Back to GetFilings.com
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File No. 000-20616
Peoples Bancorporation, Inc.
(Exact name of Registrant as specified in its charter)
South Carolina 57-0951843
-------------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1818 East Main Street, Easley, South Carolina 29640
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (864) 859-2265
Securities Registered Pursuant to Section 12 (b)
of the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12 (g) of the
Securities Exchange Act of 1934:
Common Stock, $1.67 Par Value
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant (2,405,478 shares) on June 30, 2002 was
approximately $45,102,713. The aggregate market value of the voting and
non-voting common equity held by nonaffiliates of the Registrant (2,512,567
shares) on March 1, 2003 was approximately $48,366,915. As of such dates, no
organized trading market existed for the common stock of the Registrant. For the
purpose of this response, officers, directors and holders of 5% or more of the
Registrant's common stock are considered affiliates of the Registrant.
The number of shares outstanding of the Registrant's common stock, as of March
1, 2003: 3,507,911 shares of $1.67 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders - Part III
1
PART I
ITEM 1. BUSINESS
Forward Looking Statements
This Annual Report contains forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products and similar matters. All statements that are not
historical facts are "forward-looking statements." Words such as "estimate,"
"project," "intend," "expect," "believe," "anticipate," "plan," and similar
expressions identify forward-looking statements. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with terms of the safe harbor, the Company notes
that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performances, development and
results of the Company's business include, but are not limited to, the
following: risks from changes in economic and industry conditions; changes in
interest rates; risks inherent in making loans including repayment risks and
value of collateral; dependence on senior management; and recently-enacted or
proposed legislation. Statements contained in this filing regarding the demand
for Peoples Bancorporation's products and services, changing economic
conditions, interest rates, consumer spending and numerous other factors may be
forward-looking statements and are subject to uncertainties and risks.
The Company
Peoples Bancorporation, Inc. was incorporated under South Carolina law
on March 6, 1992, for the purpose of becoming a bank holding company by
acquiring all of the common stock of The Peoples National Bank, Easley, South
Carolina. The Company commenced operations on July 1, 1992 upon effectiveness of
the acquisition of The Peoples National Bank. The company has three wholly-owned
subsidiaries: The Peoples National Bank, Easley, South Carolina, a national bank
which commenced business operations in August 1986; Bank of Anderson, National
Association, Anderson, South Carolina, a national bank which commenced business
operations in September 1998; and, Seneca National Bank, Seneca, South Carolina,
a national bank which commenced business operations in February 1999 (sometimes
referred to herein as "the Banks").
The Company engages in no significant operations other than the
ownership of its three subsidiaries and the support thereof. The Company
conducts its business from six banking offices located in the Upstate Area of
South Carolina.
The principal offices of the Company are located at 1818 East Main
Street, Easley, South Carolina 29640. The Company's telephone number is (864)
859-2265. The principal office of The Peoples National Bank is located at 1800
East Main Street, Easley, South Carolina 29640. The principal office of Bank of
Anderson, National Association is located at 201 East Greenville Street,
2
Anderson, South Carolina 29621, and the principal office of Seneca National Bank
is located at 201 Bypass 123, Seneca, South Carolina 29678.
General Business
Some of the major services which the Company provides through its
banking subsidiaries include checking accounts; NOW accounts; savings and other
time deposits of various types; daily repurchase agreements; alternative
investment products such as annuities, mutual funds, stocks and bonds; loans for
business, agriculture, real estate, personal uses, home improvement and
automobiles; credit cards; letters of credit; home equity lines of credit; an
accounts receivable financing program; a wholesale mortgage lending program;
safe deposit boxes; bank money orders; wire transfer services; internet banking
and use of ATM facilities. The Banks do not have trust powers. The Company has
no material concentration of deposits from any single customer or group of
customers. No significant portion of its loans is concentrated within a single
industry or group of related industries and the Company does not have any
foreign loans. There are no material seasonal factors that would have an adverse
effect on the Company.
As a financial holding company, the Company is a legal entity separate
and distinct from its subsidiaries. The Company coordinates the financial
resources of the consolidated enterprises and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends and fees for services performed.
Territory Served and Competition
The Peoples National Bank serves its customers from four locations; two
offices in the city of Easley and one office in the city of Pickens, South
Carolina, which are located in Pickens County, and one office in the
unincorporated community of Powdersville, South Carolina, which is located in
the northeast section of Anderson County, South Carolina. Easley, South Carolina
is located approximately 10 miles west of Greenville, South Carolina. Pickens,
South Carolina is located approximately 8 miles north of Easley, and
Powdersville, South Carolina is located approximately 12 miles southeast of
Easley.
Bank of Anderson, National Association, serves its customers from one
location in the City of Anderson, South Carolina. Anderson is located
approximately 25 miles southwest of Greenville, South Carolina and approximately
25 miles south of Easley in Anderson County.
Seneca National Bank serves its customers from one location in the City
of Seneca, South Carolina. Seneca is located approximately 30 miles northwest of
Easley, South Carolina in Oconee County, South Carolina.
3
Each subsidiary bank of the Company is an independent bank, and,
therefore, each bank is responsible for developing and maintaining its own
customers and accounts. Located in Easley, South Carolina, The Peoples National
Bank's customer base has been primarily derived from Pickens County, South
Carolina and the northwest section of Anderson County, South Carolina. Bank of
Anderson's primary service area is Anderson County, South Carolina, more
particularly, the City of Anderson. Seneca National Bank derives most of its
customer base from the City of Seneca and surrounding Oconee County, South
Carolina.
The Banks compete with several major banks, which dominate the
commercial banking industry in their service areas and in South Carolina
generally. In addition, the Banks compete with other community banks, savings
institutions and credit unions. In Pickens County, there are twenty-eight (28)
competitor bank branches, one (1) savings institution branch, and two (2) credit
union branches. In Anderson County there are fifty-nine (59) competitor bank
branches and six (6) credit union branches. In Oconee County, there are sixteen
(16) competitor bank branches, four (4) savings institution branches, and one
(1) credit union branch. The Peoples National Bank has approximately 13.87% of
the FDIC insured deposits in Pickens County. The Peoples National Bank and Bank
of Anderson, combined, have approximately 6.64% of the FDIC insured deposits in
Anderson County. Seneca National Bank has approximately 5.09% of the FDIC
insured deposits in Oconee County.
Many competitor institutions have substantially greater resources and
higher lending limits than the Banks, and they perform certain functions for
their customers, including trust services and investment banking services, which
none of the Banks is equipped to offer directly. However, the Banks do offer
some of these services through correspondent banks. In addition to commercial
banks, savings institutions and credit unions, the Banks compete for deposits
and loans with other financial intermediaries and investment alternatives,
including, but not limited to, mortgage companies, captive finance companies,
money market mutual funds, brokerage firms, insurance companies, governmental
and corporation bonds and other securities. Several of these non-bank
competitors are not subject to the same regulatory restrictions as the Company
and its subsidiaries and many have substantially greater resources than the
Company.
The extent to which other types of financial institutions compete with
commercial banks has increased significantly within the past few years as a
result of federal and state legislation that has, in several respects,
deregulated financial institutions. The full impact of existing legislation and
subsequent laws that deregulate the financial services industry cannot be fully
assessed or predicted.
4
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER'S EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance
sheets of the Company for the years ended December 31, 2002, 2001 and 2000. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Assets
Cash and Due from Banks ....................................... $ 11,721 $ 8,768 $ 7,451
Taxable Securities ............................................ 57,915 31,873 33,794
Tax-Exempt Securities ......................................... 3,419 3,468 3,972
Federal Funds Sold ............................................ 20,454 9,274 6,252
Mortgage loans held for sale .................................. 28,572 26,167 12,777
Gross Loans ................................................... 229,523 197,098 166,621
Less: Loan Loss Reserve ...................................... 2,649 2,184 1,816
-------- -------- --------
Net Loans ..................................................... 226,874 194,914 164,805
-------- -------- --------
Other Assets .................................................. 13,807 12,790 11,034
-------- -------- --------
Total Assets .................................................. $362,762 $287,254 $240,085
======== ======== ========
Liabilities and
Shareholders' Equity
Noninterest-bearing Deposits .................................. $ 40,778 $ 32,765 $ 26,997
Interest-bearing Deposits:
Interest Checking ......................................... 32,657 28,638 24,738
Savings Deposits .......................................... 7,487 5,726 5,149
Money Market .............................................. 57,897 23,714 26,085
Certificates of Deposit ................................... 140,730 124,605 96,162
Individual Retirement Accounts ............................ 17,732 14,355 12,391
-------- -------- --------
Total Interest-bearing Deposits ............................... 256,503 197,038 164,525
-------- -------- --------
Short-term Borrowings ......................................... 27,150 22,871 21,194
Long-term Borrowings .......................................... 5,000 5,000 833
Other Liabilities ............................................. 3,079 2,445 1,690
-------- -------- --------
Total Liabilities ......................................... 332,510 260,119 215,239
-------- -------- --------
Common Stock .................................................. 5,615 5,273 4,997
Additional paid-in capital .................................... 23,275 20,455 18,736
Retained earnings ............................................. 1,362 1,407 1,113
-------- -------- --------
Total Shareholders' Equity ................................ 30,252 27,135 24,846
-------- -------- --------
Total Liabilities and Shareholders' Equity .................... $362,762 $287,254 $240,085
======== ======== ========
5
The following is a presentation of an analysis of the net interest
income of the Company for the years ended December 31, 2002, 2001 and 2000 with
respect to each major category of interest-earning assets and each major
category of interest-bearing liabilities:
Year Ended December 31, 2002
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ----------- ----------
Securities - Taxable ............................................ $ 57,915 $ 2,647 4.57%
Tax-Exempt ......................................... 3,419 151 6.69%*
Federal Funds Sold .............................................. 20,454 375 1.83%
Mortgage loans held for sale .................................... 28,572 1,069 3.74%
Gross Loans ..................................................... 229,523 16,364 7.13%
-------- --------
Total Earning Assets ........................................ $339,883 $ 20,606 6.09%*
======== ========
Liabilities
Interest Checking ............................................... $ 32,657 $ 231 0.71%
Savings Deposits ................................................ 7,487 43 0.57%
Money Market .................................................... 57,897 1,422 2.46%
Certificates of Deposit ......................................... 140,730 4,777 3.39%
Individual Retirement Accounts .................................. 17,732 751 4.24%
-------- --------
256,503 7,224
Short-term Borrowings ........................................... 27,150 532 1.96%
Long-term Borrowings ............................................ 5,000 241 4.82%
-------- --------
Total Interest-bearing Liabilities .......................... $288,653 $ 7,997 2.77%
======== ========
Excess of interest-earning assets
over interest-bearing liabilities ............................. $ 51,230
========
Net interest income ............................................. $ 12,609
========
Interest rate spread ............................................ 3.32%*
Net yield on earning assets ..................................... 3.73%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest earning assets is calculated by dividing net
interest earnings by total interest earning assets.
6
Year Ended December 31, 2001
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ----------- ----------
Securities - Taxable ............................................ $ 31,873 $ 1,918 6.02%
Tax-Exempt ......................................... 3,468 167 7.30%*
Federal Funds Sold .............................................. 9,274 420 4.53%
Mortgage loans held for sale .................................... 26,167 1,292 4.94%
Gross Loans ..................................................... 197,098 16,416 8.33%
-------- --------
Total Earning Assets ........................................ $267,880 $ 20,213 7.58%*
======== ========
Liabilities
Interest Checking ............................................... $ 28,638 $ 430 1.50%
Savings Deposits ................................................ 5,726 80 1.40%
Money Market .................................................... 23,714 770 3.25%
Certificates of Deposit ......................................... 124,605 7,074 5.68%
Individual Retirement Accounts .................................. 14,355 872 6.07%
-------- --------
197,038 9,226
Short-term Borrowings ........................................... 22,871 847 3.70%
Long-term Borrowings ............................................ 5,000 241 4.82%
-------- --------
Total Interest-bearing Liabilities .......................... $224,909 $ 10,314 4.59%
======== ========
Excess of interest-earning assets
over interest-bearing liabilities ............................. $ 42,971
========
Net interest income ............................................. $ 9,899
========
Interest rate spread ............................................ 2.99%*
Net yield on earning assets ..................................... 3.73%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest earning assets is calculated by dividing net
interest earnings by total interest earning assets.
7
Year Ended December 31, 2000
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ----------- ----------
Securities - Taxable ............................................ $ 33,794 $ 2,086 6.17%
Tax-Exempt ......................................... 3,972 195 7.44%*
Federal Funds Sold .............................................. 6,252 397 6.35%
Mortgage loans held for sale .................................... 12,777 659 5.16%
Gross Loans ..................................................... 166,621 15,498 9.30%
-------- --------
Total Earning Assets ........................................ $223,416 $ 18,835 8.48%*
======== ========
Liabilities
Interest Checking ............................................... $ 24,738 $ 519 2.10%
Savings Deposits ................................................ 5,149 92 1.79%
Money Market .................................................... 26,085 1,136 4.35%
Certificates of Deposit ......................................... 96,162 5,772 6.00%
Individual Retirement Accounts .................................. 12,391 737 5.95%
-------- --------
164,525 8,256
Short-term Borrowings ........................................... 21,194 984 4.64%
Long-term Borrowings ............................................ 833 34 4.08%
-------- --------
Total Interest-bearing Liabilities .......................... $186,552 $ 9,274 4.97%
======== ========
Excess of interest-earning assets
over interest-bearing liabilities ............................. $ 36,864
========
Net interest income ............................................. $ 9,561
========
Interest rate spread ............................................ 3.51%*
Net yield on earning assets ..................................... 4.32%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest earning assets is calculated by dividing net
interest earnings by total interest earning assets.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect of changes in average balances (volume) and rates on
interest income, interest expense and net interest income, for the periods
indicated, is shown below. The effect of a change in average balance has been
determined by applying the average rate in the earlier period to the change in
average balance in the later period, as compared with the earlier period. The
effect of a change in the average rate has been determined by applying the
average balance in the earlier period to the change in the average rate in the
later period, as compared with the earlier period.
8
Year Ended December 31,
2002 compared to 2001
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable .................................................. $ 1,276 $ (547) $ 729
Tax-Exempt ............................................... (2) (14) (16)
Federal Funds Sold ............................................ 305 (350) (45)
Net Loans ..................................................... 2,552 (2,828) (276)
------- ------- -------
Total Interest Income ......................................... 4,131 (3,739) 392
------- ------- -------
Interest paid on:
Interest Checking ........................................ 54 (253) (199)
Savings Deposits ......................................... 19 (56) (37)
Money Market ............................................. 879 (227) 652
Certificates of Deposit .................................. 826 (3,123) (2,297)
Individual Retirement Accounts ........................... 178 (299) (121)
------- ------- -------
1,956 (3,958) (2,002)
Short-term Borrowings ......................................... 137 (452) (315)
Long-term Borrowings .......................................... 0 0 0
------- ------- -------
Total Interest Expense ........................................ 2,093 (4,410) (2,317)
------- ------- -------
Change in Net Interest Income ................................. $ 2,038 $ 671 $ 2,709
======= ======= =======
Note: Changes that are not solely attributable to volume or rate have been
allocated to volume and rate on a pro-rata basis.
As reflected in the table above, most of the increase in 2002 net
interest income of $2,709,000 was primarily due to the change in volume.
Substantially all the $392,000 increase in interest income was related to the
volume growth in the loan portfolios. In reviewing the Company's deposits,
substantially all the $2,317,000 decrease in interest expense was due to the
decrease in rates paid on Certificates of Deposits.
9
Year Ended December 31,
2001 compared to 2000
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable .................................................. $ (113) $ (55) $ (168)
Tax-Exempt ............................................... (24) (4) (28)
Federal Funds Sold ............................................ 157 (134) 23
Net Loans ..................................................... 3,634 (2,083) 1,551
------- ------- -------
Total Interest Income ......................................... 3,654 (2,276) 1,378
------- ------- -------
Interest paid on:
Interest Checking ........................................ 73 (162) (89)
Savings Deposits ......................................... 10 (21) (11)
Money Market ............................................. (118) (248) (366)
Certificates of Deposit .................................. 1,629 (327) 1,302
Individual Retirement Accounts ........................... 120 15 135
------- ------- -------
1,714 (743) 971
Short-term Borrowings ......................................... 73 (211) (138)
Long-term Borrowings .......................................... 202 5 207
------- ------- -------
Total Interest Expense ........................................ 1,989 (949) 1,040
------- ------- -------
Change in Net Interest Income ................................. $ 1,665 $(1,327) $ 338
======= ======= =======
Note: Changes that are not solely attributable to volume or rate have been
allocated to volume and rate on a pro-rata basis.
As reflected in the table above, most of the increase in 2001 net
interest income of $338,000 was primarily due to the change in volume.
Substantially all the $1,378,000 increase in interest income was related to the
volume growth in the loan portfolios. In reviewing the Company's deposits,
substantially all the $1,040,000 increase in interest expense was due to the
increases in the volume of Certificates of Deposits.
LOAN PORTFOLIO
The Company engages, through the Banks, in a full complement of lending
activities, including commercial, consumer, installment and real estate loans.
Commercial lending is directed principally towards businesses whose
demands for funds fall within each Bank's legal lending limits and which are
potential deposit customers of the Banks. This category of loans includes loans
made to individuals, partnerships or corporate borrowers, and which are obtained
for a variety of business purposes. Particular emphasis is placed on loans to
small and medium-sized businesses. The Company's commercial loans are spread
throughout a variety of industries, with no industry or group of related
10
industries accounting for a significant portion of the commercial loan
portfolio. Commercial loans are made on either a secured or unsecured basis.
When taken, security consists of liens on inventories, receivables, equipment,
and furniture and fixtures. Unsecured commercial loans are generally short-term
with emphasis on repayment strengths and low debt to worth ratios. At December
31, 2002, approximately $16,225,000, or 46%, of commercial loans were unsecured
compared to approximately $12,482,000 or 46% at December 31, 2001.
The Company's real estate loans are primarily construction loans and
loans secured by real estate, both commercial and residential, located within
the Company's trade areas. The Company does not actively pursue long-term, fixed
rate mortgage loans for retention in its loan portfolio. The Banks have mortgage
loan originators who originate and package loans that are pre-sold at
origination to third parties. The Company also purchases mortgage loans through
a wholesale mortgage loan division of The Peoples National Bank that are also
pre-sold at origination to third parties. These loans are classified as loans
held for sale for reporting purposes. In 2002, the Company originated
$400,545,000, and sold $386,444,000 in mortgage loans held for sale.
The Banks' direct consumer loans consist primarily of secured
installment loans to individuals for personal, family and household purposes,
including automobile loans to individuals, and pre-approved lines of credit.
Management believes the loan portfolio is adequately diversified. Real
estate lending (both mortgage and construction loans) continues to be the
largest component of the loan portfolio, representing $190,631,000 or 62% of
total loans at December 31, 2002, compared to $162,425,000 or 64% at year end
2001. There are no foreign loans and few agricultural loans. The following table
presents various categories of loans contained in the Company's loan portfolio
and the total amount of all loans at December 31, 2002, 2001, 2000, 1999 and
1998.
Loan Portfolio Composition
(dollars in thousands)
December 31,
------------
Type of Loan 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Commercial and Industrial .......................... $ 35,548 $ 26,997 $ 24,084 $ 25,677 $ 13,812
Real Estate ........................................ 190,631 162,425 141,516 101,276 62,099
Consumer Loans ..................................... 24,308 23,114 19,426 14,964 12,106
Mortgage loans held for sale ....................... 55,026 40,925 16,992 6,662 0
-------- -------- -------- -------- --------
Subtotal ...................................... 305,513 253,461 202,018 148,579 88,017
Less allowance for loan losses .................. 2,850 2,288 2,023 1,581 1,093
-------- -------- -------- -------- --------
Net Loans .......................................... $302,663 $251,173 $199,995 $146,998 $ 86,924
======== ======== ======== ======== ========
Percentage of Loans in Category
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Commercial and Industrial ..................... 11.64% 10.65% 11.92% 17.28% 15.69%
Real Estate ................................... 62.40% 64.08% 70.05% 68.16% 70.55%
Consumer Loans ................................ 7.96% 9.12% 9.62% 10.07% 13.76%
Mortgage loans held for sale .................. 18.00% 16.15% 8.41% 4.49% 0.00%
------ ------ ------ ------ ------
Total .................................... 100.00% 100.00% 100.00% 100.00% 100.00%
11
The following is a presentation of an analysis of maturities of loans
as of December 31, 2002:
Loan Maturity and Interest Sensitivity
(dollars in thousands)
Due After 1
Due in 1 Year up to Due after
Type of Loans Year or less 5 years 5 years Total
------------ ------- ------- ----
Commercial and Industrial .......................... $ 12,953 $ 18,348 $ 4,247 $ 35,548
Real Estate ........................................ 69,461 98,396 22,774 190,631
Consumer Loans ..................................... 8,857 12,547 2,904 24,308
Mortgage Loans Held for Sale ....................... 55,026 0 0 55,026
-------- -------- -------- --------
Total .......................................... $146,297 $129,291 $ 29,925 $305,513
All loans are recorded according to original terms, and demand loans,
overdrafts, mortgage loans held for sale and loans having no stated repayment
terms or maturity are reported as due in one year or less.
At December 31, 2002, the amount of loans due after one year with
predetermined interest rates totaled approximately $102,270,000 while the amount
of loans due after one year with floating interest rates totaled approximately
$56,946,000.
The following table presents information on non-performing loans and
real estate acquired in settlement of loans:
December 31,
------------
(dollars in thousands)
Non-performing Assets 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Non-performing loans:
Non-accrual loans ........................... $ 926 $ 993 $ 993 $ 628 $ 617
Past due 90 days or more .................... 5 0 108 0 0
Other restructured loans .................... 0 8 67 150 8
------ ------ ------ ------ ------
Total non-performing loans .................... $ 931 $1,001 $1,168 $ 778 $ 625
Real estate acquired in
settlement of loans ......................... 193 950 478 219 101
------ ------ ------ ------ ------
Total non-performing assets ................... $1,124 $1,951 $1,646 $ 997 $ 726
====== ====== ====== ====== ======
Non-performing assets as a
Percentage of loans and
other real estate ........................... 0.37% 0.77% 0.82% 0.68% 0.83%
Allowance for loan losses as
a percentage of non-
performing loans ............................ 306% 229% 173% 203% 175%
In an effort to more accurately reflect the status of the Company's
loan portfolio, accrual of interest is discontinued on a loan that displays
certain problem indications, which might jeopardize full and timely collection
of principal and/or interest. The Company's Loan Policy drives the
administration of problem loans. Through daily review by credit managers,
monthly reviews of exception reports, and ongoing analysis of asset quality
trends, economic and business factors, loan monitoring is managed. Credit
management activities, including specific reviews of new large credits, are
12
reviewed by the Directors' Loan Committees of each banking subsidiary, which
meet monthly.
With respect to the loans accounted for on a non-accrual basis and
restructured loans, the gross interest income that would have been recorded if
the loans had been current in accordance with their original terms and
outstanding throughout the period or since origination amounts to $76,000 for
the year ended December 31, 2002. The amount of interest on those loans that was
included in net income for 2002 amounts to $27,000.
As of December 31, 2002, there were no potential problem loans
classified for regulatory purposes as doubtful, substandard or special mention
that have not been disclosed above, which (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources of the Company, or (ii)
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
The Company accounts for impaired loans in accordance with SFAS No. 114
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114, as amended by
SFAS No. 118, requires that impaired loans be measured based on the present
value of expected future cash flows or the underlying collateral values as
defined in the pronouncement. The Company complies with the provisions of SFAS
No.114, as necessary, when determining the adequacy of the allowance for loan
losses. When the ultimate collectability of an impaired loan's principal is in
doubt, wholly or partially, all cash receipts are applied to principal. When
this doubt does not exist, cash receipts are applied under the contractual terms
of the loan agreement. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent that
any interest has been foregone. Further cash receipts are recorded as recoveries
on any amounts previously charged off. At December 31, 2002 and 2001, there was
no recorded investment in impaired loans.
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
The purpose of the Company's allowance for loan losses is to absorb
loan losses that occur in the loan portfolios of its bank subsidiaries.
Management determines the adequacy of the allowance quarterly and considers a
variety of factors in establishing a level of the allowance for losses and the
related provision, which is charged to expense. Factors considered in
determining the adequacy of the reserve for loan losses include: historical loan
losses experienced by the Company, current economic conditions affecting a
borrower's ability to repay, the volume of outstanding loans, the trends in
delinquent, non-accruing and potential problem loans, and the quality of
collateral securing non-performing and problem loans. By considering the above
factors, management attempts to determine the amount of reserves necessary to
provide for inherent losses in the loan portfolios of its subsidiaries, however,
the amount of reserves may change in response to changes in the financial
13
condition of larger borrowers, changes in the Company's local economies and
expected industry trends.
The allowance for loan losses represents management's estimate of the
amount of future losses inherent in the loan portfolios of its bank
subsidiaries. While it is the Company's policy to charge-off in the current
period loans in which a loss is considered probable, there are inherent losses
that cannot be quantified precisely or attributed to particular loans or classes
of loans. Because the state of the economy, industry trends, and conditions
affecting individual borrowers may affect the amount of such losses,
management's estimate of the appropriate amount of the allowance is necessarily
approximate and imprecise. The Company and its bank subsidiaries are also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance for loan losses in
comparison to a group of peer companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies
predominantly on its ongoing review of the loan portfolio, including historical
charge-offs, which is undertaken both to ascertain whether there are probable
losses that must be charged off and to assess the risk characteristics of the
portfolio in the aggregate. The Company utilizes the services of an outside
consultant to perform quality reviews of its loan portfolio. The review
considers the judgments and estimates of management and also those of bank
regulatory agencies that review the loan portfolio as part of their regular
examination process. The Comptroller of the Currency, as part of its routine
examination process of various national banks, including the Banks, may require
additions to the allowance for loan losses based upon the regulators' credit
evaluations differing from those of management. The Company's management
believes they have in place the controls and personnel to adequately monitor its
loan portfolios.
Management does not segregate the allowance by loan category and the
entire allowance is available to absorb losses from all loan categories.
At December 31, 2002 the allowance for loan losses was $2,850,000, or
1.14% of gross outstanding loans (excluding mortgage loans held for sale),
compared to $2,288,000, or 1.08% of gross outstanding loans (excluding mortgage
loans held for sale), at December 31, 2001. During fiscal 2002, the Company
experienced net charge-offs of $382,000, or 0.15% of average loans, compared to
net charge-offs of $627,000, or 0.28% of average loans in fiscal 2001. Consumer
loan net charge-offs were $69,000 in 2002 compared to net charge-offs of
$105,000 in 2001. Commercial loan net charge-offs were $272,000 in 2002 compared
to net charge-offs of $403,000 in 2001. Mortgage loan net charge-offs were
$41,000 in 2002 compared to net charge-offs of $119,000 in 2001.
The Company made provisions for loan losses of $944,000 in fiscal 2002
compared to $892,000 for fiscal 2001.
14
In fiscal 2002 and 2001, The Peoples National Bank made provisions for
loan losses of $550,000 and $621,000, respectively. In fiscal 2002 and 2001, The
Peoples National Bank recorded net charge-offs of $97,000 and $590,000,
respectively. In fiscal 2002, Bank of Anderson made provisions for loan losses
of $130,000 compared to $150,000 in 2001. In fiscal 2002 and 2001, Bank of
Anderson recorded net charge-offs of $12,000 and $30,000, respectively. Seneca
National Bank made provisions for loan losses of $264,000 in fiscal 2002
compared to $121,000 in 2001. In fiscal 2001 and 2000 Seneca National Bank
recorded net charge-offs of $273,000 and $7,000 respectively. The substantial
increase in charge-offs at Seneca National Bank was primarily due to a problem
with one of its credits. Management took total charges of approximately $245,000
during 2002 due to the apparent uncollectibility of this single credit.
Management continues to closely monitor the levels of non-performing
and potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of non-performing and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision and
allowance for loan losses. This would likely decrease net income.
The following table summarizes the allowance for loan loss balances of
the Company at the beginning and end of each period, changes in the allowance
arising from charge-offs and recoveries by category and additions to the
allowance, which have been charged to expense.
Analysis of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Balance at beginning of year ....................... $2,288 $2,023 $1,581 $1,093 $ 987
Charge-offs:
Commercial and industrial ..................... 277 406 104 15 30
Real estate ................................... 47 120 17 50 56
Consumer ...................................... 86 129 127 80 53
------ ------ ------ ------ ------
410 655 248 145 139
Recoveries:
Commercial and industrial ..................... 5 3 3 17 3
Real estate ................................... 6 1 1 0 0
Consumer ...................................... 17 24 5 45 48
------ ------ ------ ------ ------
28 28 9 62 51
------ ------ ------ ------ ------
Net Charge-offs .................................... 382 627 239 83 88
Provision for loan losses .......................... 944 892 681 571 194
------ ------ ------ ------ ------
Balance at end of year ............................. $2,850 $2,288 $2,023 $1,581 $1,093
====== ====== ====== ====== ======
15
The following table sets forth ratios of net charge-offs or the
allowance for loan losses to the items stated:
Asset Quality Ratios:
Years Ended December 31,
------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Net charge-offs to average loans ................... 0.17% 0.32% 0.14% 0.07% 0.11%
outstanding during the year
Net charge-offs to total loans ..................... 0.15% 0.30% 0.13% 0.06% 0.10%
outstanding at end of year
Allowance for loan losses to ....................... 1.24% 1.16% 1.21% 1.38% 1.38%
average loans
Allowance for loan losses to ....................... 1.14% 1.08% 1.09% 1.11% 1.24%
total loans
Net charge-offs to allowance for ................... 13.40% 27.40% 11.81% 5.25% 8.07%
loan losses
Net charge-offs to provision for ................... 40.47% 70.29% 35.10% 14.54% 45.40%
loan losses
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans are charged against the allowance in the
period in which management determines it is more likely than not that the full
amounts of such loans have become uncollectable. Recoveries of previously
charged-off loans are credited to the allowance.
Management considers the allowance for loan losses adequate to cover
inherent losses on the loans outstanding at December 31, 2002. In the opinion of
management, there are no material risks or significant loan concentrations in
the present portfolio. It must be emphasized, however, that the determination of
the allowance for loan losses using the Company's procedures and methods rests
upon various judgments, estimates and assumptions about present and future
economic conditions and other factors affecting loans. No assurance can be given
that the Company will not in any particular period sustain loan losses which are
sizable in relation to the amount reserved or that subsequent evaluation of the
loan portfolio, in light of conditions and factors then prevailing, will not
require significant changes in the allowance for loan losses or future charges
to earnings. The allowance for loan losses is also subject to review and
approval by various regulatory agencies through their periodic examinations of
the Company's subsidiaries. Such examinations could result in required changes
to the allowance for loan losses.
INVESTMENTS
The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities and in certain obligations of states and municipalities. The
Banks enter into Federal funds transactions with their principal correspondent
banks and usually act as net sellers of such funds. The sale of Federal funds
amounts to a short-term loan from one bank to another bank.
16
The following table summarizes the book and market values of investment
securities held by the Company at December 31, 2002, 2001 and 2000.
Securities Composition
(dollars in thousands)
2002 2001 2000
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
AVAILABLE FOR SALE
Obligations of U.S. Treasury and
other U.S. Government agencies ............. $79,125 $80,163 $30,076 $30,339 $31,767 $31,673
State and Political Subdivisions ............... - - - - - -
------- ------- ------- ------- ------- -------
Total Available for Sale ....................... $79,125 $80,163 $30,076 $30,339 $31,767 $31,673
------- ------- ------- ------- ------- -------
HELD FOR INVESTMENT
State and Political Subdivisions ............... $ 4,123 $ 4,248 $ 3,339 $ 3,417 $ 3,754 $ 3,794
------- ------- ------- ------- ------- -------
Other Investments .............................. 1,884 1,884 1,815 1,815 1,088 1,088
------- ------- ------- ------- ------- -------
Total ................................. $85,132 $86,295 $35,230 $35,571 $36,609 $36,555
======= ======= ======= ======= ======= =======
The Company accounts for investments in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investments classified as available
for sale are carried at market value. Unrealized holding gains or losses are
reported as a component of shareholder's equity net of deferred income taxes in
comprehensive income. Securities classified as held for investment are carried
at cost, adjusted for the amortization of premiums and the accretion of
discounts. In order to qualify as held for investment, the Company must have the
ability to hold the securities to maturity. The Company has no trading
securities.
At December 31, 2002 the Company's total investment portfolio
classified as available for sale had a book value of $79,125,000 and a market
value of $80,163,000 for an unrealized net gain of $1,038,000.
17
The following table indicates the respective maturities and weighted
average yields of securities as of December 31, 2002:
Securities Maturity Schedule
(dollars in thousands)
Amortized Weighted
Cost Average Yield**
---- ---------------
AVAILABLE FOR SALE
Obligations of U.S. Treasury and other Government agencies:
0-1 Year ........................................................................ $ 4,422 4.85%
1-5 Years ....................................................................... 53,059 3.42%
5-10 Years ...................................................................... 11,225 4.47%
Greater than 10 Years ........................................................... 10,419 5.77%
-------
$79,125 4.00%
=======
HELD FOR INVESTMENT
State and political subdivisions:
0-1 Year ........................................................................ $ 375 7.58%*
1-5 Years ....................................................................... 2,327 6.23%*
5-10 Years ...................................................................... 1,321 4.76%*
Greater than 10 Years ........................................................... 100 6.35%*
-------
Total .................................................................. $ 4,123 6.01%*
=======
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
** Weighted average yields on available for sale securities are based on
amortized cost.
DEPOSITS
The Company offers a full range of interest-bearing and
noninterest-bearing accounts, including commercial and retail checking accounts,
negotiable orders of withdrawal ("NOW") accounts, public funds accounts, money
market accounts, individual retirement accounts, including Keogh plans with
stated maturities, regular interest-bearing statement savings accounts and
certificates of deposit with fixed rates and a range of maturity date options.
The sources of deposits are residents, businesses and employees of businesses
within the Company's market areas obtained through the personal solicitation of
the Company's officers and directors, direct mail solicitations and
advertisements published in the local media. From time to time the Company
garners deposits from sources outside of its normal trade areas through the
Internet or through brokers. These deposits are short-term in nature and are
used to manage the Company's short-term liquidity position. These brokered
deposits are generally more volatile than deposits acquired in the local market
areas. At December 31, 2002 and 2001, Internet deposits totaled approximately
$990,000 and $7,681,000, respectively. Brokered deposits totaled $5,100,000 at
December 31, 2001 and there were no brokered deposits at December 31, 2002.
During 2002 the Company reduced its dependence on these nontraditional deposits
replacing them with core deposits obtained through several deposit gathering
campaigns. The Company pays competitive interest rates on interest checking,
savings, money market, time and individual retirement accounts. In addition, the
Banks have implemented a service charge fee schedule competitive with other
financial institutions in the Banks' market areas, covering such matters as
maintenance fees on checking accounts, per item processing fees on checking
accounts, returned check charges and the like.
18
The Company's average deposits in 2002 were $297,281,000 compared to
$229,803,000 the prior year, an increase of $67,478,000 or 29%. The increase in
average deposits in 2002 is attributable to new deposits generated by all Banks,
but particularly to aggressive deposit campaigns at Bank of Anderson and Seneca
National Bank.
In 2002 the average noninterest-bearing deposits increased
approximately $8,013,000 or 24%, average interest-bearing checking accounts
increased $4,019,000 or 14%, average savings accounts increased $1,761,000 or
31%, average money market accounts increased $34,183,000 or 144%, average
certificates of deposit increased $16,125,000 or 13%, and individual retirement
accounts increased $3,377,000 or 24%. The significant growth in deposits is
attributable to new deposits generated by Bank of Anderson and Seneca National
Bank in 2002, coupled with continued internal deposit growth at The Peoples
National Bank. Competition for deposit accounts is primarily based on the
interest rates paid, service charge structure, location convenience and other
services offered.
The following table presents, for the years ended December 31, 2002,
2001 and 2000, the average amount of and average rate paid on each of the
following deposit categories:
Deposit Category Average Amount Average Rate Paid
-------------- -----------------
(dollars in thousands)
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Noninterest-bearing Deposits ...................... $ 40,778 $ 32,765 $ 26,977 - - -
Interest-bearing Deposits
Interest Checking ............................. 32,657 28,638 24,738 0.71% 1.50% 2.10%
Savings Deposits .............................. 7,487 5,726 5,149 0.57% 1.40% 1.79%
Money Market .................................. 57,897 23,714 26,085 2.46% 3.25% 4.35%
Certificates of Deposit ....................... 140,730 124,605 96,162 3.39% 5.68% 6.00%
Individual Retirement Accounts ................ 17,732 14,355 12,391 4.24% 6.07% 5.95%
The Company's core deposit base consists of consumer time deposits less
than $100,000, savings accounts, NOW accounts, money market accounts and
checking accounts. Although such core deposits are becoming increasingly
interest-sensitive for both the Company and the industry as a whole, such core
deposits continue to provide the Company with a large and stable source of
funds. Core deposits as a percentage of average total deposits averaged
approximately 78% in 2002 compared to approximately 76% in 2001. The Company
closely monitors its reliance on certificates of deposits greater than $100,000,
which are generally considered less stable and less reliable than core deposits.
Virtually all of the certificates of deposit over $100,000 are held by local
customers. In 2001 the Company had $5,100,000 in brokered deposits included in
total certificates of deposits. There were no brokered deposits at December 31,
2002.
19
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities as of December 31,
2002:
Time Certificates of Deposit
----------------------------
(dollars in thousands)
3 months or less ................ $ 27,441
4-6 months ...................... 7,900
7-12 months ..................... 16,408
Over 12 months .................. 27,650
-------------------
Total .................. $ 79,399
===================
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity
for the years ended December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
----- ---- ----
Return on average assets ...................... 1.21% 1.07% 1.01%
Return on average equity ...................... 14.49% 11.31% 9.78%
Average equity to average assets ratio ........ 8.34% 9.45% 10.35%
Dividend payout ratio (1) ..................... 17.98% 18.89% 18.26%
(1) Includes cash-in-lieu of fractional shares paid on 5% stock dividend.
SHORT-TERM BORROWINGS
The following table summarizes the Company's short-term borrowings for
the years ended December 31, 2002, 2001 and 2000. These borrowings consist of
federal funds purchased and securities sold under agreements to repurchase,
which generally mature on a one-business-day basis.
Maximum
Outstanding Annual Average Interest
at any Average Interest Year End Rate at
Year Ended December 31, Month End Balance Rate Balance Year End
--------- ------- ---- ------- --------
2002:
Federal funds purchased .............................. $ 4,363,000 $ 364,000 1.67% $ 0 1.64%
Securities sold under repurchase agreements .......... $35,331,000 $25,597,000 2.44% $35,331,000 1.52%
2001:
Federal funds purchased .............................. $ 2,000,000 $ 479,000 3.82% $ 0 2.14%
Securities sold under repurchase agreements .......... $20,646,000 $17,165,000 3.84% $20,646,000 2.49%
2000:
Federal funds purchased .............................. $ 3,660,000 $ 888,000 4.08% $ 3,660,000 6.85%
Securities sold under repurchase agreements .......... $32,613,000 $17,435,000 4.36% $14,157,000 4.27%
MARKET RISK - INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the
fair value of financial instruments due to a change in interest rates, exchange
rate and equity prices. The Company's primary risk is interest rate risk.
20
The primary objective of Asset/Liability Management at the Company is
to manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles in order to maintain adequate liquidity.
This is achieved by maintaining the proper balance of rate-sensitive earning
assets and rate-sensitive earning liabilities. The relationship of
rate-sensitive earning assets to rate-sensitive liabilities is the principal
factor in projecting the effect that fluctuating interest rates will have on
future net interest income. Rate-sensitive assets and interest-bearing
liabilities are those that can be repriced to current market rates within a
relatively short time period. Management monitors the rate sensitivity of
earning assets and interest-bearing liabilities over the entire life of these
instruments, but places particular emphasis on the first year. At December 31,
2002, approximately 40% of the Company's interest-earning assets were scheduled
to reprice or to mature within one year compared to approximately 82% of
interest-bearing liabilities.
The following table shows the Company's rate-sensitive position at
December 31, 2002 as measured by gap analysis (the difference between the
earning asset and interest-bearing liability amounts scheduled to be repriced to
current market rates in subsequent periods). Over the next 12 months
approximately $120.5 million more interest-bearing liabilities than earning
assets can be repriced to current market rates at least once. As a result, at
December 31, 2002 the ratio of rate-sensitive assets to rate-sensitive
liabilities within the one-year time frame was 57%, indicating a
"liability-sensitive" position.
The following table sets forth the Company's interest sensitivity
position as of December 31, 2002.
Interest Sensitivity Analysis
(dollars in thousands)
Within 3 4-12 Over 5
Months months 1-5 years Years Total
------ ------ --------- ----- -----
INTEREST-EARNING ASSETS:
Federal Funds Sold ................................ $ 2,635 $ 0 $ 0 $ 0 $ 2,635
Investment Securities ............................. 275 6,845 54,718 24,457 86,295
Interest Bearing Deposits in Other Banks .......... 33 0 0 0 33
Total loans ....................................... 110,176 38,407 126,939 29,991 305,513
--------- --------- --------- --------- ---------
Total Interest-Earning Assets ....................... $ 113,119 $ 45,252 $ 181,657 $ 54,448 $ 394,476
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Interest Checking ............................... 0 34,631 0 0 34,631
Savings Deposits ................................ 0 8,545 0 0 8,545
Money Market .................................... 67,002 0 0 0 67,002
Time Deposits ................................... 57,596 63,773 55,792 221 177,382
Other Borrowings ................................ 47,331 0 5,000 0 52,331
--------- --------- --------- --------- ---------
Total Interest-Bearing Liabilities .................. 171,929 106,949 60,792 221 339,891
--------- --------- --------- --------- ---------
Interest sensitive gap .............................. $ (58,810) $ (61,697) $ 120,865 $ 54,227
Cumulative interest sensitive gap ................... $ (58,810) $(120,507) $ 358 $ 54,585
RSA/RSL ............................................. 66% 42%
Cumulative RSA/RSL .................................. 66% 57%
RSA - rate sensitive assets; RSL - rate sensitive liabilities
21
Asset/liability management is the process by which the Company monitors
and controls the mix and maturities of its assets and liabilities. The essential
purposes of asset/liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest-sensitive assets and
liabilities. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Company seeks to invest the largest portion of its assets in commercial,
consumer and real estate loans.
Each of the Company's banking subsidiaries has established an
Asset/Liability Management Committee. These committees use a variety of tools to
analyze interest rate sensitivity, including a static gap presentation and a
simulation model. A "static gap" presentation reflects the difference between
total interest-sensitive assets and liabilities within certain time periods.
While the static gap is a widely used measure of interest sensitivity, it is
not, in management's opinion, the best indicator of a company's sensitivity
position. It presents a static view of the timing of maturities and repricing
opportunities, without taking into consideration that changes in interest rates
do not affect all assets and liabilities equally. For example, rates paid on a
substantial portion of savings and core time deposits may contractually change
within a relatively short time frame, but those rates are significantly less
interest-sensitive than market-based rates such as those paid on non-core
deposits. Accordingly, a liability-sensitive gap position is not as indicative
of a company's true interest sensitivity as would be the case for an
organization which depends to a greater extent on purchased funds to support
earning assets. Other significant incremental borrowing cost and the volume and
mix of earning asset growth would also impact net interest income. Accordingly,
the Company's banking subsidiaries also use an asset/liability simulation model
that estimates balance sheet and earnings variations under different interest
rate environments to measure and manage interest rate risk.
It is the responsibility of the Committees to establish parameters for
various interest risk measures, to set strategies to control interest rate risk
within those parameters, to maintain adequate and stable net interest income,
and to direct the implementation of tactics to facilitate achieving their
objectives.
Management is not aware of any known events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital resources or results of operations. Management is not aware
of any current recommendations by the regulatory authorities, which if they were
to be implemented, would have a material effect on the Company's liquidity,
capital resources or results of operations.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company's liquidity position is primarily dependent upon its need
to respond to short-term demand for funds caused by withdrawals from deposit
22
accounts and upon the liquidity of its assets. The Company's primary liquidity
sources include cash and due from banks, federal funds sold and "securities
available for sale". In addition, the Company (through the Banks) has the
ability, on a short-term basis, to borrow funds from the Federal Reserve System
and to purchase federal funds from other financial institutions. At December 31,
2002 the Banks, in aggregate, had unused federal funds lines of credit totaling
$17,750,000 with correspondent banks. The Banks are also members of the Federal
Home Loan Bank System and have the ability to borrow both short- and long-term
funds on a secured basis. At December 31, 2002 The Peoples National Bank had
$5,000,000 in long-term borrowings and $12,000,000 in short-term borrowings from
the Federal Home Loan Bank of Atlanta. At December 31, 2002, The Peoples
National Bank had unused borrowing capacity from the Federal Home Loan Bank of
Atlanta of $51,214,000. At December 31, 2002, Bank of Anderson, N. A. had unused
borrowing capacity from the Federal Home Loan Bank of Atlanta of $13,186,000.
Seneca National Bank had unused borrowing capacity from the Federal Home Loan
Bank of Atlanta of $4,530,000 at December 31, 2002. The Federal Home Loan Bank
requires that investment securities, qualifying single-family mortgage loans and
stock of the Federal Home Loan Bank owned by the Banks be pledged to secure any
advances from the Federal Home Loan Bank. The unused borrowing capacity
currently available assumes that the Banks' $1,432,600 investment in Federal
Home Loan Bank stock as well as certain securities and qualifying mortgages
would be pledged to secure future borrowings. Management believes that it could
obtain additional borrowing capacity from the Federal Home Loan Bank by
identifying additional qualifying collateral that could be pledged.
Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs outside of those of its subsidiaries. Peoples Bancorporation
requires liquidity to pay limited operating expenses and dividends. The parent
company's liquidity needs are fulfilled through management fees assessed each
subsidiary bank and from dividends passed up to the parent company from The
Peoples National Bank.
The Company plans to meet its future cash needs through the liquidation
of temporary investments, maturities or sales of loans and investment
securities, generation of deposits and Federal Home Loan Bank advances. Company
management believes its liquidity sources are adequate to meet its operating
needs and does not know of any trends that may result in the Company's liquidity
materially increasing or decreasing.
OFF-BALANCE SHEET RISK
The Company, through the operations of the Banks, makes contractual
commitments to extend credit in the ordinary course of its business activities.
These commitments are legally binding agreements to lend money to customers of
the Banks at predetermined interest rates for a specified period of time. At
December 31, 2002 the Banks had outstanding commitments to extend credit of
$64,267,000 through various types of arrangements, described further in the
table on the following page.
23
The commitments generally expire in one year. Past experience indicates
that many of these commitments to extend credit will expire not fully used.
However, as described under Liquidity, the Company believes that it has adequate
sources of liquidity to fund commitments that are drawn upon by the borrower.
December 31, 2002
-----------------
Unused Commitments
Lines of credit secured by residential properties ........... $ 25,394
Lines of credit secured by commercial properties ............ 14,061
Other unused commitments .................................... 24,812
----------
Total .................................................... $ 64,267
==========
In addition to commitments to extend credit, the Banks also issue
standby letters of credit which are assurances to a third party that it will not
suffer a loss if the bank's customer fails to meet its contractual obligation to
the third party. Standby letters of credit totaled $5,248,000 at December 31,
2002. Past experience indicates that many of these standby letters of credit
will expire unused. However, through its various sources of liquidity, the
Company believes that it will have the necessary resources to meet these
obligations should the need arise.
Neither the Company nor its subsidiaries are involved in other
off-balance sheet contractual relationships or transactions that could result in
liquidity needs or other commitments or significantly impact earnings. The
Company did not maintain any obligations under non-cancelable operating lease
agreements at December 31, 2002. Refer to Note 11 and Note 12 of the Company's
consolidated financial statements for discussion on commitments and
contingencies and financial instruments with off-balance sheet risk.
CAPITAL ADEQUACY and RESOURCES
The capital needs of the Company have been met through the retention of
earnings and from the proceeds of prior public stock offerings.
For bank holding companies with total assets of more than $150 million,
such as the Company, capital adequacy is evaluated on a consolidated basis. The
Company's banking subsidiaries must separately meet regulatory capital
requirements. Generally, the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") expects bank holding companies to operate above
minimum capital levels. The Office of the Comptroller of the Currency
("Comptroller") regulations establish the minimum leverage capital ratio
requirement for national banks at 3% in the case of a national bank that has the
highest regulatory examination rating and is not contemplating significant
growth or expansion. All other national banks are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Furthermore, the Comptroller
reserves the right to require higher capital ratios in individual banks on a
case-by-case basis when, in its judgment, additional capital is warranted by a
deterioration of financial condition or when high levels of risk otherwise
24
exist. The Banks have not been notified that they must maintain capital levels
above regulatory minimums. The Company's leverage capital ratio was 7.93% at
December 31, 2002 compared to 9.55% at December 31, 2001. The leverage capital
ratio for The Peoples National Bank was 7.73% at December 31, 2002 compared to
8.06% at December 31, 2001. Bank of Anderson's leverage capital ratio was 6.43%
at December 31, 2002 compared to 8.99% at December 31, 2001. Seneca National
Bank's leverage capital ratio was 7.90% at December 31, 2002 compared to 10.11%
at December 31, 2001. The decreases in the Company's and Banks' leverage capital
ratios resulted from the growth in assets experienced during 2002.
The Federal Reserve Board has adopted a risk-based capital rule that
requires bank holding companies to have qualifying capital to risk-weighted
assets of at least 8%, with at least 4% being "Tier 1" capital. Tier 1 capital
consists principally of common stockholders' equity, non-cumulative preferred
stock, qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain intangible
assets. "Tier 2" (or supplementary) capital consists of general loan loss
reserves (subject to certain limitations), certain types of preferred stock and
subordinated debt, and certain hybrid capital instruments and other debt
securities such as equity commitment notes. A bank holding company's qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital components, provided that the maximum amount of
Tier 2 capital that may be treated as qualifying capital is limited to 100% of
Tier 1 capital. The Comptroller imposes a similar standard on national banks.
The regulatory agencies expect national banks and bank holding companies to
operate above minimum risk-based capital levels. The Company's risk-based
capital ratio was 11.96% and its Tier 1 capital to risk weighted assets ratio
was 10.98% at December 31, 2002, compared to 12.88% and 11.91%, respectively, at
December 31, 2001. The Peoples National Bank's risk-based capital ratio was
10.97% and its Tier 1 capital to risk weighted assets ratio was 10.02% at
December 31, 2002, compared to 11.08% and 10.24%, respectively, at December 31,
2001. Bank of Anderson's risk-based capital ratio was 11.69% and its Tier 1
capital to risk weighted assets ratio was 10.70% at December 31, 2002 compared
to 12.31% and 11.09%, respectively at December 31, 2001. Seneca National Bank's
risk-based capital ratio was 12.18% and its Tier 1 capital to risk weighted
assets ratio was 11.16% at December 31, 2002 compared to 13.95% and 12.70%,
respectively at December 31, 2001. The decreases in the Company's and the Banks'
risk-based capital ratios and their Tier 1 capital to risk-weighted assets
ratios in 2002 resulted from growth in assets experienced during 2002. (See
"Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operation).
During 2002 and 2001, the retention of earnings net of dividends paid
increased the Company's capital by $3,595,000 and $2,489,000 respectively.
Capital expenditures in the near future are expected to be funded by internally
generated funds.
PAYMENT of DIVIDENDS
If a national bank's surplus fund equals the amount of its capital
stock, the directors may declare quarterly, semi-annual or annual dividends out
25
of the bank's net profits, after deduction of losses and bad debts. If the
surplus fund does not equal the amount of capital stock, a dividend may not be
paid until one-tenth of the bank's net profits of the preceding half year, in
the case of quarterly or semi-annual dividends, or the preceding two years, in
the case of an annual dividend, are transferred to the surplus fund.
The approval of the Comptroller is required if the total of all
dividends declared by a national bank in any calendar year will exceed the total
of its retained net profits of that year combined with its retained net profits
for the preceding two years, less any required transfers to surplus or a fund
for the retirement of any preferred stock. The Comptroller's regulations provide
that provisions for possible credit losses cannot be added back to net income
and charge-offs cannot be deducted from net income in calculating the level of
net profits available for the payment of dividends.
The payment of dividends by the Banks may also be affected or limited
by other factors, such as the requirements to maintain adequate capital above
regulatory guidelines. If, in the opinion of the Comptroller, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the Comptroller may require, after notice and
hearing, that such bank cease and desist from such practice. The Comptroller has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve, the Comptroller and the FDIC have issued policy statements that provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
The Company's primary sources of funds with which to pay dividends to
shareholders are the dividends it receives from its subsidiary banks. In 2002
The Peoples National Bank paid dividends of $777,869 to the Company, which in
turn paid those dividends to its shareholders, compared to $570,515 in 2001.
Bank of Anderson and Seneca National Bank paid no dividends to the Company in
2002 or 2001
MONETARY POLICIES and EFFECT OF INFLATION
The earnings of bank holding companies are affected by the policies of
regulatory authorities, including the Board of Governors of the Federal Reserve
System, in connection with its regulation of the money supply. Various methods
employed by the Federal Reserve Board include open market operations in U. S.
Government securities, changes in the discount rate on member bank borrowings
and changes in reserve requirements against member bank deposits. These methods
are used in varying combinations to influence overall growth and distribution of
bank loans, investments and deposits, and their use may also affect interest
rates charged on loans or paid on deposits. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
26
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principals which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation. Unlike companies in most other industries, virtually all of the
assets and liabilities of financial institutions are monetary in nature. As a
result, interest rates generally have a more significant effect on a financial
institution's performance that does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as do the prices of goods and
services.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses that have large investments in plant and
inventories, it does have some effect. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above-average growth in assets, loans and deposits. Also,
general increases in the prices of goods and services will result in increased
operating expenses.
CORRESPONDENT BANKING
Correspondent banking involves the provision of services by one bank to
another bank, which cannot provide that service for itself, or chooses not to,
from an economic, regulatory or practical standpoint. The Banks purchase
correspondent services offered by larger banks, including check collections, the
sale and purchase of federal funds, security safekeeping, investment services,
over-line and liquidity loan participations and sales of loans to or
participations with correspondent banks.
The Banks sell loan participations to correspondent banks with respect
to loans that exceed the Banks' lending limits. Managements of the Banks have
established correspondent relationships with Wachovia Bank, N. A., Charlotte,
North Carolina and The Bankers Bank, Atlanta, Georgia. As compensation for
services provided by correspondents, the Banks maintain certain balances with
such correspondents in non-interest bearing accounts.
DATA PROCESSING
The Company has a data-processing department, which performs a full
range of data-processing services for the Banks. Such services include an
automated general ledger, deposit accounting, loan accounting and data
processing. In February of 2002 the Company made a decision to replace its
current data processing system with a new system. The new system was installed
during 2002 at a cost of approximately $1,250,000.
SUPERVISION AND REGULATION
The Company and the Banks operate in a highly regulated environment,
and their business activities are governed by statute, regulation and
administrative policies. To the extent that the following information describes
27
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Banks.
As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience. Although the Company
elected to become a financial holding company as of June 23, 2000, neither the
Company nor the Banks has yet made a decision as to how to adapt the new
legislation to their use. Accordingly, the following discussion relates to the
supervisory and regulatory provisions that apply to the Company and the Banks as
they currently operate.
The business activities of the Company and Banks are closely supervised
by a number of federal regulatory agencies, including the Federal Reserve Board,
the Comptroller of the Currency (the "Comptroller") and the Federal Deposit
Insurance Corporation (the "FDIC"). The Company is regulated by the Federal
Reserve Board under the Federal Bank Holding Company Act of 1956, as amended,
which requires every bank holding company to obtain the prior approval of the
Federal Reserve Board before acquiring more than 5% of the voting shares of any
bank or all or substantially all of the assets of a bank, and before merging or
consolidating with another bank holding company. The Federal Reserve Board
(pursuant to regulation and published policy statements) has maintained that a
bank holding company must serve as a source of financial strength to its
subsidiary banks. In adhering to the Federal Reserve Board policy the Company
may be required to provide financial support to a subsidiary bank at a time
when, absent such Federal Reserve Board policy, the Company may not deem it
advisable to provide such assistance.
Under the Riegel-Neal Interstate Banking and Branching Efficiency Act
of 1994, the Company, and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentages and
other restrictions. The legislation also provides that in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multi-state bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if the laws of the host state expressly
permit it. The authority of a bank to establish, and operate branches within a
state continue to be subject to applicable state branching laws. South Carolina
28
law was amended effective July 1, 1996, to permit such interstate branching, but
not de novo branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Company does not generally
attempt to compete for the banking relationships of large corporations and
businesses, but concentrates its efforts on small to medium-sized businesses and
on individuals. The Company believes it has competed effectively in this market
segment by offering quality, personal service.
A bank holding company is generally prohibited from acquiring control
of any company that is not a bank and from engaging in any business other than
the business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto, and are thus
permissible for bank holding companies, including the following activities:
acting as an investment or financial advisor to subsidiaries and certain outside
companies; leasing personal and real property or acting as a broker with respect
thereto; providing management consulting advice to nonaffiliated banks and
non-bank depository institutions; operating collection agencies and credit
bureaus; acting as a futures commission merchant; providing data processing and
data transmission services; acting as an insurance agent or underwriter with
respect to limited types of insurance; performing real estate appraisals;
arranging commercial real estate equity financing; providing securities
brokerage services; and underwriting and dealing in obligations of the United
States, the states and their political subdivisions.
As discussed below under "Gramm-Leach-Bliley Act", a bank holding
company that meets certain requirements may now qualify as a financial holding
company and thereby significantly increase the variety of services it may
provide and the investments it may make.
The Company also is subject to limited regulation by the South Carolina
State Board of Financial Institutions (the "State Board"). Consequently, the
Company must give notice to, or receive the approval of, the State Board
pursuant to applicable law and regulations prior to engaging in the acquisition
of South Carolina banking institutions or holding companies. The Company also
may be required to file with the State Board periodic reports with respect to
its financial condition and operation, management and inter-company relations
between the Company and its subsidiaries.
As national banks, the Banks are subject to supervision by the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, the Banks may establish branch offices anywhere
within the State of South Carolina. In addition, the Banks are subject to
various other state and federal laws and regulations, including state usury
laws, laws relating to fiduciaries, consumer credit and laws relating to branch
29
banking. The Banks' loan operations are subject to certain federal consumer
credit laws and regulations promulgated thereunder, including, but not limited
to; the federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers; the Home Mortgage Disclosure Act, requiring financial
institutions to provide certain information concerning their mortgage lending;
the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain prohibited factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit reporting agencies; the Bank Secrecy Act, dealing with, among other
things, the reporting of certain currency transactions; and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the Banks are subject to the
Truth in Savings Act, requiring certain disclosures about rates paid on savings
accounts; the Expedited Funds Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA imposes on financial institutions an affirmative and
ongoing obligation to meet the credit needs of their local communities,
including low- and moderate-income neighborhoods, consistent with the safe and
sound operation of those institutions. Each financial institution's actual
performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person. In addition, a national bank may grant loans and
extensions of credit to a single person up to 10% of its unimpaired capital and
surplus, provided that the transactions are fully secured by readily marketable
collateral having a market value determined by reliable and continuously
available price quotations. This 10% limitation is separate from, and in
addition to, the 15% limitation for unsecured loans. Loans and extensions of
credit may exceed the general lending limits if they qualify under one of
several exceptions. Such exceptions include, among others, certain loans or
extensions of credit arising from the discount of commercial or business paper,
the purchase of banker's acceptances, loans secured by documents of title, loans
secured by U. S. obligations and loans to or guaranteed by the federal
government.
Both the Company and the Banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller (see
"CAPITAL ADEQUACY and RESOURCES").
30
Failure to meet capital guidelines could subject the Banks to a variety
of enforcement remedies, including the termination of deposit insurance by the
FDIC and placing the Banks in receivership.
Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However, management of the Company is unable to predict whether and when higher
capital requirements would be imposed and, if so, at what levels and on what
schedule.
A joint rule promulgated by the Federal Reserve Board, the FDIC and the
Comptroller provides that the banking agencies must include in their evaluations
of a bank's capital adequacy an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The
agencies have issued statements that describe the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates.
Another joint rule promulgated by the financial institution regulators
further provides that the risk-based capital guidelines must take account of
concentration of credit risk and the risk of non-traditional activities. The
rule explicitly identifies concentration of credit risk and the risk arising
from other sources, as well as an institution's overall capital adequacy.
The Company is a legal entity separate and distinct from the Banks.
Most of the revenues of the Company are expected to continue to result from
dividends paid to the Company by the Banks. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders. See "PAYMENT OF DIVIDENDS."
As national banks, the Banks are subject to examinations and reviews by
the Comptroller. The examinations are typically completed on-site and are
subject to off-site review as well. The Banks also submit to the FDIC quarterly
reports of condition, as well as such additional reports as may be required by
the national banking laws.
The Banks are required to pay semiannual assessments to the FDIC. Since
January 1997, the assessments imposed on all FDIC deposits for deposit insurance
has an effective rate ranging from 0 to 27 basis points per $100 of insured
deposits, depending on the institution's capital position and other supervisory
factors. Legislation enacted in 1996 also requires that both SAIF-insured and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"). To cover those
obligations, during 2002, the FDIC assessed both BIF-insured and SAIF-insured
deposits a range of 1.82 to 1.70 basis points per $100 of deposits. Currently,
the FDIC is assessing BIF-insured and SAIF-insured deposits each 1.68 basis
points per $100 of deposits to cover the interest on FICO obligations. The FICO
assessment will continue to be adjusted quarterly to reflect changes in the
assessment bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions.
31
As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examination of the Company and any subsidiaries.
The scope of regulation and permissible activities of the Company and
the Banks are subject to change by future federal and state legislation.
Gramm-Leach-Bliley Act
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act,
which makes it easier for affiliations between banks, securities firms and
insurance companies to take place. The Act removes Depression-era barriers that
had separated banks and securities firms, and seeks to protect the privacy of
consumers' financial information. Most of the provisions of the Act require the
applicable regulators to adopt regulations in order to implement these
provisions, and a substantial number of regulations have already been adopted.
Under provisions of the legislation, which became effective March 11,
2000, banks, securities firms and insurance companies are able to structure new
affiliations through a holding company structure or through a financial
subsidiary. The legislation created a new type of bank holding company called a
"financial holding company" which has powers much more extensive than those of
standard holding companies. These expanded powers include authority to engage in
"financial activities," which are activities that are (1) financial in nature;
(2) incidental to activities that are financial in nature; or (3) complementary
to a financial activity and that do not impose a safety and soundness risk.
Significantly, the permitted financial activities for financial holding
companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also created another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
32
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also established the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirmed that states are the regulators for
insurance activities of all persons, including federally chartered banks, the
Act prohibits states from preventing depository institutions and their
affiliates from conducting insurance activities.
The Act also established a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how financial institutions may use
personal financial information. The privacy provisions of the Act have been
implemented by regulations of various federal agencies.
The Company anticipates that the Act and the regulations adopted
pursuant to the Act will be likely to create new opportunities for it to offer
expanded services to customers in the future, though the Company has not yet
determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company further expects that the Act
will increase competition from larger financial institutions that are currently
more capable than the Company of taking advantage of the opportunity to provide
a broader range of services. However, the Company continues to believe that its
commitment to providing high quality, personalized service to customers will
permit it to remain competitive in its market area.
The Company elected to become a financial holding company effective
June 23, 2000, but it has not yet used that status to engage in any activities
that are not also permissible for bank holding companies.
33
EMPLOYEES
The Company and the Banks presently employ one hundred twenty-eight
(128) full-time and twenty-six (26) part-time persons. Management believes that
its employee relations are good.
EXECUTIVE OFFICERS
The executive officers of the Company are Robert E. Dye, Chairman,
President and Chief Executive Officer; R. Riggie Ridgeway, Executive Vice
President, Secretary and Treasurer; William B. West, Senior Vice President and
Chief Financial Officer; and Patricia A. Jensen, Vice President. Information
about all of the executive officers except Patricia A. Jensen is set forth in
Item 10, part III of this report on Form 10-K.
Patricia A. Jensen, age 49, has served as Vice President of the Company
since its formation in 1992. Mrs. Jensen has served as Vice President and
Cashier of The Peoples National Bank since August 1986. Prior to joining The
Peoples National Bank, Mrs. Jensen served as Vice President of First Union
National Bank.
34
ITEM 2. PROPERTIES
The Company's corporate office is located at 1818 East Main Street in
Easley, South Carolina. The property consists of a three-story brick building
containing approximately 10,670 square feet on 0.665 acres of land owned by the
Company. This building houses some of the Company's support functions, including
administration, accounting, financial reporting, human resources, training,
marketing, internal audit, compliance, and purchasing. It also houses the
residential mortgage department of The Peoples National Bank. The Company also
owns an adjacent office building located at 1814 East Main Street in Easley,
South Carolina. The property consists of a two-story brick building containing
approximately 6,624 square feet on 0.566 acres of land owned by the Company.
This building houses some of the Company's support functions including
operations, data processing, and information technology.
The main office of The Peoples National Bank is located at 1800 East
Main Street in Easley, South Carolina. The property consists of a two-story
brick building of approximately 10,412 square feet, which is constructed on 1.75
acres of land owned by The Peoples National Bank. Improvements include a
three-lane drive-through teller installation, vault, night depository,
safe-deposit facilities, and a drive-through automated teller machine.
The Peoples National Bank owns and operates three branch facilities:
one in Powdersville, South Carolina located approximately seven miles east of
the Bank's main office containing approximately 3,158 square feet in a one-story
brick building situated on 0.812 acres of land; a second branch office in
Pickens, South Carolina located approximately ten miles west of the Bank's main
office containing approximately 6,688 square feet in a two-story building on
0.925 acres of land; and a third branch office in Easley located approximately 2
miles west of the Bank's main office containing approximately 3,523 square feet
in a one and one-half story building situated on l.077 acres of land. All branch
facilities have improvements including drive-through teller installations,
drive-through automated teller machines, vault, night depository, and safe
deposit facilities.
Bank of Anderson, National Association operates out of one location in
Anderson, South Carolina. The two-story building contains approximately 6,992
square feet and is situated on 1.935 acres of land in Anderson, South Carolina,
which is owned by Bank of Anderson. The bank has plans to expand this office by
adding 4,704 square feet of office space, which addition will possibly begin in
2003.
Bank of Anderson owns a parcel of 0.86 acres of land in Anderson, South
Carolina located approximately five miles northwest of the Bank's main office,
and plans to construct a branch office there, which construction has already
begun in 2003. The branch facility will have improvements including
drive-through teller installations, drive-through automated teller machines,
vault, night depository, and safe deposit facilities.
35
Seneca National Bank operates out of a two-story brick building
containing approximately 6,688 square feet situated on 1.097 acres of land in
Seneca, South Carolina, which is owned by Seneca National Bank.
All locations of the Company and the Banks are considered suitable and
adequate for their intended purposes. Management believes that insurance
coverage on the foregoing properties is adequate.
36
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of management based
on consultation with external legal counsel, the outcome of any currently
pending litigation is not expected to materially affect the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2002 to a vote of
security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded over-the-counter. Quotations
of bid and ask information are provided electronically by the National
Association of Securities Dealers, Inc.'s Over The Counter Bulletin Board under
the symbol PBCE.OB. The reported high and low bid prices for each quarter of
2002 and 2001 are shown in the following table. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Sales Price of the Company's Common Stock
Quarter Ended Low High
------------- --- ----
March 31, 2001 ................... $ 16.50 $ 16.50
June 30, 2001 .................... $ 15.75 $ 15.75
September 30, 2001 ............... $ 16.50 $ 16.50
December 31, 2001 ................ $ 14.91 $ 14.91
March 31, 2002 ................... $ 16.23 $ 16.23
June 30, 2002 .................... $ 17.75 $ 17.75
September 30, 2002 ............... $ 18.10 $ 18.10
December 31, 2002 ................ $ 19.50 $ 19.50
As of March 1, 2003, the number of holders of record of the Company's
common stock was 1,099 and the number of issued and outstanding shares was
3,507,911.
During 2002 the Company paid four quarterly cash dividends. A cash
dividend of $0.05 per common share was declared by the Company's Board of
Directors to shareholders of record on March 22nd and cash dividends of $0.06
per common share were declared by the Company's Board of Directors to
shareholders of record on each of June 21st, September 20th and December 13th.
In addition, on each of July 13, 1992, July 12, 1993, December 12, 1994,
November 30, 1995, November 8, 1996, October 31, 1997, December 7, 1998, January
14, 2000, January 5, 2001, January 4, 2002 and November 18, 2002 the Company
37
paid 5% stock dividends to shareholders. It is the policy of the Board of
Directors of the Company to reinvest earnings for such periods of time as is
necessary to the successful operations of the Company and of the Banks. Future
dividends will depend on the Company's earnings, capital requirements, financial
condition and other factors considered relevant by the Board of Directors of the
Company. Payment of dividends is also subject to regulatory restrictions (see
Item 1, "PAYMENT of DIVIDENDS").
The information required by Item 201(d) of Regulation S-K is set forth
under Item 12 of this Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(All amounts, except per share data, in thousands)
2002 2001 2000 1999 (1) 1998 (2)
---- ---- ---- -------- --------
INCOME STATEMENT DATA
Net interest income ......................... $ 12,609 $ 9,899 $ 9,561 $ 7,455 $ 5,327
Provision for loan losses ................... 944 892 681 571 194
Other operating income ...................... 6,564 5,267 2,631 1,768 1,224
Other operating expenses .................... 11,380 9,567 7,803 6,534 4,475
Net income .................................. 4,383 3,069 2,431 1,375 1,261
PER SHARE DATA (3)
Net income per common share -
Basic .................................... $ 1.30 $ 0.92 $ 0.73 $ 0.40 $ 0.47
Diluted .................................. $ 1.26 $ 0.89 $ 0.70 $ 0.38 $ 0.45
Cash dividends declared ..................... $ 0.23 $ 0.18 $ 0.15 $ 0.14 $ 0.14
BALANCE SHEET DATA
Total Assets ................................ $416,122 $312,166 $259,500 $213,913 $151,671
Total Deposits .............................. 328,174 236,802 205,634 168,776 120,100
Total Loans (Net) ........................... 302,663 251,173 199,995 146,998 86,924
Investment Securities ....................... 86,170 35,493 36,515 35,654 36,100
Total Earning Assets ........................ 394,351 296,181 239,851 198,480 142,097
Shareholders' Equity ........................ 32,747 28,551 25,815 23,346 22,471
OTHER DATA
Return on average assets .................... 1.21% 1.07% 1.01% 0.74% 0.96%
Return on average equity .................... 14.49% 11.31% 9.78% 5.91% 8.71%
(1) Seneca National Bank opened for business in February 1999.
(2) Bank of Anderson, National Association, opened for business in September
1998.
(3) Per share data has been restated to reflect 5% stock dividends in 1998,
1999, 2000, 2001 and 2002.
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Company and should be read
in conjunction with the consolidated financial statements of the Company
included herein.
CRITICAL ACCOUNTING POLICIES
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in Item 8, Note 1 to the
Consolidated Financial Statements.
Certain accounting policies involve significant judgments and
assumptions by management which have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates that could have a material impact on the carrying
values of assets and liabilities and the results of operations of the Company.
Of these significant accounting policies, the Company considers its
policies regarding the allowance for loan losses (the "Allowance") to be its
most critical accounting policy due to the significant degree of management
judgment involved in determining the amount of Allowance. The Company has
developed policies and procedures for assessing the adequacy of the Allowance,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers, which
is not known to management at the time of the issuance of the consolidated
financial statements. Refer to the discussion under Provision and Allowance for
Loan Losses, Loan Loss Experience section of this document for a detailed
description of the Company's estimation process and methodology related to the
allowance for loan losses.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
Total assets increased $103,956,000 or 33.3% from $312,166,000 at
December 31, 2001 to $416,122,000 at December 31, 2002.
The Company experienced significant loan growth during 2002 as the
total outstanding loans (excluding mortgage loans held for sale), the largest
single category of assets, increased $37,951,000 or 17.9% from $212,536,000 at
39
December 31, 2001 to $250,487,000 at December 31, 2002, as a result of an
increase in the amount of outstanding loans at the Company's three bank
subsidiaries. Total loans outstanding at December 31, 2002 for The Peoples
National Bank amounted to $150,378,000, an $18,138,000 or 13.7% increase over
the $132,240,000 held at December 31, 2001. Total loans outstanding at December
31, 2002 for Bank of Anderson amounted to $68,298,000, a $14,103,000 or 26.0%
increase over the $54,195,000 reported at December 31, 2001. Total loans
outstanding at December 31, 2002 for Seneca National Bank amounted to
$31,811,000, a $5,710,000 or 21.9% increase over the $26,101,000 reported at
December 31, 2001. A significant portion of the loan growth at Bank of Anderson
and Seneca National Bank is attributable to the fact that each commenced
business relatively recently (September 1998 and February 1999, respectively).
The Company also experienced significant growth in the pool of mortgage loans
held for sale. Mortgage loans held for sale increased $14,101,000 or 34.5% from
$40,925,000 at December 31, 2001 to $55,026,000 at December 31, 2002, as a
result of the increase in volume in the residential mortgage department. All of
the Company's mortgage loans held for sale are at The Peoples National Bank.
The Company's securities portfolio collectively, at amortized cost,
increased $49,902,000 or 141.6% from $35,230,000 at December 31, 2001 to
$85,132,000 at December 31, 2002. The increase in securities is largely due to
the deployment of increased levels of deposits at the subsidiary banks. Cash and
due from banks balances increased $4,275,000 or 82.2% from $5,199,000 at
December 31, 2001 to $9,474,000 at December 31, 2002. The increase was largely
the result of additional uncollected funds in correspondent bank accounts at
year-end. The amount of federal funds sold as of December 31, 2002 was
$2,635,000, a decrease of $4,568,000 or 63.4% from the $7,203,000 of federal
funds sold as of December 31, 2001. This decrease in federal funds sold is
largely due to a reduction of excess funds available to be invested in this type
of overnight funds.
Other assets, comprised largely of cash surrender value on life
insurance policies on key executives, prepaid expenses, other real estate owned,
and deferred income taxes, increased $202,000 or 5.9% to $3,632,000 at December
31, 2002 from $3,430,000 at December 31, 2001. This increase is largely
attributable to an additional purchase of paid-up life insurance policy on key
executives in the amount of $808,000, a decrease of $757,000 or 79.7% in other
real estate owned to $193,000 at December 31, 2002 from $950,000 at December 31,
2001, and a decrease in the deferred tax asset value of $15,000 or 0.02% to
$706,000 at December 31, 2002 from $721,000 at December 31, 2001.
Total liabilities increased $99,760,000 or 35.2% from $283,615,000 at
December 31, 2001 to $383,375,000 at December 31, 2002 largely as a result of a
$91,372,000, or 38.6%, increase in total deposits at the Company's bank
subsidiaries. Of the $91,372,000 increase in total deposits, $85,337,000 or
93.4% is attributable to growth in interest-bearing deposits, largely
certificates of deposit and interest-bearing transaction accounts, while the
remaining $6,035,000 or 6.6% is due to growth in noninterest-bearing deposits.
40
Other interest-bearing liabilities comprised of securities sold under
repurchase agreements, federal funds purchased and Federal Home Loan Bank
borrowings, increased $7,700,000 or 17.3% from $44,631,000 at December 31, 2001
to $52,331,000 at December 31, 2002. Of the $7,700,000 increase, securities sold
under repurchase agreements increased $14,685,000 or 71.1% and Federal Home Loan
Bank borrowings decreased $6,985,000 or 29.1% during 2002 from December 31, 2001
levels. The overall increase in these other interest-bearing liabilities is
largely attributable to the loan growth experienced at all three subsidiary
banks as well as an increase of $14,101,000 or 34.5% in mortgage loans held for
sale at Peoples National Bank.
Shareholders' equity increased $4,196,000 or 14.7% from $28,551,000 at
December 31, 2001 to $32,747,000 at December 31, 2002. This increase comes as a
result of net earnings for the period of $4,383,000, an increase in the market
value on the Company's "available for sale" securities portfolio of $511,000
during the period, and the exercise of stock options under the Company's Stock
Option Plans in the amount of $90,000. These additions to shareholders equity
were partially offset by the declaration and payment of $778,000 in cash
dividends and the payment of $10,000 of cash in lieu of fractional shares for a
stock dividend during 2002.
41
EARNINGS PERFORMANCE
2002 Compared to 2001
Overview
The consolidated Company's operations for the twelve months ended
December 31, 2002 resulted in net income of $4,383,000 or $1.30 per basic share
($1.26 per diluted share), compared to $3,069,000 or $0.92 per basic share
($0.89 per diluted share) for the twelve months ended December 31, 2001. The
increase in the Company's net income of $1,314,000 or 42.8% for 2002 resulted
largely from a significant decrease in total interest expense, largely from
deposits, coupled with a significant increase in non-interest income during
2002. This was partially offset by a corresponding decrease in interest income
on loans as well as increases in non-interest expense and the provision for loan
losses. In particular, both Bank of Anderson and Seneca National Bank
experienced significant increases in net income as both of these relatively new
banks continued to develop their businesses. For the twelve months ended
December 31, 2002, Peoples National Bank recorded net income of $3,418,000, an
increase of $772,000 or 29.2% over net income of $2,646,000 in 2001. For the
twelve months ended December 31, 2002, Bank of Anderson recorded net income of
$809,000, an increase of $425,000 or 110.7% over the $384,000 recorded in 2001.
For the twelve months ended December 31, 2002, Seneca National Bank recorded net
income of $234,000, an increase of $144,000 or 160.0% over the $90,000 recorded
in 2001.
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased $2,710,000 or 27.4% to
$12,609,000 for the year ended December 31, 2002 compared to $9,899,000 for the
year ended December 31, 2001.
The Company's total interest income increased $393,000 or 1.9% to
$20,606,000 in 2002 compared to $20,213,000 for 2001. This increase is largely
attributable to an increase in interest income on taxable securities of $729,000
resulting from an increase in the average balances of those types of securities,
partially offset by a decrease in interest income on loans of $275,000 resulting
from lower market interest rates experienced at the Company's three bank
subsidiaries during 2002 when compared to 2001.
Total interest expense decreased $2,317,000 or 22.5% to $7,997,000 in
2002 compared to $10,314,000 for 2001. The decreases in the amount of interest
paid on the various categories of interest-bearing liability accounts in 2002
are largely attributable to lower market interest rates experienced at the
Company's three bank subsidiaries during 2002 when compared to 2001, partially
offset by higher average balances in those types of accounts.
42
Provision and Allowance for Loan Losses
The Company's provision for loan losses was $944,000 in 2002 compared
to $892,000 for 2001, a $52,000 or 5.8% increase. This increase is largely
attributable to the increase in the volume of outstanding loans during 2002 when
compared to 2001, coupled with a $245,000 decrease in net charged-off loans. The
Peoples National Bank made provisions for loan losses of $550,000 in 2002
compared to $621,000 in 2001. Bank of Anderson made provisions for loan losses
of $130,000 in 2002 compared to $150,000 in 2001. Seneca National Bank made
provisions for loan losses of $264,000 in 2002 compared to $121,000 in 2001.
During fiscal year 2002 the Company experienced net charge-offs of $382,000, or
0.17% of average outstanding loans (excluding loans held for sale), compared to
net charge-offs of $627,000, or 0.32% of average outstanding loans in fiscal
year 2001. The net charge-offs are attributable to $97,000 in net charge-offs at
The Peoples National Bank, $12,000 in net charge-offs at Bank of Anderson, N.
A., and $273,000 in net charge-offs at Seneca National Bank. At December 31,
2002 the allowance for loan losses was 1.14% as a percentage of outstanding
loans compared to 1.08% at December 31, 2001.
At December 31, 2002 the Company had $926,000 in non-accrual loans, no
restructured loans, $5,000 in loans past due 90 days or more but still accruing
interest, and $193,000 in real estate acquired in settlement of loans, compared
to $993,000, $8,000, $0, and $950,000 respectively at December 31, 2001.
Non-performing assets as a percentage of all loans and other real estate owned
were 0.37% and 0.77% at December 31, 2002 and 2001, respectively.
In the cases of non-performing loans, management of the Company has
reviewed the carrying value of any underlying collateral. In those cases where
the collateral value may be less than the carrying value of the loan the Company
has taken specific write-downs to the loan, even though such loan may still be
performing. Management of the Company does not believe it has any non-accrual
loan that individually could materially impact the reserve for loan losses or
long-term future operating results of the Company.
The Company records real estate acquired through foreclosure at the
lower of cost or estimated market value less estimated selling costs. Estimated
market value is based upon the assumption of a sale in the normal course of
business and not on a quick liquidation or distressed basis. Estimated market
value is established by independent appraisal at the time of foreclosure.
Management believes that other real estate owned at December 31, 2002 will not
require significant write-downs in future accounting periods, and therefore will
not have a significant effect on the Company's future operations.
Other Income
Total consolidated other income, including securities transactions,
increased $1,297,000, or 24.6% from $5,267,000 in 2001 to $6,564,000 in 2002.
This increase is largely attributable to an increase of $926,000, or 28.1%, in
origination and service release fees on residential mortgage loans from
$3,295,000 in 2001 to $4,221,000 in 2002; an increase of $321,000, or 23.2%, in
43
services charges on deposit accounts from $1,381,000 in 2001 to $1,702,000 in
2002; and an increase of $9,000, or 1.5%, in other miscellaneous income from
$591,000 in 2001 to $600,000 in 2002. The Company recorded a $41,000 gain on the
sale of securities in 2002 and no gain or loss on the sale of securities in
2001.
Other Expenses
Total consolidated other expenses increased $1,813,000 or 19.0% to
$11,380,000 in 2002 compared to $9,567,000 in 2001. The increase in overall
non-interest expense is indicative of the Company's continued growth and normal
expense increases throughout the Company. Salaries and benefits, the largest
component of non-interest expense, increased $1,190,000 or 21.3% to $6,768,000
in 2002 compared to $5,578,000 in 2001. The increase in salaries and benefits
for the comparative periods is primarily attributable to the additional staffing
associated with the Company's subsidiary banks during 2002, and normal
additional staffing and salary increases throughout the Company.
Occupancy expense increased $34,000 or 6.61% to $548,000 in 2002
compared to $514,000 in 2001. The increase in occupancy expense for the two
comparative periods is partially attributable to the fact that the Company
occupied some additional office space that it already owned during 2002.
Equipment expense increased $177,000 or 27.5% to $820,000 in 2002 compared to
$643,000 in 2001. The increase for the comparative periods is partially
attributable to depreciation and other expenses associated with the conversion
to a new data processing system during 2002.
Miscellaneous other operating expenses increased $412,000 or 14.5% to
$3,244,000 in 2002 compared to $2,832,000 in 2001. The increase in miscellaneous
other operating expenses is attributable to the overall continued growth of the
Company and its three subsidiary banks.
44
2001 Compared to 2000
Overview
The consolidated Company's operations for the twelve months ended
December 31, 2001 resulted in net income of $3,069,000 or $0.92 per basic share
($0.89 per diluted share), compared to $2,431,000, or $0.73 per basic share
($0.70 per diluted share) for the twelve months ended December 31, 2000. The
increase in the Company's net income of $638,000 or 26.2% for 2001 resulted
largely from a significant increase in total interest income, largely from
loans, coupled with a significant increase in non-interest income during 2001.
This was partially offset by corresponding increases in interest expense,
non-interest expense, and provision for loan losses. In particular, both Bank of
Anderson and Seneca National Bank experienced significant increases in net
income as both of these relatively new banks continued to develop their
businesses. For the twelve months ended December 31, 2001, Peoples National Bank
recorded net income of $2,646,000, an increase of $464,000 or 21.3% over net
income of $2,182,000 in 2000. For the twelve months ended December 31, 2001,
Bank of Anderson recorded net income of $384,000, an increase of $163,000 or
73.8% over the $221,000 recorded in 2000. For the twelve months ended December
31, 2001, Seneca National Bank recorded net income of $90,000, an increase of
$49,000 or 119.5% over the $41,000 recorded in 2000.
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased $338,000 or 3.5% to
$9,899,000 for the year-ended December 31, 2001 compared to $9,561,000 for the
year-ended December 31, 2000.
The Company's total interest income increased $1,378,000 or 7.3% to
$20,213,000 in 2001 compared to $18,835,000 for 2000. This increase is largely
attributable to an increase in loan interest income of $1,551,000 resulting from
an increase in the average outstanding balances of permanent loans as well as
loans held for sale, but somewhat diminished by lower market interest rates
experienced at the Company's three bank subsidiaries during 2001 when compared
to 2000.
Total interest expense increased $1,040,000 or 11.2% to $10,314,000 in
2001 compared to $9,274,000 for 2000. The increases in the amount of interest
paid on the various categories of interest-bearing liability accounts in 2001
are largely attributable to the increases in the average outstanding balances
for these types of accounts, but they are somewhat offset by lower market
interest rates experienced at the Company's three bank subsidiaries during 2001
when compared to 2000.
Provision and Allowance for Loan Losses
The Company's provision for loan losses was $892,000 in 2001 compared
to $681,000 for 2000, a $211,000 or 31.0% increase. This increase is largely
attributable to the increase in the volume of outstanding loans during 2001 when
compared to 2000. The Peoples National Bank made provisions for loan losses of
45
$621,000 in 2001 compared to $403,000 in 2000. Bank of Anderson made provisions
for loan losses of $150,000 in 2001 compared to $198,000 in 2000. Seneca
National Bank made provisions for loan losses of $121,000 in 2001 compared to
$80,000 in 2000. During fiscal year 2001 the Company experienced net charge-offs
of $627,000 or 0.32% of average outstanding loans (excluding loans held for
sale), compared to net charge-offs of $239,000 or 0.14% of average outstanding
loans in fiscal year 2000. The net charge-offs are attributable to $590,000 in
net charge-offs at The Peoples National Bank, $30,000 in net charge-offs at Bank
of Anderson, N. A., and $7,000 in net charge-offs at Seneca National Bank. At
December 31, 2001 the allowance for loan losses was 1.08% as a percentage of
outstanding loans (excluding mortgage loans held for sale) compared to 1.09% at
December 31, 2000.
At December 31, 2001 the Company had $993,000 in non-accrual loans, one
$8,000 restructured loan, $0 in loans past due 90 days or more but still
accruing interest, and $950,000 in real estate acquired in settlement of loans,
compared to $993,000, $67,000, $108,000, and $478,000 respectively at December
31, 2000. Non-performing assets as a percentage of all loans and other real
estate owned were 0.77% and 0.81% at December 31, 2001 and 2000, respectively.
Other Income
Total consolidated other income, including securities transactions,
increased $2,636,000, or 100.2% from $2,631,000 in 2000 to $5,267,000 in 2001.
This increase is largely attributable to an increase of $1,961,000, or 147.0%,
in origination and service release fees on residential mortgage loans from
$1,334,000 in 2000 to $3,295,000 in 2001; an increase of $724,000, or 313.4%, in
net overdraft privilege fees from $231,000 in 2000 to $955,000 in 2001; and an
increase of $147,000, or 73.9%, in other miscellaneous income from $199,000 in
2000 to $346,000 in 2001. The Company did not record any gains or losses on the
sale of securities in either of 2001 or 2000.
Other Expenses
Total consolidated other expenses increased $1,764,000 or 22.6% to
$9,567,000 in 2001 compared to $7,803,000 in 2000. The significant increase in
overall non-interest expense is indicative of the significantly larger scale of
operations for the Company. Salaries and benefits, the largest component of
non-interest expense, increased $1,076,000 or 23.9% to $5,578,000 in 2001
compared to $4,502,000 in 2000. The increase in salaries and benefits for the
comparative periods is primarily attributable to the additional staffing
associated with the Company's mortgage lending activities during 2001 and normal
additional staffing and salary increases throughout the Company.
Occupancy expense increased $144,000 or 38.9% to $514,000 in 2001
compared to $370,000 in 2000. The increase in occupancy expense for the two
comparative periods is partially attributable to an increase in depreciation,
maintenance and utilities associated with the purchase of a corporate
headquarters building late in the year 2000. Equipment expense increased $37,000
or 6.1% to $643,000 in 2001 compared to $606,000 in 2000. The increase for the
46
comparative periods is attributable to increases in depreciation and maintenance
expense associated with the Company's overall growth.
Miscellaneous other operating expenses increased $507,000 or 21.8% to
$2,832,000 in 2001 compared to $2,325,000 in 2000. The increase in miscellaneous
other operating expenses is attributable to the overall continued growth of the
Company and its three subsidiary banks.
47
ITEM 7A QUALITATIVE AND QUANTITATIVE DISCLUSURES ABOUT MARKET RISK
Reference is made to the section "Market Risk - Interest Rate
Sensitivity" included in "Business" under Item 1 of this Annual Report on Form
10-K.
48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed with this report:
- - Independent Auditor's Report.
- - Consolidated Balance Sheets as of December 31, 2002 and 2001.
- - Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000.
- - Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000.
- - Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000.
- - Notes to Financial Statements.
49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors
Peoples Bancorporation, Inc.
Easley, South Carolina
We have audited the accompanying consolidated balance sheets of
Peoples Bancorporation, Inc. and Subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Bancorporation, Inc. and Subsidiaries as of December 31, 2002 and 2001
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
s/Elliott Davis, LLC
Greenville, South Carolina
January 31, 2003
50
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share information)
DECEMBER 31,
------------
2002 2001
---- ----
ASSETS
CASH AND DUE FROM BANKS .......................................................................... $ 9,474 $ 5,199
INTEREST - BEARING DEPOSITS IN OTHER BANKS ....................................................... 33 24
FEDERAL FUNDS SOLD ............................................................................... 2,635 7,203
-------- --------
Total cash and cash equivalents ......................................................... 12,142 12,426
SECURITIES
Available for sale ......................................................................... 80,163 30,339
Held for investment (fair value of $4,248 (2002) and $3,417 ( 2001)) ....................... 4,123 3,339
Other investments, at cost ................................................................. 1,884 1,815
MORTGAGE LOANS HELD FOR SALE ..................................................................... 55,026 40,925
LOANS (less allowance for loan losses of $2,850 (2002) and $2,288 (2001)) ........................ 247,637 210,248
PREMISES AND EQUIPMENT, net of accumulated depreciation .......................................... 9,539 7,961
ACCRUED INTEREST RECEIVABLE ...................................................................... 1,976 1,683
OTHER ASSETS ..................................................................................... 3,632 3,430
-------- --------
$416,122 $312,166
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing .......................................................................... $ 40,614 $ 34,579
Interest-bearing ............................................................................. 287,560 202,223
-------- --------
Total deposits ............................................................................. 328,174 236,802
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS ...................................................... 35,331 20,646
ADVANCES FROM FEDERAL HOME LOAN BANK ............................................................. 17,000 23,985
ACCRUED INTEREST PAYABLE ......................................................................... 1,575 1,218
OTHER LIABILITIES ................................................................................ 1,295 964
-------- --------
Total liabilities .......................................................................... 383,375 283,615
-------- --------
COMMITMENTS AND CONTINGENCIES - Notes 11 and 12
SHAREHOLDERS' EQUITY
Common stock - 10,000,000 shares authorized; $1.67 par value
per share; 3,507,911 (2002) shares and 3,328,609 (2001) shares outstanding ................. 5,858 5,559
Additional paid-in capital ................................................................... 25,758 22,786
Retained earnings ............................................................................ 446 32
Accumulated other comprehensive income ....................................................... 685 174
-------- --------
32,747 28,551
-------- --------
$416,122 $312,166
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
51
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except share information)
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
INTEREST INCOME
Interest and fees on loans .................................................. $17,433 $17,708 $16,157
Interest on securities
Taxable ................................................................... 2,647 1,918 2,086
Tax-exempt ................................................................ 151 167 195
Interest on federal funds sold .............................................. 375 420 397
------- ------- -------
Total interest income .................................................. 20,606 20,213 18,835
------- ------- -------
INTEREST EXPENSE
Interest on deposits ........................................................ 7,224 9,226 8,256
Interest on federal funds purchased and securities sold
under repurchase agreements ............................................... 511 679 789
Interest on advances from Federal Home Loan Bank ............................ 262 409 229
------- ------- -------
Total interest expense ................................................. 7,997 10,314 9,274
------- ------- -------
Net interest income .................................................... 12,609 9,899 9,561
PROVISION FOR LOAN LOSSES ....................................................... 944 892 681
------- ------- -------
Net interest income after provision for loan losses .................... 11,665 9,007 8,880
------- ------- -------
NONINTEREST INCOME
Service fees and other ...................................................... 2,302 1,972 1,297
Mortgage banking ............................................................ 4,221 3,295 1,334
Gain on sale of available for sale securities ............................... 41 - -
------- ------- -------
6,564 5,267 2,631
------- ------- -------
NONINTEREST EXPENSES
Salaries and benefits ....................................................... 6,768 5,578 4,502
Occupancy ................................................................... 548 514 370
Equipment ................................................................... 820 643 606
Marketing and advertising ................................................... 333 232 231
Communications .............................................................. 235 223 241
Printing and supplies ....................................................... 275 199 155
Bank paid loan costs ........................................................ 620 576 91
Other operating ............................................................. 1,781 1,602 1,607
------- ------- -------
11,380 9,567 7,803
------- ------- -------
Income before income taxes ............................................. 6,849 4,707 3,708
PROVISION FOR INCOME TAXES ...................................................... 2,466 1,638 1,277
------- ------- -------
Net income ............................................................. $ 4,383 $ 3,069 $ 2,431
======= ======= =======
BASIC NET INCOME PER COMMON SHARE ............................................... $ 1.30 $ 0.92 $ 0.73
======= ======= =======
DILUTED NET INCOME PER COMMON SHARE ............................................. $ 1.26 $ 0.89 $ 0.70
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
52
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2002, 2001 and 2000
(Amounts in thousands except share information)
Accumulated
other
compre- Total
Common stock Additional hensive share-
--------------------- paid-in Retained income holders'
Shares Amount Capital earnings (loss) equity
------ ------ ------- -------- ------ ------
BALANCE, DECEMBER 31, 1999 .............................. 2,987,627 $ 4,989 $ 18,867 $ - $ (510) $ 23,346
---------
Net income .......................................... - - - 2,431 - 2,431
Other comprehensive income:
Unrealized holding gains on securities available
for sale, net of income taxes of $231 ............. - - - - 448 448
---------
Comprehensive income ................................ - - - - - 2,879
Stock dividend (5%) ................................. 150,420 251 1,736 (1,987) - -
Cash in lieu of fractional shares on stock dividend . - - - (8) - (8)
Cash dividends ($.145 per share) .................... - - - (436) - (436)
Proceeds from stock options exercised ............... 29,999 50 (16) - - 34
--------- ------- ---------- ------- ----- ---------
BALANCE, DECEMBER 31, 2000 .............................. 3,168,046 5,290 20,587 - (62) 25,815
---------
Net income .......................................... - - - 3,069 - 3,069
Other comprehensive income:
Unrealized holding gains on securities available
for sale, net of income taxes of $122 ............ - - - - 236 236
---------
Comprehensive income ................................ - - - - - 3,305
Stock dividend (5%) ................................. 157,891 264 2,193 (2,457) - -
Cash in lieu of fractional shares on stock dividend . - - - (10) - (10)
Cash dividends ($.18 per share) ..................... - - - (570) - (570)
Proceeds from stock options exercised ............... 2,672 5 6 - - 11
--------- ------- ---------- ------- ----- ---------
BALANCE, DECEMBER 31, 2001 .............................. 3,328,609 5,559 22,786 32 174 28,551
---------
Net income .............................................. - - - 4,383 - 4,383
Other comprehensive income:
Unrealized holding gains on securities available
for sale, net of income taxes of $277 .............. - - - - 537 -
Less reclassification adjustment for gains
included in net income, net of income
taxes of $14 .................................... - - - - (26) -
-----
Net unrealized holding gains on securities ......... - - - - 511 511
----- ---------
Comprehensive income 4,894
Stock dividend (5%) ...................................... 166,541 278 2,903 (3,181) - -
Cash in lieu of fractional shares on stock dividend ...... - - - (10) - (10)
Cash dividends ($.23 per share) .......................... (778) - (778)
Proceeds from stock options exercised .................... 12,761 21 69 90
--------- ------- ---------- ------- ----- ---------
BALANCE, DECEMBER 31, 2002 ............................... 3,507,911 $ 5,858 $ 25,758 $ 446 $ 685 $ 32,747
========= ======= ========== ======= ===== =========
The accompanying notes are an integral part of these consolidated
financial statements.
53
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................................ $ 4,383 $ 3,069 $ 2,431
Adjustments to reconcile net income to net cash
used for operating activities
Loss on sale of premises and equipment .......................................... 53 - -
Gain on sale of securities available for sale ................................... (40) - -
Provision for loan losses ....................................................... 944 892 681
Benefit from deferred income taxes .............................................. (81) (110) (181)
Depreciation .................................................................... 614 564 524
Amortization and accretion (net) of premiums and discounts on securities ........ 133 12 31
Origination of mortgage loans held for sale ..................................... (400,545) (182,276) (112,367)
Sale of mortgage loans held for sale ............................................ 386,444 158,343 102,037
(Increase) decrease in accrued interest receivable .............................. (293) 133 (262)
Increase in other assets ........................................................ (384) (460) (357)
Increase (decrease) in accrued interest payable ................................. 357 (503) 567
Increase in other liabilities ................................................... 331 448 491
--------- --------- ---------
Net cash used for operating activities ..................................... (8,084) (19,888) (6,405)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ..................................... (784) - -
Purchases of securities available for sale ...................................... (102,705) (33,217) (5,628)
Purchase of other investments ................................................... (69) - -
Proceeds from principal pay downs on securities available for sale .............. 8,280 6,684 3,980
Proceeds from the maturity of securities available for sale ..................... 39,492 27,900 1,433
Proceeds from the sale of securities available for sale ......................... 5,790 - -
Net increase in loans ........................................................... (38,333) (28,764) (43,587)
Proceeds from the sale of premises and equipment ................................ 113 - -
Purchase of premises and equipment .............................................. (2,358) (387) (1,693)
--------- --------- ---------
Net cash used for investing activities ..................................... (90,574) (27,784) (45,495)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ........................................................ 91,372 31,168 36,858
Net increase (decrease) in federal funds purchased .............................. - (3,660) 3,660
Net increase (decrease) in securities sold under repurchase agreements .......... 14,685 6,489 (1,277)
Net increase (decrease) in advances from Federal Home Loan Bank ................. (6,985) 15,985 3,000
Proceeds from the sale of stock and exercise of stock options ................... 90 11 34
Cash dividends paid ............................................................. (778) (570) (436)
Cash in lieu of fractional shares on stock dividends ............................ (10) (10) (8)
--------- --------- ---------
Net cash provided by financing activities .................................. 98,374 49,413 41,831
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....................... (284) 1,741 (10,069)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................................... 12,426 10,685 20,754
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................ $ 12,142 $ 12,426 $ 10,685
========= ========= =========
CASH PAID FOR
Interest .......................................................................... $ 7,640 $ 10,817 $ 8,707
========= ========= =========
Income taxes ...................................................................... $ 2,484 $ 1,722 $ 1,169
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
54
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Principles of consolidation and nature of operations
The consolidated financial statements include the accounts of Peoples
Bancorporation, Inc. (the "Company") and its wholly-owned subsidiaries, The
Peoples National Bank, Bank of Anderson, N.A., and Seneca National Bank
(collectively referred to as the "Banks"). The Company formed Bank of
Anderson, N.A. and Seneca National Bank during 1998 with the proceeds, net of
issuance costs, from two stock offerings totaling $11,948,814. The capital
from the offerings was invested $5.5 million in Bank of Anderson, $3.5
million in Seneca National Bank and $1 million in The Peoples National Bank.
Bank of Anderson, N. A. and Seneca National Bank commenced operations in the
third quarter of 1998 and the first quarter of 1999, respectively. All
significant intercompany balances and transactions have been eliminated. The
Banks operate under national bank charters and provide full banking services
to customers. The Banks are subject to regulation by the Office of the
Comptroller of the Currency. The Company is subject to regulation by the
Federal Reserve Board.
Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of interest and noninterest income and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
The Banks make loans to individuals and small businesses located primarily in
upstate South Carolina for various personal and commercial purposes. The
Banks have diversified loan portfolios and borrowers' abilities to repay
loans is not dependent upon any specific economic sector.
Securities
The Company accounts for securities in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." Debt securities are classified upon purchase as
available for sale, held for investment, or trading. Such assets classified
as available for sale are carried at fair value. Unrealized holding gains or
losses are reported as a component of shareholders' equity (accumulated other
comprehensive income (loss)) net of deferred income taxes. Securities
classified as held for investment are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts into interest income
using a methodology which approximates a level yield of interest over the
estimated remaining period until maturity. To qualify as held for investment,
the Company must have the ability and intent to hold the securities to
maturity. Trading securities are carried at market value. The Company has no
trading securities. Gains or losses on dispositions of securities are based
on the difference between the net proceeds and the adjusted carrying amount
of the securities sold, using the specific identification method.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal reduced by an allowance
for loan losses. Interest is calculated using the simple interest method on
daily balances of the principal amounts outstanding. Loan origination and
commitment fees and direct loan origination costs are deferred and amortized
over the contractual life of the related loans or commitments as an
adjustment of the related loan yields. An allowance for loan losses is
established through a provision for loan losses charged to operations. Loans
are charged against the allowance when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible based on evaluations of the
collectibility of loans and prior loan loss experience; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the allowance for
loan losses will not be required. Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of interest is doubtful.
(Continued)
55
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Loans and allowance for loan losses, continued
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all creditors value loans at the loan's fair value if it is probable
that the creditor will be unable to collect all amounts due according to
the terms of the loan agreement. Fair value may be determined based upon
the present value of expected cash flows, market price of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No.
114 was amended by SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on
an impaired loan.
Under SFAS No. 114, when the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied
to principal. Once the reported principal balance has been reduced to zero,
future cash receipts are applied to interest income, to the extent that any
interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with
the terms of the restructured loan agreement. Interest income is recognized
on these loans using the accrual method of accounting.
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are provided for in a valuation allowance by charges
to operations.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Additions to premises and equipment
and major replacements or betterments are added at cost. Maintenance,
repairs, and minor replacements are charged to expense when incurred. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is
reflected in income.
Non-performing assets
Loans are placed in a non-accrual status when, in the opinion of
management, the collection of interest is questionable. Thereafter, no
interest is taken into income unless received in cash or until such time as
the borrower demonstrates the ability to pay principal and interest.
Other real estate owned
Other real estate owned represents properties acquired through foreclosure
and is carried at the lower of cost or fair value, adjusted for net selling
costs. Fair values of real estate owned are reviewed regularly and
writedowns are recorded when it is determined that the carrying value of
real estate exceeds the fair value less estimated costs to sell. Costs
relating to the development and improvement of such property are
capitalized, whereas those costs relating to holding the property are
charged to expense. At December 31, 2002 and 2001 real estate owned by the
Company totaled $193,000 and $950,000, respectively, and is included in
other assets. During 2002 and 2001, the Company transferred loans to real
estate acquired in foreclosure of $146,000 and $714,000, respectively.
Income taxes
The provision for income taxes includes deferred taxes on temporary
differences between the recognition of certain income and expense items for
tax and financial statement purposes. Income taxes are computed on the
liability method as described in SFAS No. 109, "Accounting for Income
Taxes".
(Continued)
56
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Statements of cash flows
For the purposes of reporting cash flows, the Company considers cash and
cash equivalents to be those amounts included in the balance sheet captions
"Cash and Due From Banks", "Interest-bearing Deposits in Other Banks" and
"Federal Funds Sold". Cash and cash equivalents have an original maturity
of three months or less.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current presentation. These reclassifications have no effect on previously
reported net income.
Risks and uncertainties
In the normal course of its business the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk, and market risk. The
Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from borrowers'
inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans
receivable, the valuation of real estate held by the Company, and the
valuation of loans held for sale and mortgage-backed securities available
for sale.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period.
The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances, and operating
restrictions, resulting from the regulators' judgments based on information
available to them at the time of their examination.
Stock option compensation plans
The Company has a stock option compensation plan through which the Board of
Directors may grant stock options to officers and employees to purchase
common stock of the Company at prices not less than 100 percent of the fair
value of the stock on the date of grant. The outstanding options become
exercisable in various increments beginning on the date of grant and
expiring five to ten years from the date of grant. The Company also has a
directors' stock option plan through which non-employee directors of the
Company shall be granted options to purchase 500 shares of common stock for
each year served on the board up to a maximum of 5,000 options per
director. The option price shall not be less than 100 percent of the fair
value of the stock on the grant date. The outstanding options become
exercisable on the grant date and expire at the earlier of the end of the
director's board service or ten years from the grant date.
The Company accounts for the plan under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
stock options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
(Continued)
57
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Net income, as reported ....................................................... $ 4,383 $ 3,069 $ 2,431
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
Net of related tax effects ................................................. (45) (58) (43)
-------- -------- ---------
Pro forma net income .......................................................... $ 4,338 $ 3,011 $ 2,388
======== ======== =========
Net income per common share
Basic - as reported ........................................................ $ 1.30 $ 0.92 $ 0.73
======== ======== =========
Basic - pro forma .......................................................... $ 1.29 $ 0.90 $ 0.71
======== ======== =========
Diluted - as reported ...................................................... $ 1.26 $ 0.89 $ 0.70
======== ======== =========
Diluted - pro forma ........................................................ $ 1.25 $ 0.87 $ 0.69
======== ======== =========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2002, 2001 and 2000: dividend yields from $.15 to
$.25 per share, expected volatility from 5 to 27 percent, risk-free
interest rates from 4.50 to 6.50 percent and expected life of 10 years.
Recently issued accounting standards
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by
the Company:
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This statement requires
companies to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated
with the retirement of tangible long-lived assets that result from the
acquisition, construction development and/or normal use of assets. A
corresponding asset (which is depreciated over the life of the asset) must
also be recorded. The provisions of SFAS No. 143 were adopted by the
Company on January 1, 2003 with no impact on financial position and results
of operations.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes prior pronouncements
associated with impairment or disposal of long-lived assets. The statement
establishes methodologies for assessing impairment of long-lived assets,
including assets to be disposed of by sale or by other means. The adoption
of this standard had no impact on the financial position of the Company.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishments of Debt, and an amendment of SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
statement also rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers and amends SFAS No. 13, Accounting for Leases. This new
statement requires gains and losses from extinguishment of debt to be
classified as an extraordinary item only if they meet the criteria of APB
Opinion NO. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, which will distinguish
transactions that are part of an entity's recurring operations from those
that are unusual or infrequent or that meet the criteria for classification
as an extraordinary item. The adoption of the provisions of SFAS No. 145
had no impact on the Company's financial position or results of operations.
(Continued)
58
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
This statement applies to costs associated with specific exit activities
and requires a liability for a cost associated with an exit or disposal
activity to be recognized and measured initially at its fair value in the
period in which the liability is incurred. A liability for a cost
associated with an exit or disposal activity is incurred when the
definition of a liability is met. The provisions of this statement are
effective for exit or disposal activities that are initiated after December
31, 2002. The provisions of this statement were adopted by the Company on
January 1, 2003 with no impact on financial position or results of
operations.
In October 2002, the FASB issued SFAS No. 147, Accounting for Acquisitions
of Certain Financial Institutions - an amendment of FASB Statements No. 72
and 144 and FASB Interpretation No. 9, which brings all business
combinations involving financial institutions, except mutual financial
institutions, into the scope of SFAS No. 141, Business Combinations. This
statement requires that all acquisitions of financial institutions that
meet the definition of a business, including acquisitions of part of a
financial institution that meet the definition of a business, must be
accounted for in accordance with SFAS No. 141 and the related intangibles
accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such
acquisitions form the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also amends
SFAS No. 144 to include in its scope long-term customer relationship
intangibles of financial institutions. SFAS No. 147 was effective upon
issuance and had no impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transaction and Disclosure - an amendment of FASB Statement
No. 123. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company adopted this standard effective December 31,
2002 and has included the required disclosures in the footnotes to the
financials. The Company has not elected the fair value treatment of
stock-based compensation and the adoption of this standard had no impact on
its financial position.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future
date are not expected to have a material impact on the consolidated
financial statements upon adoption.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances with the
Federal Reserve Bank based upon a percentage of deposits. The average amounts of
these reserve balances at December 31, 2002 and 2001 were approximately
$2,281,000 and $1,430,000, respectively.
59
NOTE 3 - SECURITIES
Securities are summarized as follows as of December 31 (tabular
amounts in thousands):
2002
----
Unrealized holding
Amortized ------------------ Fair
cost Gains Losses value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE:
OBLIGATIONS OF OTHER U. S. GOVERNMENT
AGENCIES AND CORPORATIONS
Maturing within one year .................................. $ 4,422 $ 97 $ - $ 4,519
Maturing after one but within five years .................. 53,059 339 - 53,398
Maturing after five but within ten years .................. 11,225 235 - 11,460
Maturing after ten years .................................. 10,419 367 - 10,786
------- ------- ------- -------
$79,125 $ 1,038 - $80,163
======= ======= ======= =======
SECURITIES HELD FOR INVESTMENT:
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing within one year .................................. $ 375 $ 3 - $ 378
Maturing after one but within five years .................. 2,327 128 - 2,455
Maturing after five but within ten years .................. 1,321 - 9 1,312
Maturing after ten years .................................. 100 3 - 103
------- ------- ------- -------
$ 4,123 $ 134 $ 9 $ 4,248
======= ======= ======= =======
2001
----
Unrealized holding
Amortized ------------------ Fair
cost Gains Losses value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE:
OBLIGATIONS OF OTHER U. S. GOVERNMENT
AGENCIES AND CORPORATIONS
Maturing after one but within five years .................. $12,834 $ 191 $ - $13,025
Maturing after five but within ten years .................. 6,725 16 - 6,741
Maturing after ten years .................................. 10,517 56 - 10,573
------- ------- ------- -------
$30,076 $ 263 $ - $30,339
======= ======= ======= =======
SECURITIES HELD FOR INVESTMENT:
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing within one year .................................. $ 726 $ 5 $ - $ 731
Maturing after one but within five years .................. 2,092 72 - 2,164
Maturing after five but within ten years .................. 421 4 - 425
Maturing after ten years .................................. 100 - 3 97
------- ------- ------- -------
$ 3,339 $ 81 $ 3 $ 3,417
======= ======= ======= =======
(Continued)
60
NOTE 3 - SECURITIES, Continued
OTHER INVESTMENTS, AT COST
The Banks, as member institutions, own certain stock investments in the
Federal Home Loan Bank of Atlanta ("FHLB"), the Federal Reserve Bank, and the
Bankers Bank. The stock is generally pledged against any borrowings from these
institutions (see Note 8). No ready market exists for the stock and it has no
quoted market value. However, redemption of these stocks has historically been
at par value. The Company's investments in stock are carried at par value and
are summarized below (tabular amounts in thousands):
December 31,
------------
2002 2001
---- ----
Federal Reserve Bank ....................... $ 396 $ 396
FHLB ....................................... 1,433 1,364
Bankers Bank ............................... 55 55
------ ------
$1,884 $1,815
====== ======
Securities with carrying amounts of $54,048,000 and $34,579,000 at
December 31, 2002 and 2001, respectively, were pledged to secure public deposits
and for other purposes required or permitted by law.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows (tabular amounts in thousands):
December 31,
------------
2002 2001
---- ----
Commercial and industrial - not secured by real estate ....................................... $ 35,548 $ 26,997
Commercial and industrial - secured by real estate ........................................... 72,600 53,445
Residential real estate - mortgage ........................................................... 69,579 60,881
Residential real estate - construction ....................................................... 48,452 48,099
Loans to individuals for household, family and other personal expenditures ................... 24,308 23,114
-------- --------
250,487 212,536
Less allowance for loan losses ............................................................... 2,850 2,288
-------- --------
247,637 $210,248
======== ========
Changes in the allowance for loan losses were as follows:
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
BALANCE, BEGINNING OF YEAR .......................................... $ 2,288 $ 2,023 $ 1,581
Provision for loan losses ...................................... 944 892 681
Loans charged off, net of recoveries ........................... (382) (627) (239)
------- ------- -------
BALANCE, END OF YEAR ................................................ $ 2,850 $ 2,288 $ 2,023
======= ======= =======
At December 31, 2002 and 2001 nonaccrual loans amounted to $926,000
and $993,000, respectively. Foregone interest income was approximately $76,000,
$85,000 and $64,000 on nonaccrual loans for 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, there were no impaired loans.
61
NOTE 5 - PREMISES AND EQUIPMENT
The principal categories and estimated useful lives of premises and
equipment are summarized below (tabular amounts, except years, in thousands):
December 31,
Estimated ------------
useful lives 2002 2001
------------ ---- ----
Land .................................... $ 2,122 $ 1,678
Building and improvements ............... 15 - 40 years 5,555 5,630
Furniture, fixtures and equipment ....... 3 - 10 years 5,479 3,834
------- -------
13,156 11,142
Less accumulated depreciation ........... 3,617 3,181
------- -------
$ 9,539 $ 7,961
======= =======
Depreciation expense of approximately $614,000, $564,000 and
$524,000 for 2002, 2001 and 2000, respectively, is included in occupancy and
equipment expenses in the accompanying consolidated statements of income.
NOTE 6 - DEPOSITS
The amounts and scheduled maturities of deposits are as follows
(tabular amounts in thousands):
December 31,
------------
2002 2001
---- ----
Time certificates maturing
Within one year ............................. $121,115 $115,570
After one but within two years .............. 35,522 19,483
After two but within three years ............ 13,768 1,562
After three but within four years ........... 1,998 886
After four years ............................ 4,723 118
-------- --------
177,126 137,619
Transaction and savings accounts ................. 151,048 99,183
-------- --------
$328,174 $236,802
======== ========
Certificates of deposit in excess of $100,000 totaled approximately
$79,399,000 and $61,954,000 at December 31, 2002 and 2001, respectively.
Interest expense on certificates of deposit in excess of $100,000 was
approximately, $2,197,000 in 2002, $3,066,000 in 2001, and $2,735,000 in 2000.
The Banks had approximately $990,000 and $12,781,000 in time
certificates from customers outside their market area, at December 31, 2002 and
2001, respectively.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as follows
(tabular amounts in thousands):
December 31,
------------
2002 2001
---- ----
U. S. Government securities with an amortized cost of $46,989,000
($48,138,000 fair value) and $18,671,000 ($18,786,000 fair value) at
December 31, 2002 and 2001, respectively, collateralize the agreements .................... $35,331 $20,646
======= =======
(Continued)
62
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, Continued
The Banks enter into sales of securities under agreements to
repurchase. These obligations to repurchase securities sold are reflected as
liabilities in the consolidated balance sheets. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are book entry securities maintained by a safekeeping
agent. The weighted average interest rate of these agreements was 2.44 percent
and 3.84 percent at December 31, 2002 and 2001, respectively. The agreements
mature daily. Securities sold under agreements to repurchase averaged
$25,597,000 and $17,165,000 during 2002 and 2001, respectively. The maximum
amounts outstanding at any month-end were $35,331,000 and $20,646,000 during
2002 and 2001, respectively.
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Banks had advances aggregating $17,000,000 and $23,985,000 at
December 31, 2002 and 2001, respectively. At December 31, 2002 and 2001, the
Banks had $12,000,000 and $18,985,000 of advances which bear interest at 1.30
and 1.83 percent, respectively, and mature daily. At December 31, 2002 and 2001,
$5,000,000 of the advances bear interest at 4.82 percent and mature in December
2010. An advance outstanding at December 31, 2001 was called by the FHLB in the
first quarter of 2002. At December 31, 2002 and 2001, the advances were
collateralized by one to four family residential mortgage loans aggregating
approximately $34,664,000 and $30,600,000, respectively, and by FHLB stock owned
by all three Banks. Additional borrowings under similar terms are available by
pledging additional collateral and purchasing additional stock in the FHLB.
NOTE 9 - UNUSED LINES OF CREDIT
The Banks have unused short-term lines of credit to purchase Federal
Funds from unrelated banks totaling $17,750,000 at December 31, 2002. These
lines of credit are available on a one to seven day basis for general corporate
purposes.
The Peoples National Bank has the ability to borrow an additional
$51,214,000 or 20 percent of total assets from the FHLB as of December 31, 2002.
The Bank of Anderson, N.A. has the ability to borrow an additional $13,186,000
or 10 percent of total assets, and the Seneca National Bank has the ability to
borrow an additional $4,530,000 or 10 percent of total assets. The borrowings
are available by pledging collateral and purchasing additional stock in the
FHLB.
NOTE 10 - INCOME TAXES
Provision for income taxes consists of the following (tabular amounts
in thousands):
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Current tax provision
Federal ................................ $ 2,346 $ 1,531 $ 1,351
State .................................. 201 217 107
------- ------- -------
Total current taxes ............. 2,547 1,748 1,458
Deferred tax benefit ................... (81) (110) (181)
------- ------- -------
Provision for income taxes ...... $ 2,466 $ 1,638 $ 1,277
======= ======= =======
63
NOTE 10 - INCOME TAXES, Continued
Income taxes differ from the tax expense computed by applying the
statutory federal income tax rate of 34 percent to income before income taxes.
The reasons for these differences are as follows:
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
Tax expense at statutory rate .......................................... $ 2,328 $ 1,601 $ 1,261
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit ......................... 129 135 71
Tax-exempt interest income ......................................... (51) (57) -
Officer's life insurance ........................................... (22) (22) (56)
Other .............................................................. 82 (19) 1
------- ------- -------
Provision for income taxes ....................................... $ 2,466 $ 1,638 $ 1,277
======= ======= =======
Deferred tax assets (liabilities) result from temporary differences
in the recognition of revenue and expenses for tax and financial statement
purposes. The sources and the cumulative tax effect of temporary differences are
as follows:
December 31,
------------
2002 2001
---- ----
Allowance for loan losses .................................................................... $ 969 $ 881
Tax depreciation in excess of book depreciation .............................................. (391) (207)
Deferred compensation ........................................................................ 70 63
Unrealized holding gains on securities available for sale .................................... (165) (90)
Tax deferral of business start-up costs ...................................................... 9 24
Other ........................................................................................ 49 (40)
----- -----
$ 541 $ 631
===== =====
Net deferred tax assets are included in other assets.
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. They involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the balance
sheets.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 2002, unfunded
commitments to extend credit were $64,267,000. Since many commitments will
expire unfunded, the amount of unfunded commitments does not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate.
(Continued)
64
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, Continued
At December 31, 2002, $5,248,000 was committed under letters of credit.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral varies but
may include accounts receivable, inventory, equipment, marketable securities and
property. Since most of the letters of credit are expected to expire without
being drawn upon, they do not necessarily represent future cash requirements.
NOTE 12 - LEGAL CONTINGENCIES
The Company is, from time to time, a party to various lawsuits and
claims arising from the conduct of its business. At December 31, 2002, no
lawsuits or claims were pending that are expected to have any material adverse
effect on the financial position or results of operations of the Company.
NOTE 13 - RELATED PARTY TRANSACTIONS
At December 31, 2002 and 2001, certain officers, directors, employees,
related parties and companies in which they have 10 percent or more beneficial
ownership, were indebted to the Banks in the aggregate amount of $8,261,000 and
$7,529,000, respectively. During 2002, $4,011,000 of new loans were made to this
group and repayments of $3,279,000 were received. This same group had deposits
in the Banks of $7,916,000.
NOTE 14 - COMMON STOCK AND EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share" requires that the Company present
basic and diluted net income per common share. The assumed conversion of stock
options creates the difference between basic and diluted net income per common
share. Income per share is calculated by dividing net income by the weighted
average number of common shares outstanding for each period presented. The
weighted average number of common shares outstanding for basic net income per
common share was 3,364,873 in 2002, 3,341,199 in 2001 and 3,455,235 in 2000. The
weighted average number of common shares outstanding for diluted net income per
common share was 3,473,170 in 2002, 3,432,323 in 2001 and 3,443,107 in 2000.
The Company declared or issued five percent common stock dividends
in 2002, 2001, and 2000. Net income per common share in prior years has been
restated to reflect these transactions.
NOTE 15 - RESTRICTION OF DIVIDENDS
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Banks. Federal banking
regulations restrict the amount of dividends that can be paid and such dividends
are payable only from the retained earnings of the Banks. At December 31, 2002
the Banks' retained earnings were approximately $15,309,000.
65
NOTE 16 - STOCK OPTION COMPENSATION PLANS
A summary of the status of the plans as of December 31, 2002, 2001 and
2000, and changes during the years ending on those dates is presented below (all
shares have been adjusted for stock dividends):
2002 2001 2000
---- ---- ----
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year ......................... 216,983 $ 7.97 200,084 $ 7.19 235,982 $ 6.28
Granted ............................ 17,325 17.37 19,845 15.00 9,261 15.44
Exercised .......................... (13,399) 6.70 (2,946) 3.89 (43,955) 4.19
Forfeited or expired ............... - - - - (1,204) 10.14
-------- -------- -------
Outstanding at end of year ......... 220,909 8.39 216,983 7.97 200,084 7.19
======== ========= =======
Options exercisable at
year-end ........................ 202,832 197,265 185,114
Weighted average fair
value of options granted
during the year .................... $ 17.37 $ 15.00 $ 15.44
Shares available for grant ......... 265,180 282,505 302,350
The following table summarizes information at December 31, 2002:
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price Exercisable price
- ---------------------- ---------------- ---------------- --------------- ---------------- --------------
$3.89 45,621 1.5 years $ 3.89 45,621 $ 3.89
6.72 87,086 4.3 6.72 87,086 6.72
10.22 1,908 5.3 10.22 1,908 10.22
10.20 19,132 5.6 10.20 16,262 10.20
10.19-10.20 15,299 5.8 10.19 13,004 10.19
12.38 5,454 6.3 12.38 5,454 12.38
15.57 9,248 7.3 15.57 9,248 15.57
16.33 6,061 8.1 16.33 2,425 16.33
14.75 1,653 8.3 14.75 661 14.75
14.52 8,816 8.5 14.52 8,816 14.52
14.52 1,102 8.6 14.52 441 14.52
14.12 2,204 8.8 14.12 882 14.12
16.91 8,925 9.5 16.91 8,925 16.91
17.86 8,400 9.6 17.86 2,099 17.86
--------------- ---------------
220,909 202,832
=============== ===============
The plans are administered by the Board of Directors or by a committee
designated by the Board. The plans provide that if the shares of common stock
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of common stock as a stock dividend on its
outstanding common stock, the number of shares of common stock deliverable upon
the exercise of options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend.
66
NOTE 17 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement plan for all eligible employees.
Subject to ongoing approval of the Board of Directors, the Company matches
employee contributions equal to fifty percent of the first six percent of such
contributions, subject to certain adjustments and limitations. Contributions to
the plan of $111,207, $85,089 and $73,155 were charged to operations during
2002, 2001 and 2000, respectively.
Supplemental benefits have been approved by the Board of Directors
for certain executive officers of The Peoples National Bank. These benefits are
not qualified under the Internal Revenue Code and they are not funded. However,
certain funding is provided informally and indirectly by life insurance
policies. The Company recorded expense related to these benefits of $42,706,
$42,705 and $42,705 in 2002, 2001, and 2000, respectively.
NOTE 18 - REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company and the Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Banks must meet specific capital
guidelines that involve quantitative measures of the Company's and the Banks'
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company and the Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital to
risk-weighted assets, and of Tier I capital to average assets. Management
believes, as of December 31, 2002, that the Company and Banks meet all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notification from the
Office of the Comptroller of the Currency categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Banks' categories. The Company's and the Banks' actual capital
amounts and ratios and minimum regulatory amounts and ratios are presented as
follows:
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
------------------------- -------------------------
Actual Minimum Minimum
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ------------ ---------- -------------
(amounts in thousands)
Peoples Bancorporation, Inc.:
As of December 31, 2002
Total Capital (to risk-weighted assets) ...... $ 34,912 11.96% $ 23,353 8.00% $ 29,191 10.00%
Tier I Capital (to risk-weighted assets) ..... 32,062 10.98 11,680 4.00 17,520 6.00
Tier I Capital (to average assets) ........... 32,062 7.93 16,173 4.00 20,216 5.00
As of December 31, 2001
Total Capital (to risk-weighted assets) ...... $ 30,665 12.88% $ 19,047 8.00% $ 23,808 10.00%
Tier I Capital (to risk-weighted assets) ..... 28,377 11.91 9,530 4.00 14,296 6.00
Tier I Capital (to average assets) ........... 28,377 9.55 11,886 4.00 14,857 5.00
(Continued)
67
NOTE 18 - REGULATORY MATTERS, Continued
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
------------------------- -------------------------
Actual Minimum Minimum
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ----------- ------------ ---------- -------------
(amounts in thousands)
The Peoples National Bank:
As of December 31, 2002
Total Capital (to risk-weighted assets) ....... $20,564 10.97% $14,997 8.00% $18,746 10.00%
Tier I Capital (to risk-weighted assets) ...... 18,789 10.02 7,501 4.00 11,251 6.00
Tier I Capital (to average assets) ............ 18,789 7.73 9,723 4.00 12,153 5.00
As of December 31, 2001
Total Capital (to risk-weighted assets) ....... $17,471 11.08% $12,614 8.00% $15,768 10.00%
Tier I Capital (to risk-weighted assets) ...... 16,149 10.24 6,308 4.00 9,462 6.00
Tier I Capital (to average assets) ............ 16,149 8.06 8,014 4.00 10,018 5.00
Bank of Anderson, N.A.:
As of December 31, 2002
Total Capital (to risk-weighted assets) ....... $ 8,760 11.69% $ 5,995 8.00% $ 7,494 10.00%
Tier I Capital (to risk-weighted assets) ...... 8,015 10.70 2,996 4.00 4,494 6.00
Tier I Capital (to average assets) ............ 8,015 6.43 4,986 4.00 6,233 5.00
As of December 31, 2001
Total Capital (to risk-weighted assets) ....... $ 6,333 12.31% $ 4,116 8.00% $ 5,145 10.00%
Tier I Capital (to risk-weighted assets) ...... 5,706 11.09 2,058 4.00 3,087 6.00
Tier I Capital (to average assets) ............ 5,706 8.99 2,539 4.00 3,174 5.00
Seneca National Bank:
As of December 31, 2002
Total Capital (to risk-weighted assets) ....... $ 3,943 12.18% $ 2,590 8.00% $ 3,237 10.00%
Tier I Capital (to risk-weighted assets) ...... 3,613 11.16 1,295 4.00 1,942 6.00
Tier I Capital (to average assets) ............ 3,613 7.90 1,829 4.00 2,287 5.00
As of December 31, 2001
Total Capital (to risk-weighted assets) ....... $ 3,712 13.95% $ 2,129 8.00% $ 2,661 10.00%
Tier I Capital (to risk-weighted assets) ...... 3,379 12.70 1,064 4.00 1,596 6.00
Tier I Capital (to average assets) ............ 3,379 10.11 1,337 4.00 1,671 5.00
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" requires disclosure of fair value information, whether or not
recognized in the balance sheets, when it is practical to estimate the fair
value. SFAS No. 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity or contractual obligations which require the
exchange of cash or other financial instruments. Certain items are specifically
excluded from the disclosure requirements, including the Company's common stock,
premises and equipment and other assets and liabilities.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing deposits in other banks and federal funds sold and
purchased.
(Continued)
68
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
Securities are valued using quoted fair market prices. Fair value for
the Company's off-balance sheet financial instruments is based on the discounted
present value of the estimated future cash flows.
Fair value for variable rate loans that reprice frequently, loans held
for sale, and for loans that mature in less than three months is based on the
carrying value. Fair value for fixed rate mortgage loans, personal loans, and
all other loans (primarily commercial) maturing after three months is based on
the discounted present value of the estimated future cash flows. Discount rates
used in these computations approximate the rates currently offered for similar
loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts
with no fixed maturity date is equal to the carrying value. Certificate of
deposit accounts and securities sold under repurchase agreements maturing within
one year are valued at their carrying value. The fair value of certificate of
deposit accounts and securities sold under repurchase agreements maturing after
one year are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments.
Fair value for long-term FHLB advances is based on discounted cash
flows using the Company's current incremental borrowing rate. Discount rates
used in these computations approximate rates currently offered for similar
borrowings of comparable terms and credit quality.
The Company has used management's best estimate of fair value based on
the above assumptions. Thus, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses which would be incurred in an
actual sale or settlement are not taken into consideration in the fair value
presented.
The estimated fair values of the Company's financial instruments are as
follows (amounts in thousands):
December 31,
------------
2002 2001
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Financial assets:
Cash and due from banks ....................................... $ 9,474 9,474 $ 5,199 $ 5,199
Interest-bearing deposits in other banks ...................... 33 33 24 24
Federal funds sold ............................................ 2,635 2,635 7,203 7,203
Securities available for sale ................................. 80,163 80,163 30,339 30,339
Securities held for investment ................................ 4,123 4,248 3,339 3,417
Other investments ............................................. 1,884 1,884 1,815 1,815
Mortgage loans held for sale .................................. 55,026 55,026 40,925 40,925
Loans (gross) ................................................. 250,487 259,392 212,536 217,172
Financial liabilities:
Deposits ...................................................... 328,174 330,221 236,802 238,338
Securities sold under repurchase agreements ................... 35,331 35,331 20,646 20,646
Advances from Federal Home Loan Bank .......................... 17,000 17,000 23,985 23,985
Financial instruments with off-balance
sheet risk:
Commitments to extend credit .................................. 64,267 64,267 $ 49,529 $ 49,529
Standby letters of credit ..................................... 5,248 5,248 4,817 4,817
69
NOTE 20 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of Peoples Bancorporation,
Inc. (parent company only) (amounts in thousands):
CONDENSED BALANCE SHEETS
December 31,
------------
2002 2001
---- ----
ASSETS
Cash ......................................... $ 620 $ 666
Due from subsidiaries ........................ 212 191
Investment in bank subsidiaries .............. 31,558 25,409
Premises and equipment ....................... - 1,823
Other assets ................................. 594 785
------- -------
$32,984 $28,874
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ............................ $ 237 $ 323
Shareholders' equity ......................... 32,747 28,551
------- -------
$32,984 $28,874
======= =======
CONDENSED STATEMENTS OF INCOME
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
INCOME
Fees and dividends from subsidiaries ............................. $ 3,199 $ 2,575 $ 2,225
Other income ..................................................... 94 107 12
------- ------- -------
3,293 2,682 2,237
------- ------- -------
EXPENSES
Salaries and benefits ............................................ 1,692 1,376 1,164
Occupancy ........................................................ 88 111 63
Equipment ........................................................ 168 125 126
Other operating .................................................. 683 570 459
------- ------- -------
2,631 2,182 1,812
EQUITY IN UNDISTRIBUTED NET INCOME OF BANK
SUBSIDIARIES ..................................................... 3,683 2,550 2,007
------- ------- -------
Income before income taxes .................................. 4,345 3,050 2,432
INCOME TAX EXPENSE (BENEFIT) ......................................... (38) (19) 1
------- ------- -------
Net income .................................................. $ 4,383 $ 3,069 $ 2,431
======= ======= =======
(Continued)
70
NOTE 20 - CONDENSED FINANCIAL INFORMATION, Continued
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
2002 2001 2000
---- ---- ----
OPERATING ACTIVITIES
Net income .................................................................. $ 4,383 $ 3,069 $ 2,431
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed net income of bank subsidiaries ................ (3,683) (2,550) (2,007)
Depreciation ........................................................... 28 69 41
Amortization ........................................................... 2 4 4
(Increase) decrease in other assets .................................... (198) (720) 6
Increase (decrease) in other liabilities ............................... 54 148 (62)
------- ------- -------
Net cash provided by operating activities ............................ 586 20 413
------- ------- -------
INVESTING ACTIVITIES
Investment in bank subsidiaries ............................................. (1,500) - -
Sale (purchase) of premises and equipment ................................... 1,823 (21) (1,145)
------- ------- -------
Net cash provided by (used for) investing activities ................. 323 (21) (1,145)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from the sale of stock and exercise of stock options ............... 80 1 26
Cash dividends .............................................................. (778) (570) (436)
Proceeds (repayment) of advances from subsidiaries .......................... (257) 33 40
------- ------- -------
Net cash provided by (used for) financing activities ................. (955) (536) (370)
------- ------- -------
Net decrease in cash ................................................. (46) (537) (1,102)
CASH, BEGINNING OF YEAR ......................................................... 666 1,203 2,305
------- ------- -------
CASH, END OF YEAR ............................................................... $ 620 $ 666 $ 1,203
======= ======= =======
71
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited condensed financial data by quarter for 2002 and 2001
is as follows (amounts, except share data, in thousands):
Quarter ended
-------------
2002 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Interest income ........................................ $ 4,939 $ 5,027 $ 5,344 $ 5,295
Interest expense ....................................... 1,725 2,058 2,149 2,065
---------- ---------- ---------- ----------
Net interest income ............................... 3,214 2,969 3,195 3,230
Provision for loan losses .............................. 313 198 143 290
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ...................... 2,901 2,771 3,052 2,940
Noninterest income ..................................... 1,402 1,386 1,512 2,264
Noninterest expenses ................................... 2,508 2,690 2,883 3,299
---------- ---------- ---------- ----------
Income before income taxes ........................ 1,795 1,467 1,681 1,905
Provision for income taxes ............................. 645 526 607 687
---------- ---------- ---------- ----------
Net income ........................................ $ 1,150 $ 941 $ 1,074 $ 1,218
========== ========== ========== ==========
Basic net income per common share (1) .................. $ 0.35 0.28 0.32 0.35
========== ========== ========== ==========
Diluted net income per common share (1) ................ $ 0.34 0.27 0.32 0.33
========== ========== ========== ==========
Basic weighted average shares
outstanding (1) ................................... 3,328,609 3,327,116 3,341,370 3,452,397
========== ========== ========== ==========
Diluted weighted average shares
outstanding (1) ................................... 3,430,487 3,445,871 3,402,755 3,573,062
========== ========== ========== ==========
Quarter ended
-------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2001
Interest income ........................................ $ 5,055 $ 5,181 $ 5,128 $ 4,849
Interest expense ....................................... 2,786 2,849 2,620 2,059
---------- ---------- ---------- ----------
Net interest income ............................... 2,269 2,332 2,508 2,790
Provision for loan losses .............................. 133 119 149 491
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses ...................... 2,136 2,213 2,359 2,299
Noninterest income ..................................... 1,214 1,292 1,281 1,480
Noninterest expenses ................................... 2,239 2,396 2,382 2,550
---------- ---------- ---------- ----------
Income before income taxes ........................ 1,111 1,109 1,258 1,229
Provision for income taxes ............................. 399 397 452 390
---------- ---------- ---------- ----------
Net income ........................................ $ 712 $ 712 $ 806 $ 839
========== ========== ========== ==========
Basic net income per common share (1) .................. $ 0.21 $ 0.21 $ 0.24 $ 0.26
========== ========== ========== ==========
Diluted net income per common share (1) ................ $ 0.21 $ 0.21 $ 0.24 $ 0.23
========== ========== ========== ==========
Basic weighted average shares
outstanding (1) ................................... 3,326,448 3,326,448 3,327,384 3,384,515
========== ========== ========== ==========
Diluted weighted average shares
outstanding (1) ................................... 3,417,990 3,417,990 3,427,638 3,432,323
========== ========== ========== ==========
(1) Share data has been restated to reflect 5 percent stock dividends.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "EXECUTIVE OFFICERS" under
Part I, Item 1 of this report on Form 10-K, and the information set forth under
the captions "ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Proxy Statement to be used in conjunction with the
2003 Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed
within 120 days of the Company's fiscal year end, is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
With the exception of information set forth under the captions "Board
Compensation Committee Report on Executive Compensation" and "Performance
Graph," which sub-sections are not incorporated herein by reference, the
information set forth under the caption "EXECUTIVE COMPENSATION" in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated
herein by reference.
The following table sets forth aggregated information as of December
31, 2002 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
73
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights under equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- ------------------ --------------- -------------- -----------------
Equity compensation
Plans approved by
Security holders 220,909 $ 8.39 265,180
Equity compensation
Plans not approved
By security holders 0 $ 0.00 0
------- ------ -------
Total 220,909 $ 8.39 265,180
For further information about the Company's plans as set forth in the
above table, see Note 16 of the financial statements set forth in Item 8 of this
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "CERTAIN TRANSACTIONS" in
the Proxy Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Based on their evaluation of the issuer's disclosure controls and
procedures (as defined in 17 C.F.R Sections 240.13a-14(c) and 240.15d-14(c)) as
of a date within 90 days prior to the filing of this annual report, the issuer's
chief executive officer and chief financial officer concluded that the
effectiveness of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
74
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) Financial Statements and Financial Schedules
The following consolidated financial statements and report of
independent auditors of Peoples Bancorporation, Inc. and subsidiaries are
included in Item 8 of this Annual Report on Form 10-K:
Report of Independent Auditors
Consolidated Statements of Condition - December 31, 2002 and 2001
Consolidated Statements of Income - Years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Shareholders' Equity - Years ended December
31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements - December 31, 2002
(a) (3) Listing of Exhibits:
Exhibit No. Description of Exhibit
3(i) Articles of Incorporation as amended (incorporated by reference to
exhibits to Registrant's Registration Statement on Form 8-A).
3(ii) Bylaws (incorporated by reference to exhibits to Registrant's
Registration Statement on Form 8-A).
4.1 Specimen Common Stock Certificate (incorporated by reference to
exhibits to Registrant's Registration Statement on Form S-4 (Number
33-46649)).
10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to exhibits to Registrant's Registration
Statement on Form SB-1 (Number 33-78602)).
10.3 Non-competition, Severance and Employment Agreement entered into
between the Company and Robert E. Dye, Sr. (incorporated by reference
to exhibits to Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
75
10.4 Non-competition, Severance and Employment Agreement entered into
between the Company and R. Riggie Ridgeway (incorporated by reference
to exhibits to Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.5 Peoples Bancorporation, Inc 1997 Non-Employee Director Stock Option
Plan (incorporated by reference to exhibits to Registrant's Form
10-KSB for the year ended December 31, 1997).
10.6 Salary Continuation Agreement between The Peoples National Bank and
Robert E. Dye, Sr., dated July 7, 1998, as amended (Original Agreement
incorporated by reference to exhibits to Registrant's Form 10-K for
the year ended December 31, 1998).
10.7 Salary Continuation Agreement between The Peoples National Bank and
Ralph R. Ridgeway, dated July 7, 1998, as amended (Original Agreement
incorporated by reference to exhibits to Registrant's Form 10-K for
the year ended December 31, 1998).
10.8 Non-competition, Severance and Employment Agreement entered into
between the Company and each of William B. West, David C. King and F.
Davis Arnette, Jr. (incorporated by reference to exhibits to
Registrant's Form 10-K for the year ended December 31, 1999).
10.9 Split Dollar Agreement between the Company and Robert E. Dye
10.10 Split Dollar Agreement between the Company and Ralph R. Ridgeway
21. Subsidiaries of the Registrant
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2002.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Peoples Bancorporation, Inc.
Dated: March 18, 2003 By: s/Robert E. Dye
----------------------------------
Robert E. Dye
Chairman of the Board,
President and Chief
Executive Officer
Dated: March 18, 2003 By: s/William B. West
----------------------------------
William B. West
Senior Vice President
(Principal Financial and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
s/ F. Davis Arnette, Jr. Director March 18, 2003
- ------------------------------
F. Davis Arnette, Jr.
s/ Garnet A. Barnes Director March 18, 2003
- ------------------------------
Garnet A. Barnes
s/ James A. Black, Jr. Director March 18, 2003
- ------------------------------
James A. Black, Jr.
s/ William A. Carr Director March 18, 2003
- ------------------------------
William A. Carr
s/ Charles E. Dalton Director March 18, 2003
- ------------------------------
Charles E. Dalton
77
s/ Robert E. Dye President, Chief March 18, 2003
- ------------------------------
Robert E. Dye Executive Officer
and Director
s/ Robert E. Dye, Jr. Director March 18, 2003
- ------------------------------
Robert E. Dye, Jr.
s/ W. Rutledge Galloway Director March 18, 2003
- ------------------------------
W. Rutledge Galloway
s/ David C. King Director March 18, 2003
- ------------------------------
David C. King
s/ Andrew M. McFall, III Director March 18, 2003
- ------------------------------
Andrew M. McFall, III
s/ E. Smyth McKissick, III Director March 18, 2003
- ------------------------------
E. Smyth McKissick, III
s/ Eugene W. Merritt, Jr. Director March 18, 2003
- ------------------------------
Eugene W. Merritt, Jr.
s/ George B. Nalley, Jr. Director March 18, 2003
- ------------------------------
George B. Nalley, Jr.
s/ Larry D. Reeves Director March 18, 2003
- ------------------------------
Larry D. Reeves
s/ R. Riggie Ridgeway Secretary, March 18, 2003
- ------------------------------
R. Riggie Ridgeway Treasurer and
Director
s/ Nell W. Smith Director March 18, 2003
- ------------------------------
Nell W. Smith
s/ A. J. Thompson, Jr., M.D. Director March 18, 2003
- ------------------------------
A. J. Thompson, Jr., M.
s/ William B. West Director March 18, 2003
- ------------------------------
William B. West
78
CERTIFICATIONS
I, Robert E Dye, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of Peoples
Bancorporation, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 18, 2003 By: /s/ Robert E. Dye, Sr.
------------------------
Robert E. Dye, Sr.
President and Chairman of the Board
79
CERTIFICATIONS
I, William B. West., certify that:
1. I have reviewed this annual report on Form 10-K of Peoples
Bancorporation, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 18, 2003 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)
80
EXHIBIT INDEX
Exhibit No. Description of Exhibit
3 (i) Articles of Incorporation as amended (incorporated by reference to
exhibits to Registrant's Registration Statement on Form 8-A).
3(ii) Bylaws (incorporated by reference to exhibits to Registrant's
Registration Statement on Form 8-A).
4.1 Specimen Common Stock Certificate (incorporated by reference to
exhibits to Registrant's Registration Statement on Form S-4 (Number
33-46649)).
10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to exhibits to Registrant's Registration
Statement on Form SB-1 (Number 33-78602)).
10.3 Noncompetition, Severance and Employment Agreement entered into
between the Company and Robert E. Dye, Sr. (incorporated by reference
to exhibits to Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.4 Noncompetition, Severance and Employment Agreement entered into
between the Company and R. Riggie Ridgeway (incorporated by reference
to exhibits to Registrant's Annual Report on Form 10-KSB for the year
ended December 31, 1995).
10.5 Peoples Bancorporation, Inc 1997 Non-Employee Director Stock Option
Plan (incorporated by reference to exhibits to Registrant's Form
10-KSB for the year ended December 31, 1997).
10.6 Salary Continuation Agreement between The Peoples National Bank and
Robert E. Dye, Sr., dated July 7, 1998, as amended (Original Agreement
incorporated by reference to exhibits to Registrant's Form 10-K for
the year ended December 31, 1998).
10.7 Salary Continuation Agreement between The Peoples National Bank and
Ralph R. Ridgeway, dated July 7, 1998, as amended (Original Agreement
incorporated by reference to exhibits to Registrant's Form 10-K for
the year ended December 31, 1998).
10.8 Non-competition, Severance and Employment Agreement entered into
between the Company and each of William B. West, David C. King and F.
Davis Arnette, Jr. (incorporated by reference to exhibits to
Registrant's Form 10-K for the year ended December 31, 1999).
10.9 Split Dollar Agreement between the Company and Robert E. Dye
10.10 Split Dollar Agreement between the Company and Ralph R. Ridgeway
21. Subsidiaries of the Registrant
81