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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
March 31, 2004 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 12b-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 May 4, 2004 was 3,682,754.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share data)
March 31, March 31, December 31,
2004 2003 2003
Unaudited Unaudited Audited
--------- --------- -------
ASSETS
CASH AND DUE FROM BANKS ............................................................ $ 12,774 $ 14,616 $ 9,164
INTEREST-BEARING DEPOSITS IN OTHER BANKS ........................................... 320 8 214
FEDERAL FUNDS SOLD ................................................................. 14,315 8,448 11,865
-------- -------- --------
Total cash and cash equivalents ............................................... 27,409 23,072 21,243
SECURITIES
Available for sale ............................................................ 68,675 75,533 78,714
Held for investment (market value of $7,393, $4,723 and $5,752) ............... 7,180 4,545 5,632
Other investments, at cost .................................................... 1,814 2,079 2,147
LOANS-less allowance for loan losses of $3,464, $2,932 and $3,438 .................. 295,729 262,604 292,814
MORTGAGE LOANS HELD FOR SALE ....................................................... 8,777 44,143 5,101
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization ................................................. 10,984 9,534 10,231
ACCRUED INTEREST RECEIVABLE ........................................................ 1,616 1,874 1,821
CASH SURRENDER VALUE OF LIFE INSURANCE ............................................. 9,553 2,227 2,294
OTHER ASSETS ....................................................................... 1,686 1,568 1,759
-------- -------- --------
TOTAL ASSETS .............................................................. $433,423 $427,179 $421,756
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS
Noninterest-bearing ........................................................... $ 49,531 $ 65,041 $ 42,289
Interest-bearing .............................................................. 308,084 287,026 311,040
-------- -------- --------
Total deposits ............................................................ 357,615 352,067 353,329
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS .................................................................... 31,701 32,562 24,390
FEDERAL FUNDS PURCHASED ............................................................ - 400 -
NOTES PAYABLE TO FEDERAL HOME LOAN BANK ............................................ 5,000 5,000 5,000
ACCRUED INTEREST PAYABLE ........................................................... 1,497 1,476 1,604
OTHER LIABILITIES .................................................................. 1,046 1,606 1,272
-------- -------- --------
Total Liabilities ......................................................... 396,859 393,111 385,595
-------- -------- --------
SHAREHOLDERS' EQUITY
Common Stock - 10,000,000 shares authorized, $1.67
Par value per share, 3,682,754 shares, 3,507,911 shares
and 3,682,754 shares outstanding, respectively ................................ 6,150 5,858 6,150
Additional paid-in capital ......................................................... 29,505 25,758 29,505
Retained Earnings .................................................................. 727 1,858 444
Accumulated other comprehensive income ............................................. 182 594 62
-------- -------- --------
Total Shareholders' Equity ................................................ 36,564 34,068 36,161
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................................... $433,423 $427,179 $421,756
======== ======== ========
1
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except share data)
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
INTEREST INCOME
Interest and fees on loans ...................................................... $ 4,480 $ 4,527
Interest on securities
Taxable ..................................................................... 517 730
Tax-exempt .................................................................. 52 42
Interest on federal funds ....................................................... 34 26
---------- ----------
Total interest income .............................................................. 5,083 5,325
---------- ----------
INTEREST EXPENSE
Interest on deposits ............................................................ 1,529 1,728
Interest on federal funds purchased and securities
sold under repurchase agreements ............................................ 60 133
Interest on notes payable Federal Home Loan Bank ................................... 61 75
---------- ----------
Total interest expense ............................................................. 1,650 1,936
---------- ----------
Net interest income ........................................................... 3,433 3,389
PROVISION FOR LOAN LOSSES .......................................................... 130 129
---------- ----------
Net interest income after provision for loan losses ................................ 3,303 3,260
NON-INTEREST INCOME
Service fees and other income ................................................... 738 622
Gain on sale of mortgage loans held for sale .................................... 472 2,111
Gain on sale of available for sale securities .................................. 93 1
---------- ----------
1,303 2,734
NON-INTEREST EXPENSES
Salaries and benefits ........................................................... 2,155 2,026
Occupancy ....................................................................... 159 149
Equipment ....................................................................... 295 252
Marketing and advertising ...................................................... 79 64
Communications ................................................................. 61 63
Printing and supplies .......................................................... 43 65
Bank paid loan costs ........................................................... 61 114
Director fees .................................................................. 72 75
Executive retirement benefit expense ........................................... 419 38
Other operating expenses ........................................................ 448 548
---------- ----------
Total noninterest expenses ............................................ 3,792 3,394
---------- ----------
Income before income taxes ...................................................... 814 2,600
PROVISION FOR INCOME TAXES ......................................................... 273 943
---------- ----------
Net income ...................................................................... $ 541 $ 1,657
========== ==========
INCOME PER COMMON SHARE:
BASIC ........................................................................... $ 0.15 $ 0.45
========== ==========
DILUTED ......................................................................... $ 0.14 $ 0.43
========== ==========
WEIGHTED AVERAGE COMMON SHARES:
BASIC ........................................................................... 3,682,754 3,683,307
========== ==========
DILUTED ......................................................................... 3,833,717 3,812,988
========== ==========
DIVIDENDS PAID PER COMMON SHARE .................................................... $ 0.07 $ 0.07
========== ==========
2
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 2003 and 2004
(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, 2002 ........................ 3,507,911 $ 5,858 $ 25,758 $ 446 $ 685 $ 32,747
Net Income ........................................ - - - 1,657 - 1,657
Other comprehensive income, net of tax:
Unrealized holding gains on
securities available for sale .................. - - - - (91) (91)
---------
Comprehensive income .............................. 1,566
Cash Dividends .................................... - - - (245) - (245)
--------- --------- --------- --------- --------- ---------
Balance, March 31, 2003 ........................... 3,507,911 $ 5,858 $ 25,758 $ 1,858 $ 594 $ 34,068
========= ========= ========= ========= ========= =========
Balance, December 31, 2003 ........................ 3,682,754 $ 6,150 $ 29,505 $ 444 $ 62 $ 36,161
Net Income ........................................ - - 541 - 541
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale,
net of income taxes of $94 .................... - - - - 181
Less reclassification
adjustments for gains
included in net income, net of
income taxes of $32 .......................... - - - - (61) 120
---------
Comprehensive income .............................. 661
Cash Dividends .................................... - - - (258) - (258)
--------- --------- --------- --------- --------- ---------
Balance, March 31, 2004 ........................... 3,682,754 $ 6,150 $ 29,505 $ 727 $ 182 $ 36,564
========= ========= ========= ========= ========= =========
3
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months Ended
March 31,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ............................................................................ $ 541 $ 1,657
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Gain on sale of premises and equipment ................................................ - (13)
Gain on sale of mortgage loans held for sale .......................................... (472) (2,111)
Gain on sale of securities available for sale ......................................... (93) (1)
Provision for loan losses ............................................................. 130 129
Depreciation and amortization ......................................................... 247 210
Amortization and accretion (net) of premiums and
discounts on securities ............................................................. 69 78
Origination of mortgage loans held for sale .......................................... (43,368) (117,650)
Sale of mortgage loans held for sale ................................................. 40,164 130,644
Decrease in accrued interest receivable ............................................... 205 102
Decrease (increase) in other assets ................................................... 69 (164)
Decrease in accrued interest payable .................................................. (107) (99)
Increase (decrease)in other liabilities ............................................... (226) 373
--------- ---------
Net cash provided by (used for) operating activities ................................ (2,841) 13,155
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ........................................... (1,556) -
Purchases of securities available for sale ............................................ (15,708) (21,896)
Purchase of other investments ......................................................... (139) (195)
Proceeds from principal pay downs on securities available for sale .................... 1,588 3,463
Proceeds from the sale of securities available for sale ............................... 4,456 1,000
Proceeds from the maturities and calls of securities available for sale ............... 20,296 21,425
Purchase of cash surrender value of life insurance .................................... (7,224) -
Net increase in loans ................................................................. (3,046) (15,096)
Proceeds from the sale of premises and equipment ...................................... - 39
Purchase of premises and equipment .................................................... (999) (244)
--------- ---------
Net cash used in investing activities ............................................... (2,332) (11,504)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits .............................................................. 4,286 23,893
Net increase (decrease) in securities sold under repurchase
agreements .......................................................................... 7,311 (2,769)
Net increase in federal funds purchased ............................................... - 400
Net decrease in advances from Federal Home Loan Bank .................................. - (12,000)
Cash dividend ......................................................................... (258) (245)
--------- ---------
Net cash provided by financing activities ........................................... 11,339 9,279
--------- ---------
Net increase in cash and cash equivalents ........................................... 6,166 10,930
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................................. 21,243 12,142
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 27,409 $ 23,072
========= =========
CASH PAID FOR
Interest ............................................................................ $ 1,757 $ 2,035
========= =========
Income Taxes ........................................................................ $ 462 $ 492
========= =========
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 2003 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 19, 2004, payable April 2, 2004.
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 three
months ended March 31, 2004 and 2003 was 3,682,754 and 3,683,307, respectively.
The weighted average number of common shares outstanding for diluted net income
per common share was 3,833,717 and 3,812,988 for the three months ended March
31, 2004 and 2003.
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.
Quarter ended March 31,
-----------------------
2004 2003
---- ----
Net income, as reported ............................. $ 541 $ 1,657
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, Net of related tax effects ........ 27 (11)
--------- ---------
Pro forma net income ................................ $ 568 $ 1,646
========= =========
Net income per common share
Basic - as reported ............................... $ 0.15 $ 0.45
========= =========
Basic - pro forma ................................. $ 0.15 $ 0.45
========= =========
Diluted - as reported ............................. $ 0.14 $ 0.43
========= =========
Diluted - pro forma ............................... $ 0.15 $ 0.43
========= =========
The Company issued a five-percent common stock dividend in November 2003.
Per share data in 2003 has been restated to reflect these transactions.
5
NOTES TO FINANCIALS
Subsequent Event
The Company recorded a one-time, non-recurring charge of $376,000 in the
first quarter of 2004 to increase the liability for death benefits payable to
the beneficiary of the Company's former Chairman, President and CEO who died
shortly after the end of the period.
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 2003
Annual Report on Form 10-K of Peoples Bancorporation, Inc. Results of operations
for the three-month period ending March 31, 2004 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 2003
Annual Report on Form 10-K of Peoples Bancorporation, Inc.
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 2003 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.
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 first quarter of 2004 was
$541,000 or $0.14 per diluted share compared to $1,657,000 or $0.43 per diluted
share for the first quarter of 2003, a decrease of 67.4%. Return on average
equity for the three months ended March 31, 2004 was 5.97% compared to 20.46%
for the three months ended March 31, 2003. Return on average assets for the
three months ended March 31, 2004 was 0.51% compared to 1.60% for the three
months ended March 31, 2003. The decreases in the Company's net income, diluted
earnings per share, return on average equity, and return on average assets in
the first quarter of 2004 are largely attributable to a substantial decrease in
non-interest income derived from the gain on sale of residential mortgage loans
at the Company's bank subsidiaries, coupled with a one-time expense related to
salary continuation and death benefit plans for an executive at The Peoples
National Bank. The Peoples National Bank recorded net earnings of $234,000 for
the three months ended March 31, 2004 compared to net earnings of $1,243,000 for
the three months ended March 31, 2003, a decrease of 81.2%. Bank of Anderson, N.
A. recorded net earnings of $242,000 for the three months ended March 31, 2004
compared to net earnings of $300,000 for the three months ended March 31, 2004,
a decrease of 19.3%. Seneca National Bank recorded net earnings of $76,000 for
the three months ended March 31, 2004 compared to net earnings of $123,000 for
the three months ended March 31, 2003, a decrease of 38.2%.
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 $44,000 or 1.3% to $3,433,000 for the quarter ended March
31, 2004 compared to $3,389,000 for the quarter ended March 31, 2003. The
Company's net interest margin was 3.45% for the quarter ended March 31, 2004
compared to 3.47% for the quarter ended March 31, 2003.
The Company's total interest income for the first quarter of 2004 was
$5,083,000 compared to $5,325,000 for the first quarter of 2003, a decrease of
$242,000 or 4.5%. Interest and fees on loans, the largest component of total
interest income, decreased $47,000 in the first quarter of 2004 to $4,480,000
compared to $4,527,000 for the first quarter of 2003, a decrease of 1.0%.
Interest on taxable securities, the second largest component of total interest
income, decreased $213,000 in the first quarter of 2004 to $517,000 compared to
$730,000 for the first quarter of 2003, a decrease of 29.2%. The decrease in
interest on taxable securities for the three-month period was primarily due to
9
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 first quarter of 2004 was
$1,650,000 compared to $1,936,000 for the first quarter of 2003, a decrease of
$286,000 or 14.8%. Interest expense on deposits, the largest component of total
interest expense, decreased $199,000 in the first quarter of 2004 to $1,529,000
compared to $1,728,000 for the first quarter of 2003, a decrease of 11.5%. The
decrease in interest expense on deposits for the three-month period ending March
31, 2004 compared to the same period in 2003 is largely attributable to lower
market interest rates experienced at the Company's bank subsidiaries, and was
partially offset by higher average balances in these accounts. Interest on notes
payable to the Federal Home Loan Bank, the second largest component of total
interest expense, decreased $14,000 or 18.7% to $61,000 for the three months
ended March 31, 2004 compared to $75,000 for the three months ended March 31,
2003, largely attributable to lower market interest rates. Interest on federal
funds purchased and securities sold under repurchase agreements, the third
largest component of total interest expense decreased $73,000 or 54.9% to
$60,000 in the first quarter of 2004 compared to $133,000 for the first quarter
of 2003. This decrease is largely attributable to lower market interest rates
experienced at the Company's bank subsidiaries as well as lower average balances
in these accounts.
Provision for Loan Losses
The provision for loan losses charged to operations during the three months
ended March 31, 2004 was $130,000 compared to $129,000 for the three months
March 31, 2003, an increase of $1,000 or 0.8%. The changes in the Company's
provision for loan losses for the first quarter of 2004 are based on
management's evaluation of the Company's overall credit quality and its estimate
of loan losses inherent in the loan portfolio. During the first three months of
2004, The Peoples National Bank made a provision of $50,000 compared to $75,000
for the same period on 2003. Bank of Anderson, N.A. made a provision of $60,000
for the first three months of 2004, compared to $30,000 for the same period of
2003. Seneca National Bank made a provision of $20,000 during the first three
months of 2004 compared to $24,000 for the same period of 2003.
Non-interest Income
Non-interest income decreased $1,431,000 or 52.3% to $1,303,000 for the
first quarter of 2004 compared to $2,734,000 for the first quarter of 2003.
Service fees and other income, the largest component of non-interest income,
increased $116,000 or 18.7% to $738,000 for the first quarter of 2004 compared
to $622,000 for the first quarter of 2003. Gain on mortgage loans held for sale,
the second largest component of non-interest income, decreased $1,639,000 or
77.6% to $472,000 for the first quarter of 2004 compared to $2,111,000 for the
first quarter of 2003. The decrease in gain on mortgage loans held for sale is
primarily the result of a significant decrease in the volume of the residential
mortgage department, which resulted from a marked decrease in demand for
residential mortgage loans and refinancings. Gains of $93,000 and $1,000 were
10
realized on the sale of available-for-sale securities during the three months
ended March 31, 2004 and 2003, respectively.
Non-interest Expense
Total non-interest expense increased $398,000 or 11.7% to $3,792,000 for
the first quarter of 2004 from $3,394,000 for the first quarter of 2003.
Salaries and benefits, the largest component of non-interest expense, increased
$129,000 or 6.4% to $2,155,000 for the first quarter of 2004 from $2,026,000 for
the first quarter of 2003. The increase in salaries and benefits is primarily
attributable to additional staffing associated with the Company's continued
growth and normal salary increases throughout the Company. Occupancy and
furniture and equipment expenses increased $53,000 or 13.2% to $454,000 in the
first quarter of 2004 compared to $401,000 in the first quarter of 2003. The
increase is primarily attributable to the opening of a new branch office of Bank
of Anderson, N. A. in August 2003 and the purchase of additional office space by
The Peoples National Bank in Easley, South Carolina in January 2004 to be used
for residential mortgage operations.
Executive Retirement Benefit Expense increased $381,000 to $419,000 for the
first quarter of 2004 from $38,000 for the first quarter of 2003. This increase
is attributable to a one-time, non-recurring charge incurred in the first
quarter of 2004 of $376,000 to increase the liability for death benefits payable
to the beneficiary of the Company's former Chairman, President and CEO who died
shortly after the end of the period. This charge is required by FASB 112 in
accordance with generally accepted accounting principles.
Other non-interest expenses decreased $165,000 or 17.8% to $764,000 for the
first three months of 2004 from $929,000 for the first three months of 2003. The
decrease in other non-interest expenses was principally attributable to
decreases in expenses associated with a significant decrease in the volume of
mortgage loans processed in the first quarter of 2004 when compared to the frist
quarter of 2003.
BALANCE SHEET REVIEW
Loans
Outstanding loans (which excludes mortgage loans held for sale) represent
the largest component of earning assets at 74.7% of total earning assets. As of
March 31, 2004, the Company held total gross loans outstanding of $299,193,000.
Gross loans increased $2,941,000 or 1.0% from $296,252,000 in total gross
outstanding loans at December 31, 2003 and increased $33,657,000 or 12.7% from
$265,536,000 in total gross loans outstanding at March 31, 2003. The increase
resulted from new loans generated by the Company's three banking subsidiaries.
The following table summarizes outstanding loans by type:
11
Loan Portfolio Composition March 31, December 31,
(Dollars in Thousands) --------- ------------
2004 2003 2003
---- ---- ----
Commercial and Industrial - not secured by real estate ................. $ 41,146 $ 36,071 $ 44,306
Commercial and Industrial - secured by real estate ..................... 88,046 77,331 84,805
Residential real estate - mortgage ..................................... 92,618 76,208 90,299
Residential real estate - construction ................................. 55,937 54,521 55,139
Consumer loans ......................................................... 21,446 21,405 21,703
-------- -------- --------
Gross Loans ....................................................... $299,193 $265,536 $296,252
======== ======== ========
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 three months ended March 31, 2004 was 5.90%
compared to 6.00% for the three months ended March 31, 2003. Interest rates are
presently at historically low levels. During 2003, the Federal Reserve lowered
the federal funds target rate one time in June by 25 basis points. A large
portion of the Company's adjustable rate loans, which constitute 53.6% of the
loan portfolio, reprice almost immediately following an 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 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
pre-sold at origination to third parties. These loans are classified as loans
held for sale for reporting purposes. In the first quarter of 2004, the Company
originated $43,368,000 and sold $40,164,000 in mortgage loans held for sale
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 an 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
March 31, 2004 approximately $21,548,000 or 52.4% of commercial loans were
unsecured.
12
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.
Allowance for Loan Losses
The allowance for loan losses at March 31, 2004 was $3,464,000 or 1.16% of
loans outstanding (which excludes mortgage loans held for sale) compared to
$3,438,000 or 1.16% of loans outstanding at December 31, 2003, and to $2,932,000
or 1.10% of loans outstanding at March 31, 2003. 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 March 31, 2004 the Company had $677,000 in non-accruing loans, no
restructured loans, $1,000 in loans more than ninety days past due and still
accruing interest, and $728,000 in Other Real Estate Owned. This compares to
$829,000 in non-accruing loans, no restructured loans, $122,000 in loans more
than ninety days past due on which interest was still being accrued, and
$517,000 in other real estate owned at December 31, 2003. At March 31, 2003 the
Company had $662,000 in non-accruing loans, no restructured loans, $303,000 in
loans more than ninety days past due and still accruing interest, and $229,000
in Other Real Estate Owned. Non-performing loans at March 31, 2004 consisted of
$23,000 in commercial loans, $620,000 in mortgage loans, and $34,000 in consumer
loans. Non-performing assets as a percentage of loans and other real estate
owned was 0.46%, 0.49%, and 0.39% at March 31, 2004, December 31, 2003 and March
31, 2003, respectively.
Net charge-offs during the three months ended March 31, 2004 were $104,000
compared to net charge-offs of $48,000 for the three months ended March 31, 2003
and net charge-offs of $518,000 for the year ended December 31, 2003. The
allowance for loan losses as a percentage of non-performing loans was 511%,
362%, and 307% as of March 31, 2004, December 31, 2003, and March 31, 2003,
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 each of March 31, 2004, December 31, 2003, and March 31, 2003, the
Company had no impaired loans.
13
Securities
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
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 March 31, 2004 securities totaled $77,669,000, which represents 19.4%
of total earning assets. Securities decreased $8,824,000 or 10.2% from
$86,493,000 invested as of December 31, 2003, and decreased $4,488,000 or 5.5%
from $82,157,000 invested as of March 31, 2003. The majority of the decrease
since December 31, 2003 was attributable to the increased calls of U. S. agency
securities in the amount of $19,825,000 and the sale of available-for-sale
mortgage backed securities in the amount of $4,456,000 at the Company's bank
subsidiaries.
At March 31, 2004 the Company's total investments classified as available
for sale had an amortized cost of $70,213,000 and a market value of $70,489,000
for an unrealized gain of $276,000. This compares to an amortized cost of
$78,620,000 and a market value of $78,714,000 for an unrealized gain of $94,000
on the Company's investments classified as available for sale at December 31,
2003. At March 31, 2003 the Company's total investments classified as available
for sale had an amortized cost of $74,633,000 and a market value of $75,533,000
for an unrealized gain of $900,000.
Cash Surrender Value of Life Insurance
The Company's cash surrender value of life insurance was $9,553,000 at
March 31, 2004, an increase of $7,259,000 or 316.4% from the $2,294,000 held at
December 31, 2003 and an increase of $7,326,000 or 329.0% from the $2,227,000
held at March 31, 2003. The increase is due to the purchase of single-premium
life insurance policies during the first quarter of 2004 on certain officers of
the Company and its bank subsidiaries. Earnings from the ownership of these
policies are used to partially offset the cost of certain employee-related
benefits.
Cash and Cash Equivalents
The Company's cash and cash equivalents increased $6,166,000 or 29.0% to
$27,409,000 at March 31, 2004 from $21,243,000 at December 31, 2003 and
increased $4,337,000 or 18.8% from $23,072,000 at March 31, 2003. 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 $4,286,000 or 1.2% to $357,615,000 at March 31,
14
2004 from $353,329,000 at December 31, 2003 and $5,548,000 or 1.6% from
$352,067,000 at March 31, 2003. Competition for deposit accounts is primarily
based on the interest rates paid, location convenience and services offered.
During the three months ended March 31, 2004, interest-bearing deposits
averaged $309,017,000 compared to $289,092,000 for the same period of 2003. 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 have been
primarily used to fund The Peoples National Bank's short-term mortgage lending
activities. On each of March 31, 2004, December 31, 2003 and March 31, 2003
there were no outstanding certificates garnered through the Internet, and no
brokered deposits.
The average interest rate paid on interest-bearing deposits was 1.99%
during the three months ended March 31, 2004 compared to 2.42% for the same
period of 2003. In pricing deposits, the Company considers its liquidity needs,
the direction and levels of interest rates, and local market conditions. At
March 31, 2004 interest-bearing deposits comprised 86.1% of total deposits
compared to 81.5% at March 31, 2003.
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 76.7% and
80.3% for the three months ended March 31, 2004 and 2003, respectively. Time
deposits of $100,000 or more represented 23.3% of total deposits at March 31,
2004 and 19.7% at March 31, 2003. The Company's larger denomination time
deposits are generally garnered from customers within the local market areas of
its banks, and therefore may have a greater degree of stability than is
typically associated with this source of funds at other financial institutions.
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 March 31, 2004 and
December 31, 2003 short-term borrowings totaled $31,701,000 and $24,390,000,
respectively, and were comprised entirely of securities sold under repurchase
agreements. At March 31, 2003 short-term borrowings totaled $32,962,000 and were
comprised of $400,000 in Federal Funds Purchased and $32,562,000 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 March
31, 2004, December 31, 2003, and March 31, 2003.
15
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
the Federal Home Loan Bank System and have the ability to borrow both short-term
and long-term funds on a secured basis. At March 31, 2004, The Peoples National
Bank had total borrowing capacity from the Federal Home Loan Bank of Atlanta
equal to $41,038,000, and the unused portion of this line of credit was
$36,038,000. 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 March 31, 2004 of $17,764,000 and $3,945,000,
respectively, all of which were unused. At March 31, 2004, the Banks had unused
federal funds lines of credit with various correspondent banks totaling
$23,750,000.
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 three months of 2004, the Company had capital expenditures
of approximately $630,000 associated with the purchase of additional office
space for the mortgage department of The Peoples National Bank. The Company is
also expecting capital expenditures that will be made during the remainder of
2004. This includes the expansion of the main office of Bank of Anderson for a
total cost of up to $800,000. This expansion was begun in the third quarter of
2003, with approximately $360,000 being spent through March 31, 2004. 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
March 31, 2004, the Banks had issued commitments to extend credit (excluding
commitments for residential mortgage loans designated for sale) of $93,179,000
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
16
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 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 $5,114,000 at March 31, 2004.
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. 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 March 31, 2004 the Company had commitments
outstanding to originate residential mortgage loans under rate locks commitments
from borrowers totaling $27,109,000. 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 March 31,
2004 for the Company was immaterial.
Neither the Company nor the subsidiaries are involved in any 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 March 31, 2004.
17
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 March 31, 2004:
CAPITAL RATIOS
(Amounts in Thousands)
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
Total Risk-based Capital .................................. $ 39,846 12.75% $ 32,082 10.00% $ 25,666 8.00%
Tier 1 Risk-based Capital ................................. 36,382 11.34 19,250 6.00 12,833 4.00
Leverage Ratio ............................................ 36,382 8.55 21,276 5.00 17,021 4.00
Peoples National Bank:
Total Risk-based Capital .................................. $ 23,485 12.62% $ 18,609 10.00% $ 14,887 8.00%
Tier 1 Risk-based Capital ................................. 21,459 11.53 11,167 6.00 7,445 4.00
Leverage Ratio ............................................ 21,459 8.89 12,069 5.00 9,655 4.00
Bank of Anderson, N. A:
Total Risk-based Capital .................................. $ 10,275 10.59% $ 9,703 10.00% $ 7,762 8.00%
Tier 1 Risk-based Capital ................................. 9,287 9.57 5,823 6.00 3,882 4.00
Leverage Ratio ............................................ 9,287 7.00 6,634 5.00 5,307 4.00
Seneca National Bank:
Total Risk-based Capital .................................. $ 4,507 12.21% $ 3,691 10.00% $ 2,953 8.00%
Tier 1 Risk-based Capital ................................. 4,057 10.99 2,215 6.00 1,477 4.00
Leverage Ratio ............................................ 4,057 8.03 2,526 5.00 2,021 4.00
18
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 March 2004, the FASB issued an exposure draft on "Share-Based
Payment". The proposed Statement addresses the accounting for transactions in
which an enterprise receives employee services in exchange for a) equity
instruments of the enterprise or b) liabilities that are based on the fair value
of the enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. This proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. This
Statement, if approved, will be effective for awards that are granted, modified,
or settled in fiscal years beginning after a) December 15, 2004 for public
entities and nonpublic entities that used the fair-value-based method of
accounting under the original provisions of Statement 123 for recognition or pro
forma disclosure purposes and b) December 15, 2005 for all other nonpublic
entities. Earlier application is encouraged provided that financial statements
for those earlier years have not yet been issued. Retrospective application of
this Statement is not permitted. The adoption of this Statement, if approved,
will not have any impact on the Company's financial position or results of
operations.
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.
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
19
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 March 31, 2004, on a cumulative basis
through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$50,271,000. This liability-sensitive position is largely attributable to the
Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $134,236,000, $54,921,000 and $41,650,000, respectively,
at March 31, 2004.
20
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 controls 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).
21
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.
- Current Report on Form 8-K dated February 13, 2004 pursuant to
Items 7 and 12 of that form, containing Summary Income Statements
for the twelve months and three months ended December 31, 2003,
and Summary Balance Sheet at December 31, 2003.
- Current Report on Form 8-K dated March 3, 2004 pursuant to Items
7 and 12 of that form, correcting information contained in
Current Report on Form 8-K dated February 13, 2004, containing
Summary Income Statements for the twelve months and three months
ended December 31, 2003, and Summary Balance Sheet at December
31, 2003.
22
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: May 7, 2004 By: /s/ R. Riggie Ridgeway
------------------------
R. Riggie Ridgeway
President and CEO
Dated: May 7, 2004 By: /s/ Robert E. Dye, Jr.
------------------------
Robert E. Dye, Jr.
Senior Vice President and CFO
(principal financial officer)
23
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
24