UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20529
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
Commission File Number: 9-13663
SCBT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0799315
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
520 GERVAIS STREET, COLUMBIA, SOUTH CAROLINA 29201
(Address of principal executive offices) (Zip code)
(803) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of issuer's classes of common
stock:
Class Outstanding as of June 30, 2004
Common Stock, $2.50 par value 7,674,221
SCBT FINANCIAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2004 and December 31, 2003
Condensed Consolidated Statements of Changes in Shareholders'
Equity - Six Months Ended June 30, 2004 and 2003
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk - Reference is made to Management's Discussion and
Analysis of Financial Condition and Results of Operations in
the Company's Annual Report on Form 10-K for the year ended
December 31, 2003
Item 4 - Controls and Procedures
Part II: Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SCBT FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except par value)
06/30/04 12/31/2003
(Unaudited) (Note 1)
----------- -----------
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 42,903 $ 38,541
Interest-bearing deposits with banks 17 4,083
Federal funds sold and securities
purchased under agreements to resell 3,000 4,500
----------- -----------
Total cash and cash equivalents 45,920 47,124
----------- -----------
Investment securities:
Held-to-maturity (fair value of $26,997 in 2004
and $30,952 in 2003) 26,111 29,487
Available-for-sale 145,247 122,522
----------- -----------
Total investment securities 171,358 152,009
----------- -----------
Loans held for sale 13,764 12,346
----------- -----------
Loans 1,050,501 939,538
Less, unearned income (426) (778)
Less, allowance for loan losses (13,366) (11,700)
----------- -----------
Loans, net 1,036,709 927,060
----------- -----------
Premises and equipment, net 33,470 32,647
----------- -----------
Other assets 29,585 26,506
----------- -----------
Total assets $ 1,330,806 $ 1,197,692
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 209,398 $ 169,192
Interest-bearing 798,419 777,086
----------- -----------
Total deposits 1,007,817 946,278
Federal funds purchased and securities
sold under agreements to repurchase 108,581 80,967
FHLB advances 92,000 52,050
Other liabilities 8,588 6,048
----------- -----------
Total liabilities 1,216,986 1,085,343
----------- -----------
Shareholders' equity:
Common stock - $2.50 par value; authorized 40,000,000 shares;
issued and outstanding 7,674,221 and 7,690,186 shares 19,186 19,225
Surplus 61,643 62,722
Retained earnings 33,853 29,787
Accumulated other comprehensive income (loss) (862) 615
----------- -----------
Total shareholders' equity 113,820 112,349
----------- -----------
Total liabilities and shareholders' equity $ 1,330,806 $ 1,197,692
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
SCBT FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(Unaudited)
(Dollars in thousands)
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
BALANCE, DECEMBER 31, 2002 7,673,339 $ 19,183 $ 62,423 $ 20,071 $ 1,819 $ 103,496
---------
Comprehensive income:
Net income - - - 7,232 - 7,232
Change in net unrealized gain (loss) on
on securities available-for-sale, net - - - - (375) (375)
of tax effects ---------
Total comprehensive income 6,857
---------
Cash dividends declared at $.31 per share - - - (2,456) - (2,456)
---------
Exercise stock options 1,348 3 19 - - 22
---------
Employee stock purchases 4,929 13 90 - - 103
---------
Restricted stock awards 2,000 5 44 - - 49
-----------------------------------------------------------------------
BALANCE, JUNE 30, 2003 7,681,616 $ 19,204 $ 62,576 $ 24,847 $ 1,444 $ 108,071
=======================================================================
BALANCE, DECEMBER 31, 2003 7,690,186 19,225 62,722 29,787 615 112,349
---------
Comprehensive income:
Net income - - 6,690 - 6,690
Change in net unrealized gain (loss) on
securities available-for-sale, net of - - - (1,477) (1,477)
tax effects ---------
Total comprehensive income 5,213
---------
Cash dividends declared at $.34 per share - - (2,624) - (2,624)
---------
Exercise stock options 54,102 135 840 - - 975
---------
Employee stock purchases 5,353 14 124 - - 138
---------
Repurchase of stock (75,420) (188) (2,043) - - (2,231)
-----------------------------------------------------------------------
BALANCE, JUNE 30, 2004 7,674,221 $ 19,186 $ 61,643 $ 33,853 $ (862) $ 113,820
=======================================================================
THE ACCOMPANYING NOTE ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
SCBT FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended Six Months Ended
6/30/2004 6/30/2003 6/30/2004 6/30/2003
Interest income:
Loans, including fees $ 14,854 $ 14,781 $ 28,899 $ 29,366
Investment securities:
Taxable 1,130 1,183 2,164 2,428
Tax-exempt 369 434 757 886
Federal funds sold and securities
purchased under agreements to resell 27 18 93 73
Money market funds - 22 11 58
Deposits with banks 2 36 17 36
----------------------- -----------------------
Total interest income 16,382 16,474 31,941 32,847
----------------------- -----------------------
Interest expense:
Deposits 2,266 3,223 4,603 6,512
Federal funds purchased and securities
sold under agreements to repurchase 137 142 254 311
Long-term debt 701 621 1,354 1,236
----------------------- -----------------------
Total interest expense 3,104 3,986 6,211 8,059
----------------------- -----------------------
Net interest income:
Net interest income 13,278 12,488 25,730 24,788
Provision for loan losses 1,594 230 2,382 1,069
----------------------- -----------------------
Net interest income after provision for loan losses 11,684 12,258 23,348 23,719
----------------------- -----------------------
Noninterest income:
Service charges on deposit accounts 2,946 2,812 5,754 5,679
Other service charges and fees 2,411 2,889 4,537 5,403
Gain on sale of bank branch - - 782 -
Gain on sale of credit card loans 953 - 953 -
----------------------- -----------------------
Total noninterest income 6,310 5,701 12,026 11,082
----------------------- -----------------------
Noninterest expense:
Salaries and employee benefits 6,928 7,144 13,759 13,854
Net occupancy expense 884 687 1,665 1,347
Furniture and equipment expense 1,124 1,093 2,197 2,114
Other expense 4,166 3,272 7,967 6,510
----------------------- -----------------------
Total noninterest expense 13,102 12,196 25,588 23,825
----------------------- -----------------------
Earnings:
Income before provision for income taxes 4,892 5,763 9,786 10,976
Provision for income taxes 1,568 1,952 3,096 3,744
----------------------- -----------------------
Net income $ 3,324 $ 3,811 $ 6,690 $ 7,232
======================= =======================
Comprehensive income $ 1,524 $ 3,595 $ 5,213 $ 6,857
======================= =======================
Earnings per share:
Basic $ 0.43 $ 0.50 $ 0.87 $ 0.94
======================= =======================
Diluted $ 0.43 $ 0.49 $ 0.86 $ 0.93
======================= =======================
Cash dividends per common share $ 0.17 $ 0.16 $ 0.34 $ 0.32
======================= =======================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
SCBT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands of dollars)
Six Months Ended
----------------------
6/30/2004 6/30/2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,690 $ 7,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,163 1,075
Provision for loan losses 2,382 1,069
Gain on sale of premises and equipment (181) (5)
Net amortization of investment securities 322 517
Net change in miscellaneous assets and
liabilities (1,128) (17,278)
--------- ---------
Net cash provided (used) by operating activities 9,248 (7,390)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 3,347 2,891
Proceeds from maturities of investment securities available-for-sale 36,424 59,762
Purchases of investment securities available-for-sale (61,822) (82,269)
Net increase in customer loans (112,292) (37,125)
Recoveries of loans previously charged off 261 455
Purchases of premises and equipment (1,970) (4,648)
Proceeds from sale of premises and equipment 239 21
--------- ---------
Net cash used by investing activities (135,813) (60,913)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 61,540 87,765
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 27,613 (7,284)
Proceeds from issuance of FHLB advances 39,975 --
Repayment of FHLB advances (25) --
Common stock issuance 138 153
Common stock repurchase (2,231) --
Dividends paid (2,624) (2,456)
Stock options exercised 975 22
--------- ---------
Net cash provided by financing activities 125,361 78,200
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,204) $ 9,897
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,124 40,514
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,920 $ 50,411
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
SCBT FINANCIAL CORPORATION AND SUBSIDIARIES
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 generally accepted accounting principles 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 footnotes required by generally accepted accounting principles 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. Operating results for the six months ended
June 30, 2004 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2004.
In April 2004, The Mortgage Banc, Inc. was incorporated as a wholly-owned
subsidiary of South Carolina Bank and Trust, N.A., as a start-up entity and
vehicle for future growth in the mortgage lending business.
The condensed consolidated balance sheet at December 31, 2003, has been
derived from the audited financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The information contained in the consolidated financial statements and
accompanying footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 2003 should be referenced when reading these
unaudited condensed consolidated financial statements.
Note 2 - Recent Accounting Pronouncements:
On December 12, 2003, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) No.03-3, Accounting for
Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 is effective
for loans acquired in fiscal years beginning after December 15, 2004. SOP 03-3
requires acquired loans to be recorded at fair value and prohibits carrying over
valuation allowances in the initial accounting for all loans acquired in a
transfer that have evidence of deterioration in credit quality since
origination, when it is probable that the investor will be unable to collect all
contractual cash flows. Loans carried at fair value, mortgage loans
held-for-sale, and loans to borrowers in good standing under revolving credit
agreements are excluded from the scope of SOP 03-3.
On March 9, 2004, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to
Loan Commitments. SAB 105 summarizes the views of the staff of the SEC regarding
the application of generally accepted accounting principles to loan commitments
accounted for as derivatives instruments. SAB 105 provides that the fair value
of recorded loan commitments that are accounted for as derivatives under
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, should not incorporate the
expected future cash flows related to the associated servicing of the future
loan. In addition, SAB 105 requires registrants to disclose their accounting
policy for loan commitments. The provisions of SAB 105 must be applied to loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The Company enters into commitments to originate loans whereby the
interest rate on the loan is determined prior to funding (rate lock
commitments). Rate lock commitments on mortgage loans that are intended to be
sold are considered to be derivatives. Accordingly, such commitments, along with
related fees received from potential borrowers, are to be recorded at fair value
in derivative assets or liabilities, with changes in fair value recorded in the
net gain or loss on sale of mortgage loans. Fair value is based on fees
currently charged to enter into similar agreements, and for fixed-rate
commitments also considers the difference between current levels of interest
rates and the committed rates. The Company has not recorded rate lock
commitments as derivative assets or liabilities as of June 30, 2004, as the
effects were not material to the consolidated financial statements.
On March 31, 2004, the Financial Accounting Standards Board (FASB) ratified
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
which provides guidance on recognizing other-than-temporary impairments on
certain investments. EITF 03-01 is effective for other-than-temporary impairment
evaluations for investments accounted for under SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, as well as non-marketable equity
securities accounted for under the cost method for reporting periods beginning
after June 15, 2004. The Company is currently evaluating the impact of adopting
EITF 03-1, but does not believe that it will have a material effect on the
consolidated financial statements.
In March 2004, the FASB issued an exposure draft, Share-Based Payment: an
Amendment of FASB No. 123 and 95. This proposed Statement addresses the
accounting for transactions in which an enterprise receives employee services in
exchange for (a) equity instruments of the enterprise or (b) liabilities that
are based on the fair value of the enterprise's equity instruments or that may
be settled by the issuance of such equity instruments. This proposed Statement
would eliminate the accounting for share-based compensation transactions using
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and generally would require instead that such transactions be
accounted for using a fair-value-based method. A final statement is expected to
be issued during the fourth quarter of 2004 and will be effective as of January
1, 2005. Management does not expect the impact of the adoption of the proposed
Statement to be materially different from the pro forma impacts disclosed under
SFAS 123.
Note 3- Retirement Plan
The components of net periodic pension cost recognized during the three and
six months ended June 30, 2004 are as follows:
(In thousands of dollars)
Three Months Ended Six Months Ended
------------------ ----------------
6/30/2004 6/30/2003 6/30/2004 6/30/2003
--------- --------- --------- ---------
Service Cost $ 167 $ 163 $ 333 $ 326
Interest Cost 179 169 358 338
Expected return on assets (198) (178) (396) (356)
Amortization of prior
service cost (10) - (20) -
Recognized net actuarial gain 47 44 94 88
--------------------- ---------------------
Total $ 185 $ 198 $ 369 $ 396
===================== =====================
The Company contributed $200,000 and $419,000, respectively, to the Plan
for the three and six months ended June 30, 2004 and may contribute up to the
allowable tax deduction limit of $821,000 for the year ending December 31, 2004.
Note 4 - Earnings Per Share:
Basic earnings per share is calculated by dividing net income by the
weighted-average shares of common stock outstanding during each period. The
Company's diluted earnings per share is 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. The weighted average
number of shares and equivalents are determined after giving retroactive effect
to stock dividends and stock splits. Weighted-average shares outstanding used in
calculating earnings per share for the three and six months ended June 30, 2004
and 2003 are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
6/30/04 6/30/03 6/30/04 6/30/03
------- ------- ------- -------
Basic 7,701,850 7,678,963 7,706,123 7,676,287
Diluted 7,776,823 7,755,277 7,786,987 7,743,526
Dividends per share are calculated using the current equivalent number of
common shares outstanding at the time of the dividend based on the Company's
shares outstanding.
Note 5 - Stock-Based Compensation:
During 1999 and 1996, the Company adopted stock option plans under which
incentive and nonqualified stock options may be granted periodically to key
employees and non-employee directors. With the exception of options granted to
directors under the 1999 plan, which may be exercised at any time prior to
expiration, options granted under the plans may not be exercised in whole or in
part within one year following the date of the grant, and thereafter become
exercisable in 25% increments over the four years following the grant date.
On April 27, 2004, the Company's shareholders approved the SCBT Financial
Corporation Stock Incentive Plan (the "2004 Plan"). The 2004 Plan replaces the
1999 Stock Option Plan, although outstanding options granted under the 1999 Plan
that were still outstanding prior to April 27, 2004 will continue to be
outstanding and governed by the provisions of the 1999 Plan. The 2004 Plan
permits the Company to grant incentive and nonqualified stock options and stock
appreciation rights and to award shares of common stock, restricted stock, and
phantom stock. At the time of its implementation, there were 600,000 shares of
the Company's common stock available under the 2004 plan. Each director, officer
and employee of the Company and its subsidiaries may participate in the 2004
Plan, which allows grants and awards through January 15, 2014, except for
certain reload options.
The Company applies the intrinsic value method in accounting for its
stock-based compensation plans in accordance with APB 25. Under the intrinsic
value method, no stock-based employee compensation cost is, or is expected to
be, reflected in net income, as all options granted under the plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Had stock-based employee compensation costs of the Company's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by SFAS 123,
as amended by SFAS 148, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated:
Three Months Ended Six Months Ended
------------------ ----------------
(In thousands of dollars, 6/30/2004 6/30/2003 6/30/2004 6/30/2003
except per share data --------- --------- --------- ---------
Net Income, as reported $ 3,324 $ 3,811 $ 6,690 $ 7,232
Less, total stock-based
employee compensation expense
determined under fair value
based method, net of related
tax effects 55 57 111 112
--------------------- ---------------------
Pro forma net income $ 3,269 $3, 754 $ 6,579 $ 7,120
===================== =====================
Earnings per share:
Basic - as reported $ 0.43 $ 0.50 $ 0.87 $ 0.94
===================== =====================
Basic - pro forma $ 0.42 $ 0.49 $ 0.85 $ 0.93
===================== =====================
Diluted - as reported $ 0.43 $ 0.49 $ 0.86 $ 0.93
===================== =====================
Diluted - pro forma $ 0.42 $ 0.48 $ 0.84 $ 0.92
===================== =====================
The effect of applying SFAS 123 in the above pro forma disclosure is not
indicative of future amounts. The Company anticipates making awards in the
future under its stock-based compensation plans.
The fair value of each stock option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
6/30/04 6/30/03
------- -------
Dividend yield 2.41% 2.55%
Expected Life 10 years 10 years
Expected volatility 25.0% 30.0%
Risk-free interest rate 4.26% 3.93%
Note 6 - 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 June 30, 2004, commitments to extend credit and standby letters of credit
totaled $275,189,000. The Company does not anticipate any material losses as a
result of these transactions.
SCBT FINANCIAL CORPORATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion relates to the financial statements contained in
this report. For further information refer to the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing in the SCBT
Financial Corporation's Annual Report on Form 10-K for the year ended December
31, 2003.
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, as amended. SCBT Financial Corporation (the "Company")
cautions readers that forward-looking statements are estimates reflecting the
best judgement of the Company's senior management or directors based on current
information, and are subject to certain risks and uncertainties that could cause
actual results to differ materially from forecasted results. Such risks and
uncertainties, include, among others, the following possibilities: (1) Credit
risk associated with an obligor's failure to meet the terms of any contract with
the bank or otherwise fail to perform as agreed; (2) Interest risk involving the
effect of a change in interest rates on both the bank's earnings and the market
value of the portfolio equity; (3) Liquidity risk affecting the bank's ability
to meet its obligations when they come due; (4) Price risk focusing on changes
in market factors that may affect the value of traded instruments in
mark-to-market portfolios; (5) Transaction risk arising from problems with
service or product delivery; (6) Compliance risk involving risk to earnings or
capital resulting from violations of or nonconformance with laws, rules,
regulations, prescribed practices, or ethical standards; (7) Strategic risk
resulting from adverse business decisions or improper implementation of business
decisions; and (8) Reputation risk that adversely effects earnings or capital
arising from negative public opinion.
SCBT Financial Corporation is a bank holding company incorporated under the
laws of South Carolina in 1985. The Company owns 100 percent of South Carolina
Bank and Trust, National Association, a national bank which opened for business
in 1932, and 100 percent of South Carolina Bank and Trust of the Piedmont,
National Association, a national bank which opened for business in 1996. The
Mortgage Banc, Inc. was incorporated in April 2004 as a wholly owned subsidiary
of South Carolina Bank and Trust, N.A. This start-up entity is focusing
initially on providing mortgage lending products, services and consulting to
other financial institutions and mortgage companies in the Southeast. Also in
April, the Company's subsidiary banks sold their credit card loan portfolios and
entered into agreements for future credit card lending and collections with a
third party servicing organization. The Company engages in no significant
operations other than the ownership of its subsidiaries.
Some of the major services which the Company provides through its banking
subsidiaries include checking, NOW accounts, savings and other deposits of
various types, alternative investment products such as annuities and mutual
funds, loans for businesses, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer services, trust
services, discount brokerage services, correspondent banking services, and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers, and no significant portion of its
loan portfolio is concentrated within a single industry or group of related
industries. There are no material seasonal factors that would have a material
adverse effect on the Company. The Company does not have foreign loans or
deposits.
For the second quarter of 2004, the Company had consolidated net income of
$3,324,000, a decrease of 12.8 percent compared with $3,811,000 earned in the
second quarter of 2003. Diluted earnings per share were $0.43 for the three
months ended June 30, 2004, a 12.2 percent decrease from the $0.49 per share
earned in the second quarter of 2003. Net income for the first six months of
2004 was $6,690,000, a decrease of 7.5 percent from $7,232,000 earned for the
same period in 2003. Diluted earnings per share were $0.86 for the six months
ended June 30, 2004, a 7.5 percent decrease from the $0.93 per share earned in
the first half of 2003.
NET INTEREST INCOME
For the second quarter of 2004, non-taxable equivalent net interest income
was $13,278,000, an increase of $790,000, or 6.3 percent, over $12,488,000 for
the same period in 2003. For the first six months of 2004, non-taxable
equivalent net interest income was $25,730,000, an increase of $942,000, or 3.8
percent, compared with $24,788,000 for the same period a year earlier. This
increase was largely the result of significantly lower rates paid on
interest-bearing liabilities in the first six months of 2004, as compared with
the same period in 2003.
The yield on a major portion of the Company's earning assets adjusts
simultaneously, but to varying degrees of magnitude, with changes in the general
level of interest rates. In spite of the Federal Reserve's quarter-point
increase in short-term rates, earlier decreases over the previous thirty months
have produced a historically low interest rate environment. The result for
depository institutions has been a compression of net interest margins. For the
first six months of 2004, the Company's non-taxable equivalent yield on interest
earning assets was 5.46 percent, as compared with 5.96 percent during the same
period in 2003, a decrease of 50 basis points. In similar six-month comparisons,
the cost of interest-bearing liabilities used to fund most of these assets
decreased 47 basis points from 1.78 percent in 2003 to 1.31 percent in 2004.
Total average interest earning assets increased by 5.9 percent from the first
six months of 2003 compared to the same period in 2004, while total average
interest bearing liabilities increased 4.4 percent.
Loans comprise the largest category of earning assets. As of June 30, 2004,
loans, net of unearned income and excluding mortgage loans held for sale, were
$1,050,075,000, compared with $938,760,000 at December 31, 2003. This increase
of $111,315,000, or 11.9 percent, was most noticeable in the commercial real
estate and residential mortgage loan categories. Mortgage loans held for sale
increased by $1,418,000, or 11.5 percent, from $12,346,000 at December 31, 2003
to $13,764,000 at June 30, 2004. For the second quarter of 2004, interest and
fees on loans, including mortgage loans held for sale, were $14,854,000, a
slight increase compared with $14,781,000 for the comparable period in 2003. For
the first six months of the year, interest and fees on loans were $28,899,000,
compared with $29,366,000 for the same period in 2003, a small decrease of
$464,000, or 1.6 percent. For the six months ended June 30, 2004, loans, net of
unearned income and excluding mortgage loans held for sale, averaged
$989,218,000 and decreased in yield by 67 basis points to 5.80 percent on a
non-tax equivalent basis, compared to $884,285,000 with a non-tax equivalent
yield of 6.47 percent for the same period in 2003. On balance, lower loan yields
during the first half of 2004 have offset higher average loan balances.
Investment securities, the second largest category of earning assets, are
utilized by the Company as a vehicle for the employment of excess funds, to
provide liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for certain public deposits and other purchased funds. At June 30,
2004, investment securities were $171,358,000, compared to $152,009,000 at
December 31, 2003. The composition of the portfolio remained relatively
consistent during the first six months of 2003, as did the Company's modest bias
toward relatively short-term and shorter average life securities in the
continuing low rate environment.
For the quarter ended June 30, 2004, interest earned on investment
securities was $1,499,000, compared with $1,617,000 for the comparable period in
2003, a decrease of $118,000, or 7.3 percent. For the six months ended June 30,
2004, interest income was $2,921,000, compared with $3,314,000 for the same
period in 2003. This decrease of $393,000, or 11.9 percent, was the result of
both lower interest yields and lower average outstanding balances year to year.
For the first six months of 2004, investment securities averaged $152,050,000
with a yield of 3.86 percent on a non-tax equivalent basis, compared to an
average of $170,250,000 and yield of 3.96 percent for the same period in 2003.
The investment securities portfolio included no "short-term" investments in
short-term U.S. government agency securities at June 30, 2004. For the first six
months of 2004, holdings of short-term investments averaged $354,000, compared
with $29,328,000 during the first half of 2003.
There were no gains or losses on sales of securities during the first six
months of 2004 and 2003. As of June 30, 2004, the Company had a net unrealized
gain of $887,000 in the held-to-maturity securities portfolio segment and a net
unrealized loss of $1,814,000 in the available-for-sale segment.
Although securities classified as available-for-sale may be sold from time
to time to meet liquidity or other needs, it is not the normal activity of the
Corporation to trade the investment securities portfolio. While management has
the ability and generally holds these assets on a long-term basis or until
maturity, the short-term investments noted above may be converted at an earlier
point, depending on changes in interest rates and alternative investment options
The Company has from time to time invested on a short-term basis in U.S.
government agency-backed money market funds. There were no such investments
outstanding at either December 31, 2003 or June 30, 2004. For the first six
months of 2004, interest income of $11,000 was earned on average money market
fund balances of $2,412,000. For the same period in 2003, interest income of
$58,000 was earned on average balances of $9,843,000.
During the first six months of 2004, the average balance of
interest-bearing liabilities was $949,925,000, a $39,740,000, or 4.4 percent,
increase over the average of $910,185,000 for the first half of 2003. Interest
expenses this year have declined by 22.9 percent to $6,211,000 with an average
rate of 1.31 percent for the first six months of 2004, compared with expense of
$8,059,000 and an average rate of 1.78 percent for the same period in 2003,
reflecting a 29.3 percent decline in the costs of interest-bearing deposits.
Noninterest-bearing deposits were $209,398,000 at June 30, 2004, an
increase of $40,206,000, or 23.8 percent, from $169,192,000 at December 31,
2003. During the same six-month periods, interest-bearing deposits grew by
$21,333,000, or 2.7 percent, from $777,086,000 to $798,419,000. During the first
six months of 2004, the Company paid interest of $4,603,000 on average
interest-bearing deposits of $796,615,000, compared with $6,512,000 paid on an
average balance of $773,807,000 in the comparable 2003 period, reflecting a 29.3
percent decline in the cost of interest-bearing deposits.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended June 30, 2004 was
$1,594,000, compared with $230,000 for the same period in 2003. For the six
months ended June 30, 2004, the provision was $2,382,000, compared to $1,069,000
for the same period in 2003. Management considers the higher provision to be a
normal-course,
prudent response to strong loan demand over the first six months and a
reflection of continued focus on asset quality. The allowance for loan losses
was $13,366,000, or 1.27 percent of outstanding loans at June 30, 2004 and
$11,700,000, or 1.25 percent of outstanding loans at December 31, 2003. The
allowance at June 30, 2004 provided 2.9 times coverage of nonperforming loans,
which totaled $4,678,000, or 0.45 percent, of period end loans. The allowance
for loan losses also provides 7.2 times coverage of second quarter annualized
net charge-offs. In 2004, net charge-offs for the second quarter and
year-to-date were $462,000 and $716,000, respectively. This represents an
annualized 0.18 percent of average loans, net of unearned income, for the
quarter and 0.14 percent for the first six months. In the prior year, net charge
offs were $367,000, or 0.16 percent, of average loans for the second quarter and
$1,038,000, or 0.24 percent, of average loans for the first six months.
While the national economy appears to be strengthening in certain
industries and geographic regions, improvements in South Carolina's business
climate have been more gradual with some moderate gains to date. In this
environment, management anticipates that charge offs in the near term may
continue at percentage of loan levels reasonably similar to the experience of
recent periods. Management evaluates the adequacy of the allowance for loan
losses by utilizing an internal risk rating system, independent credit reviews
and regulatory agency examinations, all of which assess the quality of the loan
portfolio and identify problem loans. The allowance is currently considered to
be adequate.
Other real estate owned includes real estate acquired as a result of
foreclosure. The balance in other real estate owned was $1,455,000 at June 30,
2004, compared with $1,465,000 at December 31, 2003 and $670,000 at June 30,
2003.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the second quarter of 2004 was $6,310,000, compared
with $5,701,000 for the same period in 2003, an increase of $609,000, or 10.7
percent. For the first six months of 2004, noninterest income was $12,026,000,
compared with $11,082,000 for the same period in 2003, an increase of $944,000,
or 8.5 percent. In the six-month comparisons, these increases have been mainly
attributable to a $782,000 gain on the first quarter sale of the Cameron branch
of South Carolina Bank and Trust, N.A. and a $953,000 gain on the sale of the
two banks' credit card loan portfolios in the second quarter. Service charges on
deposit accounts increased by $75,000, or 1.3 percent. These increases combined
to offset an $866,000, or 16.0 percent, decrease in other service charges and
fees that was mainly attributable to a decrease in secondary market mortgage
origination fees resulting from a decline in refinancing activity in 2004.
Noninterest expense for the second quarter of 2004 was $13,102,000, an
increase of $906,000, or 7.4 percent, from $12,196,000 for the same period in
2003. For the six months ended June 30, 2004, noninterest expense increased
$1,763,000, or 7.4 percent, to $25,588,000 from $23,825,000 in the first half of
2003. Salaries and employee benefits decreased $216,000, or 3.0 percent, to
$6,928,000 from the second quarter of 2003 to the same period in 2004. Comparing
the six-month periods, salaries and employee benefits deceased $95,000, or 0.7
percent, to $13,759,000 in 2004. Net occupancy expense for the six months ended
June 30, 2004 was $1,665,000, up $318,000, or 23.6 percent over 2003, while
furniture and equipment expense was $2,197,000, an increase of $83,000, or 3.9
percent in the same period comparisons. Other expense was $7,967,000 for the
first six months of 2004, an increase of $1,457,000, or 22.4 percent, from the
same period in 2003.
Also contributing to expense increases during the first half of 2004 were
higher occupancy costs associated with bank branch and corporate headquarters
expansion initiatives, expenses of outside services and higher real estate
property taxes. The Company recognized expenses in connection with the formation
of The Mortgage Banc and various office moves and personnel relocations. In
addition, other one-time expenses were incurred relating to several previously
announced first quarter projects, including the Denmark, SC branch bank
acquisition, corporate name change, listing on The NASDAQ Stock Market, and
consulting services for contract analyses for cost reduction opportunities.
NET INCOME
Net income was $3,324,000 for the second quarter of 2004, a decrease of
$487,000, or 12.8 percent, compared with $3,811,000 in the second quarter of
2003. For the six months ended June 30, 2004, net income decreased $542,000, or
7.5 percent, to $6,690,000, from $7,232,000 in the first half of 2003. Comparing
the first two quarters of 2004 and 2003, the $1,763,000, or 7.4 percent,
increase in noninterest expense was a main reason for the lower earnings. The
provision for loan losses, $1,313,000 higher than 2003, also contributed to the
earnings results. These higher expense items were offset in part by a $942,000
increase in net interest income and a $944,000 increase in noninterest income.
CAPITAL RESOURCES AND LIQUIDITY
The ongoing capital requirements of the Company have been met through
retained earnings, less the payment of cash dividends. As of June 30, 2004,
shareholders' equity was $113,820,000, an increase of $1,471,000, or 1.3
percent, over $112,349,000 at December 31, 2003.
The Company and its subsidiaries 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 Comptroller of the Currency,
Tier 1 capital must be at least 4 percent of risk-weighted assets, while total
capital must be at least 8 percent of risk-weighted assets. The Company's Tier 1
risk-weighted asset capital ratio at June 30, 2004 was 10.83 percent, compared
to 11.81 percent at December 31, 2003. The total risk-weighted asset capital
ratio was 12.08 at the end of the second quarter of 2004, compared with 13.06 at
the year-end 2003.
In conjunction with the risk-based ratios, the regulatory agencies have
also prescribed a leverage capital ratio for assessing capital adequacy. The
minimum leverage ratio required for banks is between 3 and 5 percent, depending
on the institution's composite rating as determined by its regulators. As of
June 30, 2004, the Company's leverage ratio was 8.56 percent, compared to 9.13
percent at December 31, 2003. The Company's capital ratios currently well exceed
the minimum standards.
Liquidity is the ability of the Company to generate sufficient cash to meet
its financial obligations, which arise primarily from the withdrawal of
deposits, extension of credit and payment of operating expenses. 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.
The Company's liabilities provide liquidity on a day-to-day basis. Daily
liquidity needs are met from deposit levels or from the use of federal funds
purchased, securities sold under agreements to repurchase and other short-term
borrowings. Additional liquidity can be secured from lines of credit extended to
the Company from its correspondent banks. Management believes that its liquidity
position is adequate.
Item 4. CONTROLS AND PROCEDURES
Within ninety days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report. Management necessarily applied its judgment
in the process of reviewing these controls and procedures, which, by their
nature, can provide only reasonable assurance regarding management's control
objectives. Based upon this evaluation, the Company's President and Chief
Executive Officer and the Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
Neither SCBT Financial Corporation nor its subsidiaries is a party to nor
is any of their property subject to any material or other pending legal
proceedings, other than in the ordinary routine proceedings incident to their
business.
Item 2. Change in Securities:
(a) through (d): Not applicable.
(e) Issuer Purchases of Equity Securities:
In February 2004 SCBT Financial Corporation announced a program with no
formal expiration date to repurchase up to 250,000 of its common shares. The
following table reflects activity in this program during the second quarter:
(d) Maximum
(c) Total Number (or
Number of Approximate
Shares Dollar Value)
(or Units) of Shares (or
Purchased as Units) that
(a) Total Part of May Yet Be
Number of (b) Average Publicly Purchased
Shares (or Price Paid Per Announced Under the
Units) Share (or Plans or Plans or
Period Purchased Unit) Programs Programs
- ---------------------------------------------------------------------------------------------
April 1 - April 30 1,662 $31.00 1,662 245,263
May 1 - May 31 39,723 29.17 39,723 205,540
June 1 - June 30 16,200 28.07 16,200 189,340
------ ------
Total 57,585 57,585
====== ======
Item 3. Defaults Upon Senior Securities: .
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
The 2004 Annual Meeting of Shareholders of the Company was held on April
27, 2004. At the meeting, shareholders of the Company elected all the
individuals nominated by the Company to serve on the Board of Directors in the
class of directors whose term expires at the 2007 Annual Meeting of
Shareholders. In addition, the shareholders of the Company approved the SCBT
Financial Corporation Stock Incentive Plan and ratified the appointment of J.W.
Hunt and Company, LLP as independent accountants for the year ending December
31, 2004. Votes cast by the shareholders of the Company at the meeting were as
follows:
Nominees for Director Shares Voted in Favor Shares Withheld Broker Non-Votes
--------------------------- --------------------- --------------- ----------------
Robert R. Horger 6,062,997 75,037 -
Harry M. Mims, Jr. 6,012,587 125,447 -
James W. Roquemore 6,085,996 51,968 -
John W. Williamson, III 6,086,161 51,873 -
Cathy Cox Yeadon 6,084,137 52,038 -
Proposal to Approve the SCBT Financial Corporation Stock Incentive Plan
- --------------------------------------------------------------------------------------------------
Shares Voted in Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- --------------------- -------------------- ------------------ ----------------
3,814,840 687,832 349,351 1,286,128
Ratification of J.W. Hunt and Company, LLP
- --------------------------------------------------------------------------------------------------
Shares Voted in Favor Shares Voted Against Shares Abstaining Broker Non-Votes
- --------------------- -------------------- ----------------- ----------------
6,079,406 18,164 40,581 --
In addition, the following individuals continue to serve as directors of
the Company until the Company's Annual Shareholders' Meeting in the year
indicated:
Term Expiring In
----------------
Luther J. Battiste, III 2005
Robert R. Hill, Jr. 2005
Ralph W. Norman 2005
Anne H. Oswald 2005
A. Dewall Waters 2005
Colden R. Battey, Jr. 2006
Charles W. Clark 2006
M. Oswald Fogle 2006
Dwight Frierson 2006
C. John Hipp, III 2006
Thomas E. Suggs 2006
Item 5. Other Information:
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K:
(a) The following is a list of exhibits to this report:
Exhibit No. Description of Exhibit
- ----------- -----------------------
3.1 Articles of Incorporation of the Registrant, as amended
(incorporated by reference to
Exhibit 3.1 to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004).
3.2 Bylaws of the Registrant, as amended (incorporated
by reference to Exhibit 3.2 to the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004).
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
(a) Reports on Form 8-K
Current Report on Form 8-K, Items 7 and 9, dated April 21, 2004 and furnished to
the Securities and Exchange Commission on April 21, 2004. Current Report on Form
8-K, Item 9, dated May 18, 2004, and furnished to the Securities and Exchange
Commission on May 18, 2004.
Pursuant to the requirements of the Securities and 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
Date: August 6, 2004 /s/ C. John Hipp, III
------------------------------
President and
Chief Executive Officer
Date: August 6, 2004 /s/ Richard C. Mathis
------------------------------
Executive Vice President and
Chief Financial Officer
Exhibit Index
Exhibit No. Description of Exhibit
- ----------- ----------------------
31 Rule 13a-14(a)/15d-14(a) Certifications.
32 Section 1350 Certifications.