SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission file
September 30, 2003 000-20616
PEOPLES BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-09581843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1818 East Main Street, Easley, South Carolina 29640
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (864) 859-2265
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was
required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12 b-2 of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the issuer's $1.67 par value
common stock as of November 7, 2003 was 3,507,911.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share data)
September 30, September 30, December 31,
2003 2002 2002
Unaudited Unaudited Audited
--------- --------- -------
ASSETS
CASH AND DUE FROM BANKS ......................................................... $ 13,445 $ 17,234 $ 9,474
INTEREST-BEARING DEPOSITS IN OTHER BANKS ........................................ 1,023 25 33
FEDERAL FUNDS SOLD .............................................................. 15,003 16,852 2,635
-------- -------- --------
Total cash and cash equivalents ............................................ 29,471 34,111 12,142
SECURITIES
Available for sale ......................................................... 79,462 76,948 80,163
Held for investment (market value of $5,188, $3,534
and $4,248) ............................................................ 5,069 3,371 4,123
Other investments, at cost ................................................. 2,146 1,884 1,884
LOANS-less allowance for loan losses of $3,745,
$2,804 and $2,850 ...................................................... 279,844 234,537 247,637
MORTGAGE LOANS HELD FOR SALE .................................................... 13,417 32,913 55,026
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization .............................................. 10,111 9,498 9,539
ACCRUED INTEREST RECEIVABLE ..................................................... 1,785 2,011 1,976
CASH SURRENDER VALUE OF LIFE INSURANCE .......................................... 2,279 1,385 2,202
OTHER ASSETS .................................................................... 2,103 1,390 1,430
-------- -------- --------
TOTAL ASSETS ........................................................... $425,687 $398,048 $416,122
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS
Noninterest-bearing ........................................................ $ 48,039 $ 45,531 $ 40,614
Interest-bearing ........................................................... 308,325 285,500 287,560
-------- -------- --------
Total deposits ......................................................... 356,364 331,031 328,174
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS ................................................................. 24,903 23,225 35,331
FEDERAL FUNDS PURCHASED ......................................................... 0 4,363 0
NOTES PAYABLE TO FEDERAL HOME LOAN BANK ......................................... 5,000 5,000 17,000
ACCRUED INTEREST PAYABLE ........................................................ 1,553 1,372 1,575
OTHER LIABILITIES ............................................................... 1,752 1,297 1,295
-------- -------- --------
Total Liabilities ...................................................... 389,572 366,288 383,375
-------- -------- --------
SHAREHOLDERS' EQUITY
Common Stock - 10,000,000 shares authorized, $1.67
Par value per share, 3,507,911 shares, 3,341,370 shares
and 3,507,911 shares outstanding, respectively ........................... 5,858 5,580 5,858
Additional paid-in capital ...................................................... 25,758 22,855 25,758
Retained Earnings ............................................................... 4,483 2,630 446
Accumulated other comprehensive income .......................................... 16 695 685
-------- -------- --------
Total Shareholders' Equity ............................................. 36,115 31,760 32,747
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $425,687 $398,048 $416,122
======== ======== ========
1
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except share data)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans .................................. $ 4,620 $ 4,400 $ 13,688 $ 13,007
Interest on securities
Taxable ................................................. 506 773 1,807 1,862
Tax-exempt .............................................. 45 36 132 108
Interest on federal funds ................................... 65 135 130 333
---------- ---------- ---------- ----------
Total interest income .......................................... 5,236 5,344 15,757 15,310
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits ........................................ 1,727 1,975 5,184 5,381
Interest on federal funds purchased and securities
sold under repurchase agreements ........................ 83 112 323 356
Interest on notes payable Federal Home Loan Bank ........... 62 62 216 195
---------- ---------- ---------- ----------
Total interest expense ......................................... 1,872 2,149 5,723 5,932
---------- ---------- ---------- ----------
Net interest income ............................................ 3,364 3,195 10,034 9,378
PROVISION FOR LOAN LOSSES ...................................... 549 143 1,007 654
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............ 2,815 3,052 9,027 8,724
NON-INTEREST INCOME
Service fees and other income ............................... 628 627 1,915 1,777
Mortgage banking ............................................ 2,478 885 7,350 2,523
Gain on sale of available for sale securities ............... 6 0 13 0
---------- ---------- ---------- ----------
3,112 1,512 9,278 4,300
NON-INTEREST EXPENSES
Salaries and benefits ....................................... 2,347 1,721 6,492 4,722
Occupancy ................................................... 156 154 454 399
Equipment ................................................... 323 217 799 549
Marketing and advertising ................................... 99 71 272 257
Communications .............................................. 71 58 199 169
Printing and supplies ....................................... 75 81 206 186
Bank paid loan costs ........................................ 108 132 362 466
Other operating expenses .................................... 694 449 2,013 1,333
---------- ---------- ---------- ----------
Total noninterest expenses ........................ 3,873 2,883 10,797 8,081
---------- ---------- ---------- ----------
Income before income taxes .................................. 2,054 1,681 7,508 4,943
PROVISION FOR INCOME TAXES ..................................... 749 607 2,735 1,778
---------- ---------- ---------- ----------
Net income .................................................. $ 1,305 $ 1,074 $ 4,773 $ 3,165
========== ========== ========== ==========
INCOME PER COMMON SHARE:
BASIC ....................................................... $ 0.37 $ 0.31 $ 1.36 $ 0.90
========== ========== ========== ==========
DILUTED ..................................................... $ 0.36 $ 0.30 $ 1.31 $ 0.88
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES:
BASIC ....................................................... 3,507,911 3,508,439 3,507,911 3,502,483
========== ========== ========== ==========
DILUTED ..................................................... 3,646,696 3,572,893 3,638,925 3,591,550
========== ========== ========== ==========
DIVIDENDS PAID PER COMMON SHARE ................................ $ 0.07 $ 0.06 $ 0.21 $ 0.17
========== ========== ========== ==========
2
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2002 and 2003
(Dollars in thousands except share data)
(Unaudited)
Accumulated
Common stock Additional other Total
------------ paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income equity
------ ------ ------- -------- ------ ------
Balance, December 31, 2001* ........................ 3,328,609 $ 5,559 $ 22,786 $ 32 $ 174 $ 28,551
Net Income ......................................... 3,165 3,165
Other comprehensive income, net of tax:
Unrealized holding gains on
securities available for sale ................... 521 521
----------
Comprehensive income ............................... 3,686
Cash Dividends ..................................... (567) (567)
Proceeds from stock options ........................ 12,761 21 69 90
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2002 ........................ 3,341,370 $ 5,580 $ 22,855 $ 2,630 $ 695 $ 31,760
========== ========== ========== ========== ========== ==========
Balance, December 31, 2002 ......................... 3,507,911 $ 5,858 $ 25,758 $ 446 $ 685 $ 32,747
Net Income ......................................... 4,773 4,773
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale ................... (661) (661)
Less reclassification
adjustments for gains
included in net income .......................... (8) (8)
----------
Comprehensive income ............................... 4,104
Cash Dividends ..................................... (736) (736)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2003 ........................ 3,507,911 $ 5,858 $ 25,758 $ 4,483 $ 16 $ 36,115
========= ========== ========== ========== ========== ==========
* Share data has been restated to reflect 5% stock dividends issued in January
2002 and November 2002.
3
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months Ended
September 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .......................................................................... $ 4,773 $ 3,165
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Gain on sale of premises and equipment .............................................. (6) (13)
Gain on sale of securities available for sale ....................................... (13) 0
Provision for loan losses ........................................................... 1,007 654
Depreciation and amortization ....................................................... 641 356
Amortization and accretion (net) of premiums and
discounts on securities ........................................................... 298 82
Origination of mortgage loans held for sale ......................................... (421,939) (263,913)
Sale of mortgage loans held for sale ................................................ 463,548 271,925
(Increase) decrease in accrued interest receivable .................................. 192 (328)
Increase in other assets ............................................................ (753) (147)
Increase (decrease) in accrued interest payable ..................................... (23) 154
Increase in other liabilities ....................................................... 733 225
--------- ---------
Net cash provided by operating activities ......................................... 48,458 12,160
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ......................................... (635) 0
Purchases of securities available for sale .......................................... (73,629) (73,632)
Purchase of other investments ....................................................... (195) (69)
Proceeds from the maturity of securities held to maturity ........................... 275 1,250
Proceeds from the maturity of securities available for sale ......................... 3,700 0
Proceeds from the sale of securities available for sale ............................. 6,999 5,750
Proceeds from the call of securities available for sale ............................. 48,515 16,650
Proceeds from principal pay downs ................................................... 13,241 4,049
Net increase in loans ............................................................... (33,214) (24,289)
Proceeds from the sale of premises and equipment .................................... 44 0
Purchase of premises and equipment .................................................. (1,257) (1,893)
--------- ---------
Net cash used in investing activities ............................................. (36,156) (72,184)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................................................ 28,191 94,229
Net increase (decrease) in securities sold under repurchase
agreements ........................................................................ (10,428) 2,579
Net increase in federal funds purchased ............................................. 0 4,363
Net decrease in advances from Federal Home Loan Bank ................................ (12,000) (18,985)
Proceeds from stock options exercised ............................................... 0 90
Cash dividend ....................................................................... (736) (567)
--------- ---------
Net cash provided by financing activities ......................................... 5,027 81,709
--------- ---------
Net increase in cash and cash equivalents ......................................... 17,329 21,685
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................... 12,142 12,426
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 29,471 $ 34,111
========= =========
CASH PAID FOR
Interest .......................................................................... $ 5,745 $ 5,778
========= =========
Income Taxes ...................................................................... $ 2,617 $ 1,597
========= =========
4
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 2002 Annual Report on Form
10-K and incorporated herein by reference.
STATEMENT OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection,
amounts due from banks and federal funds sold. All have maturities of three
months or less.
COMMON STOCK
The Board of Directors declared cash dividends of $0.07 per common share to
shareholders of record March 21, 2003, June 20, 2003 and September 19, 2003,
payable April 4, 2003, July 7, 2003 and October 3, 2003.
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 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 for the nine
months ended September 30, 2003 and 2002 was 3,507,911 and 3,502,483,
respectively. The weighted average number of common shares outstanding for
diluted net income per common share was 3,638,925 and 3,591,550 for the nine
months ended September 30, 2003 and 2002.
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.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported ........................................ $ 1,305 $ 1,074 $ 4,733 $ 3,165
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, Net of related tax effects ................... (17) (15) (39) (45)
---------- ---------- ---------- ---------
Pro forma net income ........................................... $ 1,288 $ 1,059 $ 4,694 $ 3,120
========== ========== ========== =========
Net income per common share
Basic - as reported .......................................... $ 0.37 $ 0.31 $ 1.36 $ 0.90
========== ========== ========== =========
Basic - pro forma ............................................ $ 0.37 $ 0.30 $ 1.34 $ 0.89
========== ========== ========== =========
Diluted - as reported ........................................ $ 0.36 $ 0.30 $ 1.31 $ 0.88
========== ========== ========== =========
Diluted - pro forma .......................................... $ 0.35 $ 0.30 $ 1.30 $ 0.87
========== ========== ========== =========
5
The Company issued a five-percent common stock dividend in January 2002
and November 2002. Per share data in 2002 has been restated to reflect these
transactions.
MANAGEMENT'S OPINION
The accompanying unaudited financial statements of Peoples Bancorporation,
Inc. have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q according to guidelines set forth by the
Securities and Exchange Commission. Accordingly, they do not include all
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. However, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for the fair presentation have been included.
The results of operations for any interim period are not necessarily indicative
of the results to be expected for an entire year.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the 2002
Annual Report of Peoples Bancorporation, Inc. on Form 10-K. Results of
operations for the three-month and nine-month periods ending September 30, 2003
are not necessarily indicative of the results to be attained for any other
period.
Critical Accounting Policies
Peoples Bancorporation, Inc. (the "Company") has adopted various
accounting policies that 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 in the 2002
Annual Report of Peoples Bancorporation, Inc. on Form 10-K.
Certain accounting policies involve significant judgments and
assumptions by management that 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 and such differences 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 the 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 the Company's 2002 Annual Report on
Form 10-K and the Allowance for Loan Losses and Provision for Loan Losses
sections of this report on Form 10-Q for a detailed description of the Company's
estimation process and methodology related to the allowance for loan losses.
7
Forward-Looking Statements
From time to time, including in this report, the Company may publish
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; adequacy of the
allowance for loan losses; dependence on senior management; and recently-enacted
or proposed legislation. Statements contained in this report 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.
Overview
The Company is a bank holding company with 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").
Currently, 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 seven banking offices and one retail mortgage
origination office located in the Upstate Area of South Carolina.
8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS PERFORMANCE
Overview
The consolidated Company's net income for the third quarter of 2003 was
$1,305,000 or $0.36 per diluted share compared to $1,074,000 or $0.30 per
diluted share for the second quarter of 2002, an increase of 21.5%. Net income
for the nine months ended September 30, 2003 was $4,773,000 or $1.31 per diluted
share compared to $3,165,000 or $0.88 per diluted share for the nine months
ended September 30, 2002, an increase of 50.8%. Return on average equity for the
nine months and three months ended September 30, 2003 was 20.38% and 14.59%
compared to 14.20% and 14.02% for the nine months and three months ended
September 30, 2002. Return on average assets for the nine months and three
months ended September 30, 2003 was 1.64% and 1.20% compared to 1.21% and 1.12%
for the nine months and three months ended September 30, 2002. The increases in
the Company's net income, earnings per fully diluted share, return on average
equity, and return on average assets in 2003 are attributable to increased
earnings at the Company's bank subsidiaries. The Peoples National Bank recorded
net earnings of $3,640,000 for the nine months ended September 30, 2003 compared
to net earnings of $2,386,000 for the nine months ended September 30, 2002, an
increase of 52.6%. Bank of Anderson, N. A. recorded net earnings of $838,000 for
the nine months ended September 30, 2003 compared to net earnings of $578,000
for the nine months ended September 30, 2002, an increase of 45.0%. Seneca
National Bank recorded net earnings of $326,000 for the nine months ended
September 30, 2003 compared to net earnings of $229,000 for the nine months
ended September 30, 2002, an increase of 42.4%.
Interest Income, Interest Expense and Net Interest Income
The largest component of the Company's net income is interest income. Net
interest income, which is the difference between the interest earned on assets
and the interest paid for the liabilities used to fund those assets, measures
the gross profit from lending and investing activities and is the primary
contributor to the Company's earnings. Net interest income before provision for
loan losses increased $169,000 or 5.3% to $3,364,000 for the quarter ended
September 30, 2003 compared to $3,195,000 for the quarter ended September 30,
2002. For the nine months ended September 30, 2003 net interest income before
provision for loan losses increased $656,000 or 7.0% to $10,034,000 compared to
$9,378,000 for the nine months ended September 30, 2002. The increases in the
net interest income resulted primarily from an increase in the balances of
interest earning assets, as well as a decrease in interest expense associated
with interest bearing liabilities. The Company's net interest margin for the
nine months and three months ended September 30, 2003 was 3.33% and 3.26%,
respectively, compared to 3.84% and 3.57%, respectively, for the nine months and
three months ended September 30, 2002.
The Company's total interest income for the third quarter of 2003 was
$5,236,000 compared to $5,344,000 for the third quarter of 2002, a decrease of
9
$108,000 or 2.0%. Total interest income for the nine months ended September 30,
2003 was $15,757,000 compared to $15,310,000 for the nine months ended September
30, 2002, an increase of $447,000 or 2.9%. Interest and fees on loans, the
largest component of total interest income, increased $220,000 in the third
quarter of 2003 to $4,620,000 compared to $4,400,000 for the third quarter of
2002, an increase of 5.0%. Interest and fees on loans increased $681,000 for the
nine months ended September 30, 2003 to $13,688,000 compared to $13,007,000 for
the nine months ended September 30, 2002, an increase of 5.2%. The increase in
interest and fees on loans, as well as the increase in total interest income,
resulted primarily from the higher average balances in these types of earning
assets, and was partially offset by the lower market interest rates that were
experienced at the Company's bank subsidiaries during the first nine months of
2003 compared to the first nine months of 2002. Interest on taxable securities,
the second largest component of total interest income, decreased $267,000 in the
third quarter of 2003 to $506,000 compared to $773,000 for the third quarter of
2002, a decrease of 34.5%. Interest on taxable securities decreased $55,000 for
the nine months ended September 30, 2003 to $1,807,000 compared to $1,862,000
for the nine months ended September 30, 2002, a decrease of 3.0%. The decrease
in interest on taxable securities for the three-month and mine-month periods was
primarily due to lower average balances in these types of earning assets, and
also due to lower market interest rates experienced by the Company's bank
subsidiaries.
The Company's total interest expense for the third quarter of 2003 was
$1,872,000 compared to $2,149,000 for the third quarter of 2002, a decrease of
$277,000 or 12.9%. Total interest expense for the nine months ended September
30, 2003 was $5,723,000 compared to $5,932,000 for the nine months ended
September 30, 2002, a decrease of $209,000 or 3.5%. Interest expense on
deposits, the largest component of total interest expense, decreased $248,000 in
the third quarter of 2003 to $1,727,000 compared to $1,975,000 for the third
quarter of 2002, a decrease of 12.6%. Interest expense on deposits decreased
$197,000 for the nine months ended September 30, 2003 to $5,184,000 compared to
$5,381,000 for the nine months ended September 30, 2002, a decrease of 3.7%.
Interest on federal funds purchased and securities sold under repurchase
agreements, the second largest component of total interest expense, decreased
$29,000 or 25.9% to $83,000 in the third quarter of 2003 compared to $112,000
for the third quarter of 2002. Interest on federal funds purchased and
securities sold under repurchase agreements decreased $33,000 or 9.3% to
$323,000 for the nine months ended September 30, 2003 compared to $356,000 for
the same period in 2002. The decrease in interest expense among each of
deposits, federal funds purchased, and securities sold under repurchase
agreements for the three-month and nine-month periods ending September 30, 2003
compared to the same periods in 2002 is largely attributable to lower market
interest rates experienced at the Company's bank subsidiaries and was partially
offset by the higher average balances in some of the accounts
Interest on notes payable to the Federal Home Loan Bank, the third largest
component of total interest expense, remained unchanged at $62,000 in the third
quarter of 2003 compared to the third quarter of 2002. Interest on notes payable
to the Federal Home Loan Bank increased $21,000 or 10.8% to $216,000 for the
10
nine months ended September 30, 2003 compared to $195,000 for the nine months
ended September 30, 2002. The increase in interest expense on notes payable to
the Federal Home Loan Bank for the nine-month period ending September 30, 2003
compared to the same period in 2002 is largely attributable to the higher
average balances in those notes payable, and was partially offset by the lower
market interest rates experienced at the Company's subsidiary banks.
Provision for Loan Losses
The provision for loan losses charged to operations during the three months
and nine months ended September 30, 2003 was $549,000 and $1,007,000,
respectively, compared to $143,000 and $654,000, respectively, for the three
months and nine months ended September 30, 2002. The changes in the Company's
provision for loan losses for the third quarter and first nine months of 2003
are based on management's evaluation of the Company's overall credit quality and
its estimate of loan losses inherent in the loan portfolio. The increases were
caused primarily by the growth of the loan portfolio, a $395,000 increase in
non-accruing loans and loans 90 days past due and still accruing interest,
coupled with a specific allocation for a certain loan in the approximate amount
of $300,000 identified by management that although current and still accruing
interest, the ultimate collectibility of outstanding principal is not considered
probable. During the first nine months of 2003, The Peoples National Bank made
provision of $775,000 compared to $475,000 for the same period on 2002. Bank of
Anderson, N.A. made provision of $140,000 for the first nine months of 2003,
compared to $100,000 for the same period of 2002. Seneca National Bank made
provision of $92,000 during the first nine months of 2003 compared to $79,000
for the same period of 2002.
Non-interest Income
Non-interest income increased $1,600,000 or 105.8% to $3,112,000 for the
third quarter of 2003 compared to $1,512,000 for the third quarter of 2002.
Non-interest income increased $4,978,000 or 115.8% to $9,278,000 for the nine
months ended September 30, 2003 compared to $4,300,000 for the nine months ended
September 30, 2002. Mortgage banking fee income, the largest component of
non-interest income, increased $1,593,000 or 180% to $2,478,000 for the third
quarter of 2003 compared to $885,000 for the third quarter of 2002. Mortgage
banking fee income increased $4,827,000 or 191.3% to $7,350,000 for the first
nine months of 2003 compared to $2,523,000 for the first nine months of 2002.
The increase in mortgage banking fee income is largely attributable to increased
customer refinancing activity due to market interest rates that have been at
historical lows. The Company does not expect to be able to sustain this level of
mortgage banking fee income indefinitely. Service fees and other income, the
second largest component of non-interest income, increased $1,000 or 0.2% to
$628,000 for the third quarter of 2003 compared to $627,000 for the third
quarter of 2002. Service fees and other income increased $138,000 or 7.8% to
$1,915,000 for the first nine months of 2003 compared to $1,777,000 for the
first nine months of 2002. Gains of $6,000 and $13,000 were realized on the sale
of available-for-sale securities during the three months and nine months ended
September 30, 2003, respectively. No gain or loss was realized on the sale of
securities during the three months and nine months ended September 30, 2002.
11
Non-interest Expense
Total non-interest expense increased $990,000 or 34.3% to $3,873,000 for
the third quarter of 2003 from $2,883,000 for the third quarter of 2002. Total
non-interest expense increased $2,716,000 or 33.6% to $10,797,000 for the nine
months ended September 30, 2003 from $8,081,000 for nine months ended September
30, 2002. Salaries and benefits, the largest component of non-interest expense,
increased $626,000 or 36.4% to $2,347,000 for the third quarter of 2003 from
$1,721,000 for the third quarter of 2002. Salaries and benefits increased
$1,770,000 or 37.5% to $6,492,000 for the nine months ended September 30, 2003
from $4,722,000 for the nine months ended September 30, 2002. The increase in
salaries and benefits is primarily attributable to increases in commissions paid
due to elevated levels of mortgage loan activity, as well as additional staffing
associated with the Company's continued growth and normal salary increases
throughout the Company.
BALANCE SHEET REVIEW
Loans
Outstanding loans (which excludes mortgage loans held for sale) represent
the largest component of earning assets at 70.9% of total earning assets. As of
September 30, 2003, the Company held total gross loans outstanding of
$283,589,000. Gross loans increased $33,102,000 or 13.2% from $250,487,000 in
total gross outstanding loans at December 31, 2002 and increased $46,248,000 or
19.4% from $237,341,000 in total gross loans outstanding at September 30, 2002.
The increase resulted from new loans generated by the Company's three banking
subsidiaries. The following table summarizes outstanding loans by type:
Loan Portfolio Composition September 30, December 31,
------------- ------------
(Dollars in Thousands) 2003 2002 2002
---- ---- ----
Commercial and Industrial - not secured by real estate .................... $ 38,886 $ 31,958 $ 35,548
Commercial and Industrial - secured by real estate ........................ 84,232 68,745 72,600
Residential real estate - mortgage ........................................ 84,518 67,731 69,579
Residential real estate - construction .................................... 52,833 43,077 48,452
Consumer loans ............................................................ 23,120 25,830 24,308
-------- -------- --------
Gross Loans .......................................................... $283,589 $237,341 $250,487
======== ======== ========
The interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. The average
yield on the Company's loans for the nine months and three months ended
September 30, 2003 was 5.81% and 5.80%, respectively, compared to 7.03% and
6.86%, respectively, for the nine months and three months ended September 30,
2002. From January 2001 through September 2003, the Federal Reserve has lowered
the federal funds target rate thirteen times for a total of 550 basis points, so
12
that interest rates are now at historically low levels. A large portion of the
Banks' adjustable rate loans, which constitute approximately 51.7% of the loan
portfolio, reprice almost immediately following each interest rate change by the
Federal Reserve.
The Company's loan portfolio consists principally of residential mortgage
loans, commercial loans, and consumer loans. Substantially all of these loans
are to borrowers located in South Carolina and are concentrated in the Company's
market areas.
The Company's real estate loans are primarily construction loans and other
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 employ mortgage loan personnel who originate and package loans
that are pre-sold at origination to third parties and are classified as mortgage
loans held for sale for reporting purposes. At September 30, 2003 the Company
held $13,417,000 of mortgage loans held for sale compared to $55,026,000 at
December 31, 2002 and $32,913,000 at September 30, 2002. The substantial swings
in the level of mortgage loans held for sale are due to wide fluctuations in the
demand for residential mortgages from time to time. During the three months
ended September 30, 2003 the Company originated $147,222,000 and sold
$174,142,000 in residential mortgage loans. During the nine months ended
September 30, 2003, the Company originated $421,939,000 and sold $463,548,000 in
residential mortgage loans.
The Company's commercial lending activity is directed principally towards
businesses whose demand for funds falls 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 and corporate borrowers, 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 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 usually consists of liens on inventories, receivables,
equipment, furniture and fixtures. Unsecured commercial loans are generally
short-term with emphasis on repayment strengths and low debt-to-worth ratios. At
September 30, 2003 approximately $9,649,000 or 7.8% of commercial loans were
unsecured.
The Company's 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 that the loan portfolio is adequately diversified. The
Company has no foreign loans or loans for highly leveraged transactions. The
Company has few agricultural loans.
13
Allowance for Loan Losses
The allowance for loan losses at September 30, 2003 was $3,745,000 or 1.32%
of loans outstanding (which excludes mortgage loans held for sale) compared to
$2,850,000 or 1.14% of loans outstanding at December 31, 2002 and to $2,804,000
or 1.18% of loans outstanding at September 30, 2002. The allowance for loan
losses is based upon management's continuing evaluation of the collectibility of
past due loans based on the historical loan loss experience of the Company,
current economic conditions affecting the ability of borrowers to repay, the
volume of loans, the quality of collateral securing non-performing and problem
loans, and other factors deserving recognition.
At September 30, 2003 the Company had $1,008,000 in non-accruing loans, no
restructured loans, $318,000 in loans more than ninety days past due and still
accruing interest, and $193,000 in Other Real Estate Owned. This compares to
$926,000 in non-accruing loans, no restructured loans, $5,000 loans more than
ninety days past due on which interest was still being accrued, and $193,000 in
other real estate owned at December 31, 2002. At September 30, 2002 the Company
had $691,000 in non-accruing loans, no restructured loans, $190,000 in loans
more than ninety days past due and still accruing interest, and $193,000 in
Other Real Estate Owned. Non-performing loans at September 30, 2003 consisted of
$153,000 in commercial loans, $846,000 in mortgage loans, and $9,000 in consumer
loans. Non-performing assets as a percentage of loans and other real estate
owned was 0.51%, 0.37%, and 0.40% at September 30, 2003, December 31, 2002, and
September 30, 2002, respectively.
Net charge-offs during the nine months ended September 30, 2003 were
$112,000 compared to net charge-offs of $138,000 for the nine months ended
September 30, 2002 and net charge-offs of $382,000 for the year ended December
31, 2002. The allowance for loan losses as a percentage of non-performing loans
was 282%, 306%, and 318% as of September 30, 2003, December 31, 2002, and
September 30, 2002, respectively.
The Company accounts for impaired loans in accordance with the provisions
of Statement of Financial Accounting Standards ("SFAS") 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. When the ultimate collectibility of an impaired loan's principal
is in doubt, wholly or partially, all cash receipts are then applied to
principal. At September 30, 2003 the Company had $362,000 in impaired loans as
compared to no impaired loans at December 31, 2002 and September 30, 2002.
Securities
The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
14
taxable securities, and in certain obligations of states and municipalities. The
Company does not invest in corporate bonds nor does it hold any trading
securities. The Company uses its investment portfolio to provide liquidity for
unexpected deposit liquidation or loan generation, to meet the Company's
interest rate sensitivity goals, to secure public deposits, and to generate
income. At September 30, 2003 securities totaled $86,677,000, which represents
21.7% of total earning assets. Securities increased $507,000 or 0.6% from
$86,170,000 invested as of December 31, 2002 and $4,474,000 or 5.4% from
$82,203,000 invested as of September 30, 2002. The increase in securities is
primarily the result of the investment of excess liquidity resulting from an
increase in deposits at the Company's bank subsidiaries.
At September 30, 2003 the Company's total investments classified as
available for sale had an amortized cost of $81,583,000 and a market value of
$81,608,000 for an unrealized gain of $25,000. This compares to an amortized
cost of $79,125,000 and a market value of $80,163,000 for an unrealized gain of
$1,038,000 on the Company's investments classified as available for sale at
December 31, 2002. At September 30, 2002 the Company's total investments
classified as available for sale had an amortized cost of $75,895,000 and a
market value of $76,948,000 for an unrealized gain of $1,053,000.
Cash and Cash Equivalents
The Company's cash and cash equivalents increased $17,329,000 or 142.7% to
$29,471,000 at September 30, 2003 from $12,142,000 at December 31, 2002 and
decreased $4,640,000 or 13.6% from $34,111,000 at September 30, 2002. The
substantial swings in the level of cash and cash equivalents are due to
fluctuations in the Banks' need for immediate liquidity.
Deposits
The Banks' primary source of funds for loans and investments are their
deposits. Total deposits grew $28,190,000 or 8.6% to $356,364,000 at September
30, 2003 from $328,174,000 at December 31, 2002 and $25,333,000 or 7.7% from
$331,031,000 at September 30, 2002. The increase resulted from deposits
generated by each of the Banks. Competition for deposit accounts is primarily
based on the interest rates paid, location convenience and services offered.
During the nine months ended September 30, 2003, interest-bearing deposits
averaged $299,907,000 compared to $247,208,000 for the same period of 2002. From
time to time Peoples National Bank solicits certificates of deposit from various
sources through brokers and through a program designed to gather deposits via
the Internet. This is done to reduce the need for funding from other short-term
sources such as federal funds purchased and short-term borrowings from the
Federal Home Loan Bank of Atlanta. These non-traditional deposits are primarily
being used to fund Peoples National Bank's short-term mortgage lending
activities. On September 30, 2003 there were no outstanding certificates
garnered through the Internet, and brokered deposits totaled $688,000. At
December 31, 2002 the Internet certificates of deposit totaled $990,000, and
there were no brokered deposits. At September 30, 2002 Peoples National Bank had
15
$1,486,000 in Internet certificates of deposit and brokered deposits totaled
$100,000. These deposits are an attractive alternative funding source available
to use while continuing efforts to maintain and grow the bank's local deposit
base.
The average interest rate paid on interest-bearing deposits was 2.31%
during the nine months ended September 30, 2003 compared to 2.86% for the same
period of 2002. In pricing deposits, the Company considers its liquidity needs,
the direction and levels of interest rates, and local market conditions. At
September 30, 2003 interest-bearing deposits comprised 86.5% of total deposits
compared to 86.3% at September 30, 2002.
The Company's core deposit base consists largely of consumer time deposits,
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, these core deposits continue to
provide the Company with a large source of relatively stable funds. Core
deposits as a percentage of total deposits averaged approximately 76.9% and
77.8% for the nine months ended September 30, 2003 and 2002 respectively. The
Company closely monitors its reliance on certificates greater than $100,000,
which are generally considered to be less stable and less reliable than core
deposits.
Borrowings
The Company's borrowings are comprised of federal funds purchased,
securities sold under repurchase agreements, and both short-term and long-term
advances from the Federal Home Loan Bank of Atlanta. At September 30, 2003
short-term borrowings totaled $24,903,000 and were comprised entirely of
securities sold under repurchase agreements. At December 31, 2002 short-term
borrowings totaled $47,331,000 and were comprised of $35,331,000 in securities
sold under repurchase agreements and $12,000,000 in short-term advances from the
Federal Home Loan Bank of Atlanta. At September 30, 2002 short-term borrowings
totaled $27,588,000 and were comprised of $4,363,000 in Federal Funds Purchased
and $23,225,000 in securities sold under repurchase agreements. Short-term
borrowings are used primarily for the immediate cash needs of the Company. The
Company also had $5,000,000 of long-term advances from the Federal Home Loan
Bank of Atlanta at each of September 30, 2003, December 31, 2002, and September
30, 2002.
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 increased loan demand and
withdrawals from deposit accounts. 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 to borrow
funds on a short-term basis from the Federal Reserve System and to purchase
federal funds from other financial institutions. The Banks are also members of
16
the Federal Home Loan Bank System and have the ability to borrow both short-term
and long-term funds on a secured basis. At September 30, 2003, The Peoples
National Bank had total borrowing capacity from the Federal Home Loan Bank of
Atlanta equal to $38,026,000, and the unused portion of this line of credit was
$33,026,000. The Company's other two bank subsidiaries, Bank of Anderson and
Seneca National Bank, each had established secured lines of credit with the
Federal Home Loan Bank at September 30, 2003 of $13,497,000 and $3,529,000,
respectively, all of which were unused. At September 30, 2003, the Banks had
unused federal funds lines of credit with various correspondent banks totaling
$22,450,000.
Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs, and requires liquidity to pay limited operating expenses and
dividends only.
During the first nine months of 2003, the Company had capital expenditures
of approximately $809,000 associated with the construction of a branch facility
for Bank of Anderson, which opened in August 2003. The Company is also planning
capital expenditures that may be made in whole or part during the remainder of
2003. This includes the expansion of the main office of Bank of Anderson for a
total cost of approximately $800,000. This expansion was begun in the third
quarter of 2003, with approximately $25,000 being spent during the quarter. The
Company may also purchase additional office space for the mortgage department of
The Peoples National Bank in Easley for approximately $630,000, as well as a
tract of land at an undetermined price for a branch office of The Peoples
National Bank in Greenville. The Company may additionally make other lesser
capital expenditures through the normal course of business.
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 and DERIVATIVE FINANCIAL INSTRUMENTS
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
September 30, 2003, the Banks had issued commitments to extend credit (excluding
commitments for residential mortgage loans designated for sale) of $72,662,000
through various types of arrangements. The commitments generally expire in one
year. Past experience indicates that many of these commitments to extend credit
will expire not fully used. As described under Liquidity, the Company believes
that it has adequate sources of liquidity to fund commitments that are drawn
upon by the borrowers.
In addition to commitments to extend credit, the Banks also issue standby
letters of credit, which are assurances to a third party that they 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 $4,273,000 at September 30,
2003. 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
17
obligations should the need arise. Various types of collateral secure most of
the standby letters of credit. The Company believes that the risk of loss
associated with standby letters of credit is comparable to the risk of loss
associated with its loan portfolio. Moreover, the fair value associated with any
standby letters of credit issued by the Company is immaterial to the Company.
According to Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, loan commitments
that relate to the origination or purchase of mortgage loans that will be held
for sale must be accounted for as derivative instruments. Therefore, such
commitments are recorded at fair value in derivative assets or liabilities, with
changes in fair value recorded in the net gain or loss on sale of mortgage
loans. The Company engages in the origination and sale of residential mortgage
loans and enters into commitments on an individual loan basis to both originate
and sell residential mortgage loans whereby the interest rate on the loan to the
borrower and to the end purchaser of the loan is determined prior to funding
(rate lock commitments). At September 30, 2003 the Company had commitments
outstanding to originate residential mortgage loans under rate locks commitments
from borrowers totaling $20,711,000. Simultaneously, the Company had commitments
to sell these loans to third parties under rate lock commitments. The Company
does not collect any upfront fees when issuing a mortgage loan commitment to a
potential borrower and mortgages are sold to third parties at par value. The
cumulative effect under SFAS No. 133 for rate lock commitments as of June 30,
2003 for the Company was immaterial.
Neither the Company nor the 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
have any obligations under non-cancelable operating lease agreements at
September 30, 2003.
18
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.
The Company and the Banks are required to maintain certain capital ratios
by federal banking regulators. The following table sets forth the capital ratios
for the Company and the Banks as of September 30, 2003:
CAPITAL RATIOS
(Amounts in Thousands)
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
Total Risk-based Capital ............... $39,767 12.75% $31,190 10.00% $24,952 8.00%
Tier 1 Risk-based Capital .............. 36,099 11.57 18,720 6.00 12,480 4.00
Leverage Ratio ......................... 36,099 8.31 21,720 5.00 17,376 4.00
Peoples National Bank:
Total Risk-based Capital ............... $24,059 12.71% $18,929 10.00% $15,143 8.00%
Tier 1 Risk-based Capital .............. 21,692 11.46 11,357 6.00 7,571 4.00
Leverage Ratio ......................... 21,692 8.50 12,760 5.00 10,208 4.00
Bank of Anderson, N. A:
Total Risk-based Capital ............... $ 9,736 11.45% $ 8,503 10.00% $ 6,802 8.00%
Tier 1 Risk-based Capital .............. 8,853 10.41 5,103 6.00 3,402 4.00
Leverage Ratio ......................... 8,853 7.08 6,252 5.00 5,002 4.00
Seneca National Bank:
Total Risk-based Capital ............... $ 4,357 11.72% $ 3,718 10.00% $ 2,974 8.00%
Tier 1 Risk-based Capital .............. 3,939 10.60 2,230 6.00 1,486 4.00
Leverage Ratio ......................... 3,939 8.23 2,393 5.00 1,914 4.00
19
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation--Transition and Disclosure", an amendment of FASB Statement 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. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board ("APB")
Opinion No. 28, "Interim Financial Reporting", to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of APB
Opinion No. 25. The provisions of SFAS No. 148 are effective for annual
financial statements for fiscal years ending after December 15, 2002, and for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company has adopted the disclosure
provisions of SFAS No. 148 which had no impact on the financial condition or
operating results of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on the financial condition or operating results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances.) Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
financial condition or operating results of the Company.
In June 2003, the American Institute of Certified Public Accountants
(AICPA) issued an exposure draft of a proposed Statement of Position (SOP),
Allowance for Credit Losses. The proposed SOP addresses the recognition and
measurement by creditors of the allowance for credit losses related to all
loans, as that term is defined in SFAS No. 114, Accounting by Creditors for
20
Impairment of a Loan. The proposed SOP provides that the allowance for credit
losses reported on a creditor's balance sheet should consist only of (1) a
component for individual loan impairment recognized and measured pursuant to
FASB Statement No. 114 and (2) one or more components of collective loan
impairment recognized pursuant to FASB Statement No. 5, Accounting for
Contingencies, and measured in accordance with the guidance in the proposed SOP.
The provisions of the proposed SOP would be effective for financial statements
for fiscal years beginning after December 15, 2003, with earlier application
permitted. The effect of initially applying the provisions of the proposed SOP,
if any, would be reported as a change in accounting estimate. The effect on the
financial condition or operating results of the Company related to the adoption
of this proposed SOP have not been determined.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises principally from interest rate
risk inherent in its lending, deposit, and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages certain other risks, such as credit quality and liquidity risk,
in the normal course of business, management considers interest rate risk to be
its most significant market risk and the risk that could potentially have the
largest material effect on the Company's financial condition and results of
operations. Other types of market risks, such as foreign currency risk and
commodity price risk do not arise in the normal course of the Company's business
activities, although they may affect a few of the Company's customers
The primary objective of Asset and Liability Management at the Company is
to manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate-sensitive earning assets and rate-sensitive
interest-bearing liabilities. The relationship of rate-sensitive earning assets
to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate-sensitive assets and 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 next twelve months. At September 30, 2003, on a cumulative basis
through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$141,412,000. This liability-sensitive position is largely attributable to the
Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $134,262,000, $57,478,000 and $39,386,000, respectively,
at September 30, 2003.
21
Item 4. CONTROLS AND PROCEDURES
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure and procedures (as defined in 17
C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that the
effectiveness of such controls and procedures, as of the end of the period
covered by this quarterly report, was adequate.
No disclosure is required under 17 C.F.R. Section 229.308(c).
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
31.2 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K.
Peoples Bancorporation, Inc. filed a Current Report on Form 8-K
dated July 15, 2003 pursuant to Item 9 of that Form with respect
to information provided pursuant to Item 12 of that Form.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORPORATION, INC.
Dated: November 7, 2003 By: /s/ Robert E. Dye, Sr.
------------------------
Robert E. Dye, Sr.
President and Chairman of the Board
Dated: November 7, 2003 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)
24
Exhibit Index
Exhibit No. Description of Exhibit
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
31.2 Rule 13a-14(a) / 15D-14(a) Certifications
32 Section 1350 Certifications
25