events in certain geographic areas |
| Negative conditions in the real estate markets where collateral for the Company’s mortgage loans are located could adversely affect the Company’s borrower’s ability to repay and the value of the collateral |
| SCBT Financial Corporation is fully exposed to the negative effects of real estate values, which are affected, by various factors, including but not limited to changes in general or regional economic conditions, governmental rules or policies and natural disasters such as hurricanes or floods |
| SCBT Financial Corporation is exposed to competition with other financial institutions |
| The banking and financial services industry is very competitive |
| Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us |
| The financial services industry has and is experiencing an ongoing trend towards consolidation in which fewer large national and regional banks and firms are replacing many smaller and more local banks and firms |
| These larger firms hold a large accumulation of assets |
| These larger institutions have significantly greater resources and a wider geographic presence or greater accessibility |
| In some instances, these banks operate without the traditional brick and mortar facilities that restrict geographic presence |
| Some competitors are able to offer more services, more favorable pricing or greater customer convenience than we do |
| In addition, competition has grown from new banks and other financial services providers that target our existing or potential customers |
| As consolidation continues among large banks, the Company expects additional smaller institutions to try to exploit its markets |
| Technological developments have allowed competitors, including some non-depository institutions, to compete more effectively in local markets and have expanded the range of financial products, services and capital available to the Company’s target customers |
| If the company is unable to implement, maintain and use such technologies effectively, it may not be able to offer products or achieve cost-efficiencies necessary to compete in this industry |
| In addition, some of these competitors have fewer regulatory constraints and lower cost structures |
| SCBT Financial Corporation is exposed to the failure of our technology |
| The Company relies on its computer systems, and outside service providers and their technology, for much of its business, including recording the Company’s assets and liabilities |
| If computer systems or outside technology sources fail, are not reliable or there is a breach of security, the Company’s ability to maintain accurate financial records may be impaired, which could materially affect operations and financial condition |
| SCBT Financial Corporation is exposed to the services of its management team and employees |
| The Company is dependent upon the ability and experience of a number of key management personnel who have substantial experience with our operations, the financial services industry and the markets in which the Company offers services |
| It is possible that the loss of the services of one or more of the Company’s senior executives or key managers would have an adverse effect on operations |
| The Company’s success also depends on its ability to continue to attract, manage and retain other qualified middle management personnel as it grows |
| We cannot assure you that we will continue to attract or retain such personnel |
| SCBT Financial Corporation is exposed to the fact that additional capital resources may be needed in the future and the fact that these capital resources may not be available when needed or at all |
| The Company may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments or for future growth |
| No assurance can be given that such financing will be available to the Company on acceptable terms or at all |
| Risks Relating to Legal and Regulatory Matters SCBT Financial Corporation is subject to extensive regulation that could restrict its activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from the Banks |
| The Company is subject to regulation from the Federal Reserve Board |
| Our Banks are subject to extensive regulation, supervision and examination by the OCC which are their primary federal regulator, and by the FDIC, which insures their deposits |
| As a member of the FHLB, the Bank must also comply with applicable regulations of the Federal Housing Finance Board and the FHLB Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders |
| The Banks’ activities are also regulated under consumer protection laws applicable to our lending, deposit and other activities |
| A sufficient claim against us under these laws could have a material adverse effect on our results |
| SCBT Financial Corporation is exposed to changes in the regulation of financial services companies |
| Proposals for further regulation of the financial services industry are continually being introduced in the Congress of the United States of America and the General Assembly of the State of South Carolina |
| The agencies regulating the financial services industry also periodically adopt changes to their regulations |
| Proposals that are now receiving a great deal of attention include regulation of government sponsored-entities |
| It is possible that one or more legislative proposals may be adopted or regulatory changes may be made that would have an adverse effect on the Company |
| 10 _________________________________________________________________ SCBT Financial Corporation is exposed to negative public opinion, which could damage our reputation and adversely affect earnings |
| Reputational risk is the risk to the Company’s operations from negative public opinion |
| Negative public opinion can result from the actual or perceived manner in which the Company conducts its business activities, including but not limited to the following: sales practices, practices in origination and servicing operations and retail banking operations, management of actual or potential conflicts of interest and ethical issues; and protection of confidential customer information |
| Negative public opinion can adversely affect the Company’s ability to keep and attract customers and can expose the Company to litigation |
| SCBT Financial Corporation is exposed to changes in accounting standards that could impact reported earnings |
| The accounting standard setters, including the FASB, SEC and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements |
| These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of operations |
| In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements |
| SCBT Financial Corporation is exposed to declines in the value of qualified pension plan assets or unfavorable changes in laws or regulations that govern pension plan funding, which could require the Company to provide significant amounts of funding for its qualified pension plan |
| The Company does expect to make material cash contributions to its qualified defined benefit pension plan in the near and long term |
| A significant decline in the value of qualified pension plan assets in the future or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding |
| As a result, the Company may be required to fund its qualified defined benefit pension plan with a greater amount of cash from operations, perhaps by an additional material amount |
| Also, recognition of an additional minimum liability caused by changes in pension plan assets or measurement of the accumulated benefit obligation could have a material impact on the Company’s consolidated balance sheet |
| As of December 31, 2005 the Company’s qualified pension plan assets exceed its accumulated benefit obligation by dlra109cmam000 |
| Other Risk Factors SCBT Financial Corporation may make future acquisitions, which could dilute current shareholders’ ownership of the Company’s stock and may cause the Company to become more susceptible to adverse economic events |
| On a regular and ongoing basis, the Company reviews and evaluates other business and opportunities for business combinations that would be strategically beneficial |
| As a result, we may be involved in negotiations or discussions that, if they were to result in a transaction, could have a material effect on the Company’s financial conditions including short and long term liquidity or results of short or long term operations |
| Future business acquisitions could be material to the Company and it may issue additional shares of common stock to pay for those acquisitions, which would dilute current shareholders’ ownership interest |
| Acquisitions also could require the Company to use substantial cash or other liquid assets or to incur debt |
| In those events, it could become more susceptible to economic downturns and competitive pressures |
| SCBT Financial Corporation is exposed to difficulties in combining the operations of acquired entities with the Company’s own operations, which may prevent the Company from achieving the expected benefits from its acquisitions |
| The Company may not be able to achieve fully the strategic objectives and operating efficiencies in an acquisition |
| Inherent uncertainties exist in integrating the operations of an acquired entity |
| In addition, the markets and industries in which the Company and its potential acquisition targets operate are highly competitive |
| The Company may lose customers or the customers of acquired entities as a result of an acquisition |
| The Company also may lose key personnel, either from the acquired entity or from itself, as a result of an acquisition |
| The Company may not discover all known and unknown factors when examining a company for acquisition during the due diligence period |
| These factors could produce unintended and unexpected consequences for the Company |
| Undiscovered factors as a result of acquisition, pursued by non-related third party entities, could bring civil, criminal, and financial liabilities against the Company, its management, and the management of those entities acquired |
| These factors could contribute to the Company not achieving the expected benefits from its acquisitions within desired time frames, if at all |
| SCBT Financial Corporation is exposed to a volatile stock price |
| The Company’s stock price has been volatile in the past, and several factors could cause the price to fluctuate substantially in the future |
| These factors include but are not limited to: actual or anticipated variations in earnings, changes in analysts’ recommendations or projections, the Company’s announcements of developments related to its businesses, operations and stock performance of other companies deemed to be peers, new technology used or services offered by traditional and non-traditional competitors, news reports of trends, concerns, irrational exuberance on the part of investors, and other issues related to the financial services industry |
| The Company’s stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to the Company’s performance |
| General market declines or market volatility in the future could adversely affect the price of the Company’s common stock, and the current market price may not be indicative of future market prices |
| 11 _________________________________________________________________ SCBT Financial Corporation is exposed to conditions or assumptions different from the judgments, assumptions or estimates used in the Company’s critical accounting policies, the accuracy of our financial statements and related disclosures could be affected |
| The preparation of financial statements and related disclosure in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes |
| Our critical accounting policies, which are described in this document, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that are considered “critical” because they required judgments, assumptions and estimates that materially impact the Company’s consolidated financial statements and related disclosures |
| As a result, if future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, such events or assumptions could have a material impact on the Company’s consolidated financial statements and related disclosures |