South State Corp - 10-Q quarterly report FY

WASHINGTON, D.C. 20529

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

For the quarterly period ended September 30, 2006

OR

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

Commission file number 001-12669

 

(exact name of registrant as specified in its charter)

(800) 277-2175

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed

by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months

(or for such shorter period that the registrant was required to file such reports)

and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

(See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.)

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company

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

 

 

 

 

 

 

 

 

 

The condensed consolidated balance sheet at December 31, 2005, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States 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, 2005 should be referenced when reading these unaudited condensed consolidated financial statements.

 

 

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 which expressed the staff’s views regarding the process of quantifying financial statement misstatements due to the diversity in practice. The staff is requiring that a company accumulate and quantify misstatements using both the “rollover” and “iron curtain” approaches. The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year or years of origination. The SEC requires application for the year ending December 31, 2006. The Company is in the process of determining the effects, if any, on its financial statements.

 

 

 

 

 

 

The Company's loan portfolio is comprised of the following:

 

 

An analysis of the changes in the allowance for loan losses is as follows:

 

 

 

The Company's interest-bearing deposits are comprised of the following:

 

 

 

Effective January 1, 2006, amendments were made to our pension plan and 401(k) savings plan. On this date, a new benefit formula applies only to participants who have not attained age 45 or who do not have five years of service. Concurrently, changes in our 401(k) plan will be effective for new employees hired on or after this date or for employees under the age of 45 or who have attained at least five years of service.

The components of net periodic pension expense recognized during the three and nine months ended September 30 are as follows:

 

 

The Company contributed $195,000 and $585,000, respectively, to the pension plan for the three and nine months ended September 30, 2006 and anticipates making similar additional contributions during the year.

Basic earnings per share are calculated by dividing net income by the weighted-average shares of common stock outstanding during each period. The Company’s diluted earnings per share are based on the weighted-average shares of common stock outstanding during each period plus the maximum dilutive effect of common stock issuable upon exercise of stock options. 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 are as follows:

 

The calculation of diluted earnings per share excludes outstanding stock options that have exercise prices greater than the average market price of the common shares as follows for the three and nine months ended September 30:

 

 

Dividends per share are calculated using the current number of common shares issued and outstanding at the record date for any dividends paid during the reported periods.

 

The Company’s 1999 and 2004 stock option programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.

With the exception of non-qualified options granted to directors under the 1999 and 2004 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than one year following the grant date, incentive stock options granted under the plans may not be exercised in whole or in part within one year following the date of the grant, as these incentive stock options become exercisable in 25% increments ratably over the four year period following the grant date. The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and have terms ranging from five to ten years. No options were granted under the 1999 plan after January 2, 2004, and the plan is closed other than for any options still unexercised and outstanding. The 2004 plan is the only plan from which new stock-based compensation grants may be issued.

The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options’ vesting periods. The following weighted-average assumptions were used in valuing options issued:

 

 

 

 

The following table presents pro forma net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards for the three and nine months ended September 30, 2005:

 

 

As a result of adopting Statement No. 123R on January 1, 2006, earnings before income taxes for the three and nine months ended September 30, 2006 were lower than if share-based compensation had continued to be accounted for under Opinion 25 in the amount of $66,000 and $337,000, respectively.

 

The Company from time-to-time also grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Company’s stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expenses, equal to the total value of such awards, ratably over the vesting period of the stock grants. Grants to employees typically vest over a 48-month period, while grants to non-employee directors typically vest within a 12-month period.

 

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, 2006, commitments to extend credit and standby letters of credit totaled $421,556,000. The Company does not anticipate any material losses as a result of these transactions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the financial statements contained in this quarterly report beginning on page 1. For further information, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Annual Report on Form 10-K for the year ended December 31, 2005.

SCBT Financial Corporation, headquartered in Columbia, South Carolina, is a bank holding company incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our wholly-owned subsidiaries: South Carolina Bank and Trust, N.A. and South Carolina Bank and Trust of the Piedmont, N.A., both national banks that opened for business in 1932 and 1996, respectively. We engage in no significant operations other than the ownership of these banking subsidiaries.

At September 30, 2006, we had $2.1 billion in assets and approximately 633 full-time equivalent employees. Through our banking subsidiaries we provide our customers with checking accounts, NOW accounts, savings and time deposits of various types, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, business loans, agriculture loans, real estate loans, personal use loans, home improvement loans, automobile loans, credit cards, letters of credit, home equity lines of credit, safe deposit boxes, bank money orders, wire transfer services, correspondent banking services, and use of ATM facilities.

The following discussion describes our results of operations for the quarter ended September 30, 2006 as compared to the quarter ended September 30, 2005 as well as results for the nine months ended September 30, 2006 and 2005, and also analyzes our financial condition as of September 30, 2006 as compared to December 31, 2005. Like most financial institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.

Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process.

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.

The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

We measure our progress based on the results of soundness, profitability, and growth. We continued to achieve outstanding results during the third quarter of 2006 despite the slowing growth in the market. The following key operating highlights for the third quarter are outlined below:

 

Operating highlights for the nine months ended September 30, 2006:

 

 

Our consolidated earnings growth reflected the continued strong profitability of our bank subsidiaries during the third quarter of 2006. South Carolina Bank and Trust had net income of $5,147,000 and South Carolina Bank and Trust of the Piedmont had net income of $595,000 during this period.

For the third quarter 2006, overall growth in earning assets contributed to higher non-taxable equivalent (“Non-TE”) net interest income. We have been able to increase net interest income and maintain very adequate margins in a flat yield curve environment, despite competition for deposits and other factors that have caused rates on interest-bearing liabilities to increase generally more than asset yields. Our level of our earning assets and the management of our net interest margin determines our level of net interest income. The continued growth of our loan portfolio is the primary driver of the increase in net interest income.

 

Non-taxable equivalent net interest income increased 17 percent in the third quarter of 2006 compared to the same period in 2005. For the first nine months of 2006, non-taxable equivalent net interest income increased 21 percent from the same period in 2005. Some key highlights are outlined below:

Growth in commercial real estate and the Sun Bancshares acquisition drove the increase in total loans from the comparable period in 2005. Total loans grew 23 percent from the balance at September 30, 2005 and 10 percent from the balance at December 31, 2005. Loans are our largest category of earning assets, and commercial real estate loans represent 47 percent of our total loans. At September 30, 2006, loans outstanding, excluding loans held for sale, were $1,682,217,000, compared to $1,535,901,000 at December 31, 2005 and $1,372,325,000 at September 30, 2005. Loans outstanding include unearned income.

 

 

Interest earned on loans increased 41 percent in the third quarter of 2006 compared to the same period in 2005. Some key highlights are outlined below:

For the first nine months of 2006, interest earned on loans increased 46 percent from the same period in 2005. In the nine-month comparisons, we noted the following:

 

We use investment securities, the second largest category of earning assets, to generate interest income through the employment of excess funds, to provide liquidity, to fund loan demand or deposit liquidation, and to pledge as collateral for public funds deposits and repurchase agreements. The composition of the portfolio remained relatively consistent with a bias towards increasing purchases of US government agency bonds rather than mortgage-backed securities. We continued our approach of slightly lengthening the average life of the portfolio as interest rates increased and with an anticipated end to the Federal Reserve's tightening cycle. At September 30, 2006, investment securities were $212,606,000, compared to $182,744,000 at December 31, 2005 and $178,286,000 at September 30, 2005.

 

 

Interest earned on investment securities increased 39 percent in the third quarter of 2006 compared to the same period in 2005. For the first nine months of 2006, interest earned increased 32 percent from the same period in 2005. Some key highlights are outlined below:

Although securities classified as available for sale may be sold from time to time to meet liquidity or other needs, it is not our normal practice to trade this segment of the investment securities portfolio. While management generally holds these assets on a long-term basis or until maturity, any short-term investments or securities available for sale could be converted at an earlier point, depending partly on changes in interest rates and alternative investment opportunities.

 

 

 

 

Deposit growth continued to remain strong through the third quarter. We continued to see strong growth in the number of transaction accounts and savings accounts. Our customers opened 14,194 new demand deposit checking accounts during the first nine months of 2006, an 18 percent increase from openings in the number of accounts during the first nine months of 2005. While the amount of noninterest-bearing deposits decreased slightly from the linked quarter in 2006, the balance increased 8 percent, to $273,329,000, from the amount at December 31, 2005.

We have established an allowance for loan losses through a provision for loan losses charged to expense on our statement of income. The allowance for loan losses represents an amount that we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. We assess the adequacy of the allowance for loan losses by using an internal risk rating system, independent credit reviews, and regulatory agency examinations—all of which evaluate the quality of the loan portfolio and seek to identify problem loans. Based on this analysis, management and the board of directors consider the current allowance to be adequate. Nevertheless, our evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Actual losses may vary from our estimates, and there is a possibility that charge-offs in future periods could exceed the allowance for loan losses as estimated at any point in time. We expect loan charge-off levels to increase slightly during the current year as compared to 2005.

The provision for loan losses for the third quarter ended September 30, 2006 was $1,048,000 compared to $1,674,000 in the comparable period last year and $1,522,000 in the immediately preceding quarter. The provision reflects a decrease in our allowance for loan losses due to lower third quarter 2006 net charge-offs and less new loan growth compared to the third quarter of 2005. Some key highlights regarding the third quarter asset quality are outlined below:

OREO includes certain real estate acquired as a result of foreclosure and property not intended for bank use. As of September 30, 2006, other real estate owned was $363,000, compared with $379,000 at December 31, 2005 and $1,083,000 at the end of the third quarter of 2005.

 

 

 

 

Noninterest income growth of 7 percent in the third quarter of 2006 compared to the same period in 2005 came as a result of the following:

As noninterest income increased during the third quarter, secondary market mortgage fees decreased nearly 3 percent, reflecting a slow-down in the market. The origination volume for mortgage loans held for sale decreased slightly from the linked quarter in 2006.

For the first nine months of 2006, noninterest income increased 12 percent from the same period in 2005. In the nine-month comparisons, the increase is mainly attributable to the following:

 

Other noninterest expense includes a $216,000 increase in miscellaneous charge-offs, an increase resulting partially from an isolated check fraud occurrence perpetrated from outside our lead bank subsidiary. We have implemented corrective actions to help prevent a possible occurrence in the future. However, overall charge-offs were offset by a $173,000 decrease in overdraft charge-offs during the quarter. Other noninterest expense also includes a $141,000 write-down on the disposal of certain bank equipment during the third quarter 2006.

For the nine months ended September 30, 2006, noninterest expense increased 17 percent from the same period in 2005. This increase is mainly attributable to the following:

 

Our ongoing capital requirements have been met primarily through retained earnings, less the payment of cash dividends. As of September 30, 2006, shareholders’ equity was $160,331,000, an increase of $11,928,000, or 8 percent, from $148,403,000 at December 31, 2005.

We are subject to certain risk-based capital guidelines. Certain ratios measure the relationship of capital to a combination of balance sheet and off balance sheet risks. The values of both balance sheet and off balance sheet items are adjusted to reflect credit risk. Under the guidelines promulgated by the Board of Governors of the Federal Reserve System, which are substantially similar to those of the Comptroller of the Currency, Tier 1 risk-based capital must be at least 4 percent of risk-weighted assets, while total risk-based capital must be at least 8 percent of 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 Tier 1 leverage ratio required for banks is between 3 and 5 percent, depending on the institution’s composite rating as determined by its regulators.

 

Compared to December 31, 2005, our capital ratios have slightly declined primarily because of the continuing growth in assets. Our capital ratios are currently well in excess of the minimum standards and continue to be in the “well capitalized” regulatory classifications.

Liquidity is the ability for us to generate sufficient cash to meet our financial obligations, which arise primarily from the withdrawal of deposits, extension of credit and payment of operating expenses. Asset liquidity is maintained by the maturity structure of loans, investment securities and other short-term investments. Management has policies and procedures governing the length of time to maturity on loans and investments. Normally, changes in the earning asset mix are of a longer-term nature and are not utilized for day-to-day corporate liquidity needs.

Our liabilities provide liquidity on a day-to-day basis. Daily liquidity needs are met from deposit levels or from our use of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings. Additional liquidity can be secured from lines of credit extended to us from our correspondent banks and the Federal Home Loan Bank. We believe that our liquidity position is adequate.

We have no material concentration of deposits from any single customer or group of customers. We have no significant portion of our loans concentrated within a single industry or group of related industries. Furthermore, we attempt to avoid making loans that, in an aggregate amount, exceed 10 percent of total loans to a multiple number of borrowers engaged in similar business activities that could cause these aggregated loans to be similarly impacted by economic or other conditions. As of September 30, 2006, there were no aggregated loan concentrations of this type. We do not believe there are any material seasonal factors that would have a material adverse effect on us. We do not have foreign loans or deposits.

We consider concentrations of credit to exist when, pursuant to regulatory guidelines, the amounts loaned to a multiple number of borrowers engaged in similar business activities which would cause them to be similarly impacted by general economic conditions represents 25 percent of total risk-based capital. Based on this criteria, we had five such credit concentrations for the nine month period ended September 30, 2006, including loans to borrowers engaged in other activities related to real estate, loans to lessors of nonresidential buildings, loans to religious organizations, loans to lessors of residential buildings, and loans to borrowers constructing new single family housing.

We have no material changes in our quantitative and qualitative disclosures about market risk as of September 30, 2006 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2005.

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

There have been no significant changes in our internal controls over financial reporting that occurred during the third quarter of 2006 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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

We are not a party to, nor is any of our property the subject of, any pending material proceeding other than those that may occur in our ordinary course of business.

Investing in SCBT Financial Corporation’s common shares involves certain risks, including those identified and described in Item 1A. of our Annual Report of Form 10-K for the fiscal year ended December 31, 2005 (“Form 10-K”), as well as cautionary statements contained in this Form 10-Q, including those under the caption “Forward-Looking Statements” set forth in Part I, Item 2 of this Form 10-Q. There has been no material change in the risk factors previously disclosed in our Form 10-K.

(a) and (b) not applicable

(c) Issuer Purchases of Equity Securities:

In February 2004, we announced a program with no formal expiration date to repurchase up to 250,000 of our common shares. The following table reflects share repurchase activity during the third quarter of 2006:

 

 

* These shares were repurchased under arrangements, authorized by our stock-based compensation plans and Board of Directors, whereby officers or directors may sell previously owned shares to SCBT in order to pay for the exercises of stock options or for income taxes owed on vesting shares of restricted stock. These shares are not purchased under the plan to purchase 250,000 shares announced in February 2004.

 

Not applicable.

 

 

Not applicable.

 

 

Not applicable.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.