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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 September 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 September 30, 2004
Common Stock, $2.50 par value 7,640,725
SCBT FINANCIAL CORPORATION
INDEX
Part I: Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003
Condensed Consolidated Statements of Changes in Shareholders' Equity -
Nine Months Ended
September 30, 2004 and 2003
Condensed Consolidated Statements of Income -
Three and Nine Months Ended
September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended
September 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 6 - Exhibits and Reports on Form 8-K
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SCBT FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(In thousands of dollars, except par value)
9/30/2004 12/31/2003
(Unaudited) (Note 1)
------------ ------------
ASSETS
------
Cash and cash equivalents:
Cash and due from banks $ 38,629 $ 38,541
Interest-bearing deposits with banks 9,280 4,083
Federal funds sold and securities
purchased under agreements to resell 7,000 4,500
-----------------------------
Total cash and cash equivalents 54,909 47,124
-----------------------------
Investment securities:
Held-to-maturity (fair value of $26,500 in 2004
and $30,952 in 2003) 25,435 29,487
Available-for-sale 146,358 122,522
-----------------------------
Total investment securities 171,793 152,009
-----------------------------
Loans held for sale 16,910 12,346
-----------------------------
Loans 1,097,011 939,538
Less, unearned income (279) (778)
Less, allowance for loan losses (13,837) (11,700)
-----------------------------
Loans, net 1,082,895 927,060
-----------------------------
Premises and equipment, net 33,491 32,647
-----------------------------
Other assets 29,831 26,506
-----------------------------
Total assets $ 1,389,829 $ 1,197,692
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 223,273 $ 169,192
Interest-bearing 921,380 777,086
-----------------------------
Total deposits 1,144,653 946,278
Federal funds purchased and securities
sold under agreements to repurchase 71,214 80,967
FHLB advances 51,975 52,050
Other liabilities 5,241 6,048
-----------------------------
Total liabilities 1,273,083 1,085,343
-----------------------------
Shareholders' equity:
Common stock - $2.50 par value; authorized 40,000,000 shares;
issued and outstanding 7,640,725 and 7,690,186 shares 19,102 19,225
Surplus 60,732 62,722
Retained earnings 36,452 29,787
Accumulated other comprehensive income 460 615
-----------------------------
Total shareholders' equity 116,746 112,349
-----------------------------
Total liabilities and shareholders' equity $ 1,389,829 $ 1,197,692
=============================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
SCBT FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
---------------------------------------------
(Unaudited)
(Dollars in thousands)
ACCUMULATED
COMMON STOCK OTHER
--------------------- 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 - - - 11,118 - 11,118
Change in net unrealized gain on securities
available-for-sale, net of tax effects - - - - (1,251) (1,251)
-----------
Total comprehensive income 9,867
-----------
Cash dividends declared at $.49 per share - - - (3,763) - (3,763)
-----------
Exercise stock options 5,173 13 78 - - 91
-----------
Employee stock purchases 7,695 19 142 - - 161
-----------
Restricted stock awards 2,000 5 44 - - 49
-----------
Repurchase of common stock (2,100) (5) (48) (53)
-----------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2003 7,686,107 $ 19,215 $ 62,639 $ 27,426 $ 568 $ 109,848
=======================================================================
BALANCE, DECEMBER 31, 2003 7,690,186 19,225 62,722 29,787 615 112,349
-----------
Comprehensive income:
Net income - - 10,592 - 10,592
Change in net unrealized gain on securities
available-for-sale, net of tax effects - - - (155) (155)
-----------
Total comprehensive income 10,437
-----------
Cash dividends declared at $.51 per share - - (3,927) - (3,927)
-----------
Exercise stock options 52,952 132 804 - - 936
-----------
Employee stock purchases 8,075 21 181 - - 202
-----------
Restricted stock awards 3,000 8 79 87
-----------
Repurchase of stock (113,488) (284) (3,054) - - (3,338)
-----------------------------------------------------------------------
BALANCE, JUNE 30, 2004 7,640,725 $ 19,102 $ 60,732 $ 36,452 $ 460 $ 116,746
=======================================================================
THE ACCOMPANYING NOTE ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
----------------------------------------------------------------------
SCBT FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Unaudited)
(In thousands of dollars, except per share data)
Three Months Ended Nine Months Ended
---------------------- ---------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
---------- ---------- --------- ---------
Interest income:
Loans, including fees $ 15,659 $ 14,867 $ 44,558 $ 44,342
Investment securities:
Taxable 1,343 1,189 3,507 3,784
Tax-exempt 360 335 1,117 1,054
Federal funds sold and securities
purchased under agreements to resell 54 15 147 88
Money market funds - - 11 58
Deposits with banks 26 5 43 41
---------------------- ---------------------
Total interest income 17,442 16,411 49,383 49,367
---------------------- ---------------------
Interest expense:
Deposits 2,986 2,703 7,589 9,215
Federal funds purchased and securities
sold under agreements to repurchase 176 155 430 466
FHLB advances 700 653 2,054 1,889
---------------------- ---------------------
Total interest expense 3,862 3,511 10,073 11,570
---------------------- ---------------------
Net interest income:
Net interest income 13,580 12,900 39,310 37,797
Provision for loan losses 787 831 3,169 1,900
---------------------- ---------------------
Net interest income after provision for loan losses 12,793 12,069 36,141 35,897
---------------------- ---------------------
Noninterest income:
Service charges on deposit accounts 3,026 2,974 8,780 8,653
Other service charges and fees 2,182 3,458 6,719 8,752
Gain on sale of bank branch - - 782 -
Gain on sale of credit card loans - - 953 -
---------------------- ---------------------
Total noninterest income 5,208 6,432 17,234 17,405
---------------------- ---------------------
Noninterest expense:
Salaries and employee benefits 6,885 7,428 20,644 21,282
Net occupancy expense 792 764 2,457 2,111
Furniture and equipment expense 1,097 1,188 3,294 3,302
Other expense 3,504 3,448 11,471 9,958
---------------------- ---------------------
Total noninterest expense 12,278 12,828 37,866 36,653
---------------------- ---------------------
Earnings:
Income before provision for income taxes 5,723 5,673 15,509 16,649
Provision for income taxes 1,821 1,787 4,917 5,531
---------------------- ---------------------
Net income $ 3,902 $ 3,886 $ 10,592 $ 11,118
====================== =====================
Comprehensive income $ 5,224 $ 3,010 $ 10,437 $ 9,867
====================== =====================
Earnings per share:
Basic $ 0.51 $ 0.51 $ 1.38 $ 1.45
====================== =====================
Diluted $ 0.50 $ 0.50 $ 1.36 $ 1.44
====================== =====================
Cash dividends per common share $ 0.17 $ 0.17 $ 0.51 $ 0.49
====================== =====================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-----------------------------------------------------------------------
SCBT FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
(In thousands of dollars)
Nine Months Ended
----------------------
9/30/2004 9/30/2003
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,592 $ 11,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,873 1,888
Provision for loan losses 3,169 1,900
Gain on sale of premises and equipment (188) (5)
Net amortization of investment securities 439 931
Net change in miscellaneous assets and
liabilities (8,834) (953)
----------------------
Net cash provided by operating activities 7,051 14,879
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held to maturity 4,007 3,671
Proceeds from maturities of investment securities available-for-sale 42,252 91,661
Purchases of investment securities available-for-sale (66,729) (95,047)
Purchases of investment securities held-to maturity - (475)
Net increase in customer loans (159,360) (51,989)
Recoveries of loans previously charged off 356 539
Purchases of premises and equipment (2,577) (5,293)
Proceeds from sale of premises and equipment 277 21
----------------------
Net cash used by investing activities (181,774) (56,912)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits 198,376 35,349
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase (9,753) 7,299
Proceeds from FHLB advances 39,975 14,000
Repayment of FHLB advances (40,050) (14,000)
Common stock issuance 289 210
Common stock repurchase (3,338) (53)
Dividends paid (3,927) (3,763)
Stock options exercised 936 91
----------------------
Net cash provided by financing activities 182,508 39,133
----------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 7,785 $ (2,900)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 47,124 40,514
----------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,909 $ 37,614
======================
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 nine months ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004.
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 derivative 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's practice is to lock in the investor sale-side rate simultaneously and
at the same terms as the rate lock to the borrower. The Company has not recorded
rate lock commitments as derivative assets or liabilities as of September 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. As originally issued, EITF 03-1 would be 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. On
September 30, 2004, the FASB voted to delay implementation of EITF 03-1 in order
to reconsider its guidance. It is anticipated that the statement will be
reissued during the fourth quarter with an effective date of December 31, 2004.
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. The FASB is expected to issue a
final statement during the fourth quarter of 2004 that would be effective for
reporting periods beginning after June 15, 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 nine
months ended September 30, 2004 are as follows:
(In thousands of dollars)
Three Months Ended Nine Months Ended
-------------------- ---------------------
9/30/2004 9/30/2003 09/30/04 09/30/03
---------- --------- -------- --------
Service cost $ 166 $ 163 $ 498 $ 490
Interest cost 179 169 537 508
Expected return on assets (198) (178) (594) (536)
Amortization of prior service cost (10) - (30) -
Recognized net actuarial gain 47 44 141 132
----------------------------------------------
Total $ 184 $ 198 $ 552 $ 594
==============================================
The Company contributed $188,000 and $607,000, respectively, to the Plan for the
three and nine months ended September 30, 2004, and expects to contribute
$1,591,000 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 nine months ended September 30,
2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
--------- --------- --------- ---------
Basic 7,657,920 7,682,611 7,689,938 7,678,418
Diluted 7,728,735 7,764,910 7,766,709 7,750,205
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 Nine Months Ended
---------------------- ----------------------
(In thousands of dollars, except per share data) 9/30/2004 9/30/2003 9/30/2004 9/30/2003
--------- --------- --------- ---------
Net income, as reported $ 3,902 $ 3,886 $10,592 $11,118
Less, total stock-based employee
compensation expense determined under fair
value based method, net of related tax effects 68 56 179 168
------------------- ---------------------
Pro forma net income $ 3,834 $ 3,830 $10,413 $10,950
=================== =====================
Earnings per share:
Basic - as reported $ 0.51 $ 0.51 $ 1.38 $ 1.45
=================== =====================
Basic - pro forma $ 0.50 $ 0.50 $ 1.35 $ 1.43
=================== =====================
Diluted - as reported $ 0.50 $ 0.50 $ 1.36 $ 1.44
=================== =====================
Diluted - pro forma $ 0.50 $ 0.49 $ 1.34 $ 1.41
=================== =====================
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:
Nine Months Ended
------------------------------
9/30/2004 9/30/2003
--------- ---------
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 September 30, 2004, commitments to extend credit and standby letters of
credit totaled $277,104,000. The Company does not anticipate any material losses
as a result of these transactions.
Note 7 - Subsequent Events:
On October 21, 2004, the Company's Board of Directors declared a five percent
(5%) stock dividend payable on January 1, 2005, to shareholders of record on
December 20, 2004. Had the stock dividend been paid as of September 30, 2004,
earnings per share would have been adjusted to the following amounts:
Three Months Ended Nine Months Ended
--------------------------- --------------------------
9/30/2004 9/30/2003 9/30/2004 9/30/2003
--------- --------- ---------- ---------
Basic $ 0.49 $ 0.48 $ 1.31 $ 1.38
=========================== ==========================
Diluted $ 0.48 $ 0.48 $ 1.30 $ 1.37
=========================== ==========================
On October 28, 2004 C. John Hipp, III, announced his decision to resign the
positions of President, Chief Executive Officer, and director of the Company to
take some personal time to determine what other opportunities might be of
interest. Simultaneously, Robert R. Hill, Jr. was appointed Interim Chief
Executive Officer. He is expected to be elected President and Chief Executive
Officer at the next meeting of the Board of Directors.
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 primarily provides
mortgage lending products, services and consulting to other financial
institutions in the Southeast.
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.
During the third quarter of 2004, the Company opened two loan production
offices, one in Summerville, South Carolina, just north of Charleston, the other
in Fort Mill, South Carolina, south of Charlotte. The Summerville location was
subsequently approved to operate as a full service banking facility.
In October, C. John Hipp, III announced his decision to resign his
positions of President, Chief Executive Officer and director of the Company in
order to take some personal time to determine what other opportunities might be
of interest to him. Simultaneously, Robert R. Hill, Jr. was appointed Interim
Chief Executive Officer. He is expected to be formally elected President and
Chief Executive Officer at the next full meeting of the Board of Directors. Mr.
Hill has served the Company as a director and for the past five years as
President and Chief Operating Officer of the lead bank, South Carolina Bank and
Trust, N.A.
For the three months ended September 30, 2004, the Company had consolidated
net income of $3,902,000, an increase of 0.4 percent compared with $3,886,000
earned in the third quarter of 2003. Diluted earnings per share were $0.50 for
the third quarter in both years. Net income for the first nine months of 2004
was $10,592,000, a decrease of 5.0 percent from $11,118,000 earned for the same
period in 2003. Diluted earnings per share were $1.36 for the nine months ended
September 30, 2004, a 5.6 percent decrease from the $1.44 per share earned in
the same period of 2003.
NET INTEREST INCOME
For the third quarter of 2004, non-taxable equivalent net interest income
was $13,580,000, an increase of $680,000, or 5.3 percent, over $12,900,000 for
the third quarter in 2003. For the first nine months of 2004, non-taxable
equivalent net interest income was $39,310,000, an increase of $1,513,000, or
4.0 percent, compared with $37,797,000 for the same period a year earlier. This
increase in nine-month comparisons was largely the result of an increase in
total average interest earning assets, which offset the combined effects of
higher total average interest bearing liabilities and a 14 basis point decrease
in the non-taxable equivalent net interest margin.
The yield on the majority of the Company's interest earning assets adjusts
simultaneously, but to varying degrees of magnitude, with changes in the general
level of interest rates. While the Federal Reserve has made modest upward
adjustments in short-term target interest rates in recent months, intermediate
and longer-term rates have not as yet moved accordingly. Thus, depository
institutions continue to experience the challenge of net interest margin
compression. Following two and one-half years of rate declines, interest rates
remain very low by historical measures. For the first nine months of 2004, the
Company's non-taxable equivalent yield on interest earning assets was 5.45
percent, as compared with 5.86 percent during the same period in 2003, a
decrease of 41 basis points. In similar nine-month comparisons, the cost of
interest-bearing liabilities used to fund most of these assets decreased 30
basis points from 1.68 percent in 2003 to 1.38 percent in 2004. Total average
interest earning assets increased by 7.4 percent comparing the first nine months
of 2004 to the same period in 2003, while total average interest bearing
liabilities increased 6.6 percent.
Loans are the largest component of earning assets. As of September 30,
2004, loans, net of unearned income and excluding mortgage loans held for sale,
were $1,096,732,000, compared with $938,760,000 at December 31, 2003. This
increase of $157,972,000, or 16.8 percent, occurred mainly in the commercial
real estate and residential mortgage loan segments. Mortgage loans held for sale
increased by $4,564,000, or 37.0 percent, from $12,346,000 at December 31, 2003
to $16,910,000 at September 30, 2004.
For the third quarter of 2004, interest and fees on loans, including
mortgage loans held for sale, were $15,659,000, an increase of $792,000, or 5.3
percent, compared with $14,867,000 for the comparable period in 2003. For the
first nine months of the year, interest and fees on loans were $44,558,000,
compared with $44,342,000 for the same period in 2003, a small increase of
$216,000, or 0.5 percent. For the nine months ended September 30, 2004, loans,
net of unearned income and excluding mortgage loans held for sale, averaged
$1,017,417,000 and decreased in yield by 57 basis points to 5.78 percent on a
non-tax equivalent basis, compared to $891,554,000 with a non-tax equivalent
yield of 6.35 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
used to provide liquidity, to fund loan demand or deposit liquidation, to pledge
as collateral for certain public deposits and other purchased funds, and to
generate interest income through the employment of excess funds. At September
30, 2004, investment securities were $171,793,000, compared to $152,009,000 at
December 31, 2003. The composition of the portfolio has remained relatively
consistent through the first nine months of 2003, reflecting the Company's
continued modest bias toward relatively short-term and shorter average life
securities in the continuing low rate environment.
For the quarter ended September 30, 2004, interest earned on investment
securities was $1,703,000, compared with $1,524,000 for the comparable period in
2003, an increase of $179,000, or 11.8 percent. For the nine months ended
September 30, 2004, interest income was $4,624,000, compared with $4,838,000 for
the same period in 2003. This decrease of 4.4 percent was mainly the result
lower average outstanding balances year-to-year, partially offset by a modest
increase in yield. For the first nine months of 2004, investment securities
averaged $158,136,000 with a yield of 3.90 percent on a non-tax equivalent
basis, compared to an average of $170,220,000 and yield of 3.79 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
September 30, 2004. For the first nine months of 2004, holdings of these
short-term investments averaged $235,000, compared with $27,382,000 through the
first three quarters of 2003.
There were no gains or losses on sales of securities during the first nine
months of 2004 and 2003. As of September 30, 2004, the Company had net
unrealized gains of $1,065,000 in the held-to-maturity securities portfolio
segment and $369,000 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 general practice of the
Company 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 asset management strategies, 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 September 30, 2004. For the first
nine months of 2004, interest income of $11,000 was earned on average money
market fund balances of $1,602,000. For the same period in 2003, interest income
of $58,000 was earned on average balances of $6,526,000.
During the first nine months of 2004, the average balance of
interest-bearing liabilities was $978,149,000, a $60,613,000, or 6.6 percent,
increase over the average of $917,536,000 for the same period in 2003. For the
first nine months of 2004, total interest expense declined by 12.9 percent to
$10,073,000 with an average rate of 1.38, compared with expense of $11,570,000
and an average rate of 1.68 percent for the same period in 2003.
Noninterest-bearing deposits were $223,273,000 at September 30, 2004, an
increase of $54,081,000, or 32.0 percent, from $169,192,000 at December 31,
2003. Comparing third quarter ending balances, interest-bearing deposits grew by
$172,628,000, or 23.1 percent, from $748,752,000 in 2003 to $921,380,000. During
the first nine months of 2004, the Company paid interest of $7,589,000 on
average interest-bearing deposits of $823,571,000, compared with $9,215,000 paid
on an average balance of $775,317,000 in the comparable 2003 period. This 17.7
percent decrease in the cost of interest-bearing deposits resulted from a
decline in rates, which offset higher average balances.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the quarter ended September 30, 2004 was
$787,000, compared with $831,000 for the same period in 2003. For the nine
months ended September 30, 2004, the provision was $3,169,000, compared to
$1,900,000 for the same period in 2003. With a continued focus on asset quality,
management considers the overall higher provision in 2004 to be an appropriate
response to strong loan demand over the first nine months. The allowance for
loan losses was $13,837,000, or 1.26 percent of outstanding loans at September
30, 2004 and $11,700,000, or 1.25 percent of outstanding loans at December 31,
2003. The allowance at September 30, 2004 provided 3.4 times coverage of
nonperforming loans, which totaled $4,054,000, or 0.37 percent, of period end
loans. The allowance for loan losses also provides 10.9 times coverage of third
quarter annualized net charge-offs. In 2004, net charge-offs for the third
quarter and year-to-date were $316,000 and $1,032,000, respectively. This
represents an annualized 0.12 percent of average loans, net of unearned income,
for the quarter and 0.10 percent for the first nine months. In the prior year,
net charge offs were $424,000, or 0.21 percent, of average loans for the third
quarter and $1,227,000, or 0.21 percent, of average loans for the first nine
months.
While the Federal Reserve has begun to cautiously increase short-term
interest rates in light of signs of economic improvement, the overall pace of
expansion has been gradual, especially in South Carolina. In this climate,
management anticipates that loan charge offs in the near term may continue at
percentage of loan levels reasonably similar to the experience thus far in 2004.
Management assesses 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 evaluate 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 $1,459,000 at September
30, 2004, compared with $1,465,000 at December 31, 2003 and $1,540,000 at
September 30, 2003.
NONINTEREST INCOME AND EXPENSE
Noninterest income for the third quarter of 2004 was $5,208,000, compared
with $6,432,000 for the same period in 2003, a decrease of $1,224,000, or 19.0
percent. For the first nine months of 2004, noninterest income was $17,234,000,
compared with $17,405,000 for the same period in 2003, a decrease of $171,000,
or 1.0 percent. In the nine-month comparisons, the 2004 results have been
bolstered by a $782,000 gain on the sale of the Cameron branch of South Carolina
Bank and Trust, N.A. in the first quarter 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 $127,000, or 1.5 percent, in the current
nine-month period. Offsetting these increases has been a $2,678,000, or 48.6
percent, decrease in secondary market mortgage origination fees, the result of a
decline in refinance activity as compared with the record pace of 2003.
Noninterest expense for the third quarter of 2004 was $12,278,000, a
decrease of $550,000, or 4.3 percent, from $12,828,000 for the same period in
2003. For the nine months ended September 30, 2004, noninterest expense
increased $1,213,000, or 3.3 percent, to $37,865,000 from $36,653,000 in the
prior year. In the third quarter of 2004, salaries and employee benefits were
$6,885,000, a decrease of $543,000, or 7.3 percent, compared with the same
period in 2003. Comparing the nine-month periods, salaries and employee benefits
deceased $638,000, or 3.0 percent, to $20,644,000 in 2004. These reduced
expenses have been the result of decreased commissions paid on lower mortgage
originations, as well as the Company's efforts to control overall
personnel-related costs and maintain an efficient workforce level. Net occupancy
expense for the nine months ended September 30, 2004 was $2,457,000, up
$346,000, or 16.4 percent over 2003, while furniture and equipment expense was
$3,294,000, almost equal with the 2003 expense. Other expense was $11,471,000
for the first nine months of 2004, an increase of $1,513,000, or 15.2 percent,
from the same period in 2003. This increase resulted from higher expenses of
outside services and higher real estate property taxes, certain costs incurred
in 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 $3,902,000 for the third quarter of 2004, slightly exceeding
the $3,886,000 earned in the third quarter of 2003. For the nine months ended
September 30, 2004, net income decreased $526,000, or 4.7 percent, to
$10,592,000 from $11,118,000 in the same period in 2003. Comparing the first
nine months of 2004 and 2003, the $1,269,000 higher provision for loan losses
and $1,212,000 increase in noninterest expense were the main contributors to
lower earnings. These higher expenses were partially offset by a $1,512,000
increase in net interest income.
CAPITAL RESOURCES AND LIQUIDITY
The Company's ongoing capital needs have been met primarily through
consistent positive earnings results and the resultant growth in retained
earnings, less the payment of cash dividends. As of September 30, 2004,
shareholders' equity was $116,746,000, an increase of $4,397,000, or 3.9
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 September 30, 2004 was 10.20 percent,
compared to 11.81 percent at December 31, 2003. The total risk-weighted asset
capital ratio was 11.45 at the end of the third quarter of 2004, compared with
13.06 at year-end 2003. These ratios have decreased in large part due to the
strong loan growth throughout 2004 and the corresponding impact on risk weighted
assets.
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
September 30, 2004, the Company's leverage ratio was 8.19 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 and the Federal Home Loan Bank.
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 Interim 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 (or Dollar Value)
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
- --------------------------------------------------------------------------------------------
July 1 - July 31 2,000 $28.08 2,000 187,340
August 1 - August 31 27,854 28.77 27,854 159,486
September 1 - September 30 8,214 29.98 8,214 151,272
-------------- ------------ ----------
Total 38,068 38,068
============== ==========
In addition, in accordance with its various stock-based compensation plans, the
Company may repurchase shares from affiliates and officers who elect to redeem
some of the SCBT shares they own in order to pay for their exercising of vested
stock options. There is no pre-determined number of shares that may be
repurchaed in accordance with this activity.
Item 3. Defaults Upon Senior Securities:
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
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).
10.1 South Carolina Bank and Trust Deferred Income Plan
31 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
(a) Reports on Form 8-K
None.
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: November 8, 2004 /s/ Robert R. Hill, Jr.
-----------------------
Interim Chief Executive Officer
Date: November 8, 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.
10.1 South Carolina Bank and Trust Deferred Income Plan