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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
June 30, 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 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 August 10, 2004 was 3,689,451.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share data)
June 30, June 30, December 31,
2004 2003 2003
Unaudited Unaudited Audited
--------- --------- -------
ASSETS
CASH AND DUE FROM BANKS ........................................................... $ 11,653 $ 10,764 $ 9,164
INTEREST-BEARING DEPOSITS IN OTHER BANKS .......................................... 961 17 214
FEDERAL FUNDS SOLD ................................................................ 9,976 19,108 11,865
--------- --------- ---------
Total cash and cash equivalents .............................................. 22,590 29,889 21,243
SECURITIES
Available for sale ........................................................... 64,053 63,094 78,714
Held for investment (market value of $7,334, $5,089 and $3,417) .............. 7,434 4,845 5,632
Other investments, at cost ................................................. 1,814 2,057 2,147
LOANS-less allowance for loan losses of $3,607, $3,220 and $3,438 ................. 307,329 275,961 292,814
MORTGAGE LOANS HELD FOR SALE ...................................................... 4,049 40,337 5,101
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization ................................................ 11,203 9,802 10,231
ACCRUED INTEREST RECEIVABLE ....................................................... 1,679 1,824 1,821
CASH SURRENDER VALUE OF LIFE INSURANCE ............................................ 9,522 2,253 2,294
OTHER ASSETS ...................................................................... 2,202 1,738 1,759
--------- --------- ---------
TOTAL ASSETS ............................................................. $ 431,875 $ 431,800 $ 421,756
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS
Noninterest-bearing .......................................................... $ 47,551 $ 44,584 $ 42,289
Interest-bearing ............................................................. 307,467 314,410 311,040
--------- --------- ---------
Total deposits ........................................................... 355,018 358,994 353,329
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS ................................................................... 32,589 29,233 24,390
FEDERAL FUNDS PURCHASED ........................................................... 267 - -
NOTES PAYABLE TO FEDERAL HOME LOAN BANK ........................................... 5,000 5,000 5,000
ACCRUED INTEREST PAYABLE .......................................................... 1,245 1,557 1,604
OTHER LIABILITIES ................................................................. 1,594 1,485 1,272
--------- --------- ---------
Total Liabilities ........................................................ 395,713 396,269 385,595
--------- --------- ---------
SHAREHOLDERS' EQUITY *
Common Stock - 15,000,000 shares authorized, $1.11
Par value per share, 5,524,131 shares, 5,261,866 shares ...................... 6,132 5,841 6,132
and 5,524,131 shares outstanding, respectively .............................
Additional paid-in capital ........................................................ 29,523 25,775 29,523
Retained Earnings ................................................................. 1,467 3,423 444
Accumulated other comprehensive income (loss) ..................................... (960) 492 62
--------- --------- ---------
Total Shareholders' Equity ............................................... 36,162 35,531 36,161
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 431,875 $ 431,800 $ 421,756
========= ========= =========
* Share data has been restated to reflect the 3-for-2 stock split to be issued
in October 2004 and the 5% common stock dividend issued in November 2003.
1
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except share data) Three Months Ended Six Months Ended
Unaudited June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans .................................. $ 4,573 $ 4,541 $ 9,053 $ 9,068
Interest on securities
Taxable ................................................. 461 571 978 1,301
Tax-exempt .............................................. 58 45 110 87
Interest on federal funds ................................... 21 39 55 65
---------- ---------- ---------- ----------
Total interest income .......................................... 5,113 5,196 10,196 10,521
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits ........................................ 1,448 1,729 2,977 3,457
Interest on federal funds purchased and securities
sold under repurchase agreements ........................ 70 107 130 240
Interest on notes payable Federal Home Loan Bank ........... 65 79 126 154
---------- ---------- ---------- ----------
Total interest expense ......................................... 1,583 1,915 3,233 3,851
---------- ---------- ---------- ----------
Net interest income ............................................ 3,530 3,281 6,963 6,670
PROVISION FOR LOAN LOSSES ...................................... 153 329 283 458
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............ 3,377 2,952 6,680 6,212
NON-INTEREST INCOME
Service fees and other income ............................... 881 665 1,619 1,287
Gain on sale of mortgage loans held for sale ................ 615 2,761 1,087 4,872
Gain on sale of available for sale securities ............... 34 6 127 7
---------- ---------- ---------- ----------
1,530 3,432 2,833 6,166
NON-INTEREST EXPENSES
Salaries and benefits ....................................... 2,099 2,119 4,254 4,145
Occupancy ................................................... 167 149 326 298
Equipment ................................................... 322 224 617 476
Marketing and advertising ................................... 70 109 149 173
Communications .............................................. 56 65 117 128
Printing and supplies ....................................... 53 66 96 131
Bank paid loan costs ........................................ 83 140 144 254
Director fees ............................................... 69 68 141 143
Executive retirement benefit expense ........................ 29 41 448 79
Other operating expenses .................................... 508 549 956 1,097
---------- ---------- ---------- ----------
Total noninterest expenses ........................ 3,456 3,530 7,248 6,924
---------- ---------- ---------- ----------
Income before income taxes .................................. 1,451 2,854 2,265 5,454
PROVISION FOR INCOME TAXES ..................................... 454 1,043 727 1,986
---------- ---------- ---------- ----------
Net income .................................................. $ 997 $ 1,811 $ 1,538 $ 3,468
========== ========== ========== ==========
INCOME PER COMMON SHARE *
BASIC ....................................................... $ 0.18 $ 0.33 $ 0.28 $ 0.63
========== ========== ========== ==========
DILUTED ..................................................... $ 0.17 $ 0.32 $ 0.27 $ 0.61
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES *
BASIC ....................................................... 5,524,131 5,524,960 5,524,131 5,524,960
========== ========== ========== ==========
DILUTED ..................................................... 5,743,099 5,714,518 5,733,499 5,724,892
========== ========== ========== ==========
CASH DIVIDENDS PAID PER COMMON SHARE ........................... $ 0.07 $ 0.07 $ 0.14 $ 0.14
========== ========== ========== ==========
* Share data has been restated to reflect the 3-for-2 stock split to be issued
in October 2004 and the 5% common stock dividend issued in November 2003.
2
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2004 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 (loss) equity
------ ------ ------- -------- ------------- ------
Balance, December 31, 2002* ................. 5,261,866 $ 5,841 $ 25,775 $ 446 $ 685 $ 32,747
Net Income .................................. 3,468 3,468
Other comprehensive income,
net of tax:
Unrealized holding gains on
securities available for sale ............ (188) (188)
Less reclassification
adjustments for gains
included in net income, net of
Income taxes of $2 ....................... (5) (5)
----------
Comprehensive income ........................ 3,275
Cash Dividends .............................. (491) (491)
--------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2003* ..................... 5,261,866 $ 5,841 $ 25,775 $ 3,423 $ 492 $ 35,531
========== ========== ========== ========== ========== ==========
Balance, December 31, 2003* ................. 5,524,131 $ 6,132 $ 29,523 $ 444 $ 62 $ 36,161
Net Income .................................. 1,538 1,538
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale ............ (938) (938)
Less reclassification
adjustments for gains
included in net income, net of
income taxes of $43 ...................... (84) (84)
----------
0
Comprehensive income ........................ 516
Cash Dividends .............................. (515) (515)
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2004* ..................... 5,524,131 $ 6,132 $ 29,523 $ 1,467 $ (960) $ 36,162
========== ========== ========== ========== ========== ==========
* Share data has been restated to reflect the 3-for-2 stock split to be issued
in October 2004 and the 5% common stock dividend issued in November 2003.
3
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands) Six months Ended
June 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .............................................................................. $ 1,538 $ 3,468
Adjustments to reconcile net income to net cash provided
by operating activities
Gain on sale of premises and equipment .................................................. (13) (7)
Gain on sale of securities available for sale ........................................... (127) (7)
Gain on sale mortgage loans held for sale ............................................... (1,087) (4,872)
Provision for loan losses ............................................................... 283 458
Depreciation and amortization ........................................................... 501 405
Amortization and accretion (net) of premiums and
discounts on securities ............................................................... 148 188
Origination of mortgage loans held for sale ............................................. (97,539) (274,717)
Sale of mortgage loans held for sale .................................................... 99,678 294,278
Decrease in accrued interest receivable ................................................. 142 153
Decrease (increase) in other assets ..................................................... (447) (361)
Decrease in accrued interest payable .................................................... (359) (18)
Increase in other liabilities ........................................................... 975 303
--------- ---------
Net cash provided by operating activities ............................................. 3,693 19,271
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ............................................. (2,139) (405)
Purchases of securities available for sale .............................................. (21,236) (45,471)
Purchase of other investments ........................................................... (139) (195)
Proceeds from the principal pay downs on securities available for sale .................. 3,292 8,026
Proceeds from the maturity of securities held to maturity ............................... 320 275
Proceeds from the maturity of securities available for sale ............................. 472 3,200
Proceeds from the sale of securities available for sale ................................. 8,101 5,999
Proceeds from the call of securities available for sale ................................. 22,825 44,265
Purchase of cash surrender value life insurance ......................................... (7,224) -
Net increase in loans ................................................................... (14,798) (28,782)
Proceeds from the sale of premises and equipment ........................................ 18 44
Purchase of premises and equipment ...................................................... (1,478) (712)
--------- ---------
Net cash used in investing activities ................................................. (11,986) (13,756)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................................................ 1,689 30,821
Net increase (decrease) in securities sold under repurchase
agreements ............................................................................ 8,199 (6,098)
Net increase in federal funds purchased ................................................. 267 -
Net decrease in notes payable to Federal Home Loan Bank ................................. - (12,000)
Cash dividend ........................................................................... (515) (491)
--------- ---------
Net cash provided by financing activities ............................................. 9,640 12,232
--------- ---------
Net increase in cash and cash equivalents ............................................. 1,347 17,747
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................................... 21,243 12,142
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................... $ 22,590 $ 29,889
========= =========
CASH PAID FOR
Interest .............................................................................. $ 3,375 $ 3,869
========= =========
Income Taxes .......................................................................... $ 545 $ 1,778
========= =========
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 and June 18, 2004, payable April 2, 2004
and July 9, 2004.
Statement of Financial Accounting Standards ("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 six months
ended June 30, 2004 and 2003 was 5,524,131 and 5,524,960 respectively. The
weighted average number of common shares outstanding for diluted net income per
common share was 5,733,499 and 5,724,892 for the six months ended June 30, 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") SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported ...................................... $ 997 $ 1,811 $ 1,538 $ 3,468
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, Net of related tax effects ................. (27) (11) (55) (22)
------------ ------------ ------------ ---------
Pro forma net income ......................................... $ 970 $ 1,800 $ 1,483 $ 3,446
============ ============ ============ =========
Net income per common share
Basic - as reported ........................................ $ 0.18 $ 0.33 $ 0.28 $ 0.63
============ ============ ============ =========
Basic - pro forma .......................................... $ 0.18 $ 0.33 $ 0.27 $ 0.62
============ ============ ============ =========
Diluted - as reported ...................................... $ 0.17 $ 0.32 $ 0.27 $ 0.61
============ ============ ============ =========
Diluted - pro forma ........................................ $ 0.17 $ 0.31 $ 0.26 $ 0.60
============ ============ ============ =========
5
The Company issued a five-percent common stock dividend in November 2003
and will issue a 3-for-2 stock split in October 2004. Share data has been
restated to reflect these transactions. Upon issuance of the 3-for-2 stock
split, the Company will file articles of amendment to its Articles of
Incorporation increasing it's authorized shares from 10,000,000 to 15,000,000
and decreasing it's par value from $1.67 per share to $1.11 per share.
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
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.
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 of Peoples Bancorporation, Inc. on Form 10-K. Results of
operations for the three-month and six-month periods ending June 30, 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
7
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.
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 located in the Upstate Area of
South Carolina.
8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS PERFORMANCE
Overview
The Company's consolidated net income for the second quarter of 2004 was
$997,000 or $0.17 per diluted share compared to $1,811,000 or $0.32 per diluted
share for the second quarter of 2003, a decrease of $814,000 or 44.9%. Net
income for the six months ended June 30, 2004 was $1,538,000 or $0.27 per
diluted share compared to $3,468,000 or $0.61 per diluted share for the six
months ended June 30, 2003, a decrease of $1,930,000 or 55.7%. Return on average
equity for the six months and three months ended June 30, 2004 was 8.42% and
10.86% respectively, compared to 20.82% and 21.18% respectively for the six
months and three months ended June 30, 2003. Return on average assets for the
six months and three months ended June 30, 2004 was 0.72% and 0.92%
respectively, compared to 1.65% and 1.69% respectively for the six months and
three months ended June 30, 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 half of 2004 are largely attributable to a substantial
reduction in non-interest income as a consequence of reduced mortgage
originations as refinancing activity declined at the Company's bank
subsidiaries, coupled with a one-time expense at The Peoples National Bank
related to death benefit plans for an executive. The Peoples National Bank
recorded net earnings of $869,000 for the six months ended June 30, 2004
compared to net earnings of $2,633,000 for the six months ended June 30, 2003, a
decrease of 67.0%. Bank of Anderson, N. A. recorded net earnings of $505,000 for
the six months ended June 30, 2004 compared to net earnings of $595,000 for the
six months ended June 30, 2003, a decrease of 15.1%. Seneca National Bank
recorded net earnings of $174,000 for the six months ended June 30, 2004
compared to net earnings of $256,000 for the six months ended June 30, 2003, a
decrease of 32.0%.
Interest Income, Interest Expense and Net Interest Income
The largest component of the Company's income is net 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 $249,000 or 7.6% to $3,530,000 in the quarter ended June
30, 2004 compared to $3,281,000 in the quarter ended June 30, 2003. For the six
months ended June 30, 2004 net interest income before provision for loan losses
increased $293,000 or 4.4% to $6,963,000 compared to $6,670,000 for the six
months ended June 30, 2003. The Company's net interest margin for the three
months and six months ending June 30, 2004 was 3.54% and 3.50% respectively,
compared to 3.25% and 3.36% respectively for the three months and six months
ended June 30, 2003.
9
The Company's total interest income for the second quarter of 2004 was
$5,113,000 compared to $5,196,000 for the second quarter of 2003, a decrease of
$83,000 or 1.6%. Total interest income for the six months ended June 30, 2004
was $10,196,000 compared to $10,521,000 for the six months ended June 30, 2003,
a decrease of $325,000 or 3.1%. Interest and fees on loans, the largest
component of total interest income, increased $32,000 in the second quarter of
2004 to $4,573,000 compared to $4,541,000 for the second quarter of 2003, an
increase of 0.7%. Interest and fees on loans decreased $15,000 for the six
months ended June 30, 2004 to $9,053,000 compared to $9,068,000 for the six
months ended June 30, 2003, a decrease of 0.2%. Interest on taxable securities,
the second largest component of total interest income decreased $110,000 in the
second quarter of 2004 to $461,000 compared to $571,000 for the second quarter
of 2003, a decrease of 19.3%. Interest on taxable securities decreased $323,000
for the six months ended June 30, 2004 to $978,000 compared to $1,301,000 for
the six months ended June 30, 2003, a decrease of 24.8%. The decreases in
interest on taxable securities for the three- and six-month periods are
primarily due to lower average balances in these types of earning assets, and
also due to lower yields on these securities.
The Company's total interest expense for the second quarter of 2003 was
$1,583,000 compared to $1,915,000 for the second quarter of 2003, a decrease of
$332,000 or 17.3%. Total interest expense for the six months ended June 30, 2004
was $3,233,000 compared to $3,851,000 for the six months ended June 30, 2003, a
decrease of $618,000 or 16.0%. Interest expense on deposits, the largest
component of total interest expense, decreased $281,000 in the second quarter of
2004 to $1,448,000 compared to $1,729,000 for the second quarter of 2003, a
decrease of 16.3%. Interest expense on deposits decreased $480,000 for the six
months ended June 30, 2004 to $2,977,000 compared to $3,457,000 for the six
months ended June 30, 2003, a decrease of 13.9%. Interest on federal funds
purchased and securities sold under repurchase agreements, the second largest
component of total interest expense, decreased $37,000 or 34.6% to $70,000 in
the second quarter of 2004 compared to $107,000 for the second quarter of 2003.
Interest on federal funds purchased and securities sold under repurchase
agreements decreased $110,000 or 45.8% to $130,000 in the first half of 2004
compared to $240,000 for the first half of 2003. Interest on notes payable to
the Federal Home Loan Bank, the third largest component of total interest
expense, decreased $14,000 or 17.7% to $65,000 in the second quarter of 2004
compared to $79,000 for the second quarter of 2003. Interest on notes payable to
the Federal Home Loan Bank decreased $28,000 or 18.2% to $126,000 in the first
half of 2004 compared to $154,000 for the first half of 2003. The decrease in
interest expense among the various types of interest-bearing liabilities is
largely attributable to lower market interest rates experienced at the Company's
bank subsidiaries during the first half of 2004 when compared to the first half
of 2003, as well as lower average balances in some of these accounts.
Provision for Loan Losses
The provision for loan losses charged to operations during the three months
and six months ended June 30, 2004 was $153,000 and $283,000 respectively,
compared to $329,000 and $458,000 respectively for the three months and six
10
months ended June 30, 2003. The changes in the Company's provision for loan
losses for the second quarter and first half 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 half of 2004, The
Peoples National Bank made a provision of $125,000 compared to $325,000 for the
first half of 2003. Bank of Anderson, N.A. made provision of $120,000 for the
first six months of 2004, compared to $80,000 for the same period of 2003.
Seneca National Bank made provision of $38,000 during the first half of 2004
compared to $53,000 for the first half of 2003.
Non-interest Income
Non-interest income decreased $1,902,000 or 55.4% to $1,530,000 for the
second quarter of 2004 compared to $3,432,000 for the second quarter of 2003.
Non-interest income decreased $3,333,000 or 54.1% to $2,833,000 for the first
half of 2004 compared to $6,166,000 for the first half of 2003. Service fees and
other income, the largest core component of non-interest income in 2004,
increased $216,000 or 32.5% to $881,000 for the second quarter of 2004 compared
to $665,000 for the second quarter of 2003. Service fees and other income
increased $332,000 or 25.8% to $1,619,000 for the second quarter of 2004
compared to $1,287,000 for the second quarter of 2003. Gain on mortgage loans
held for sale, the second largest non-core component of non-interest income in
2004, decreased $2,146,000 or 77.7% to $615,000 for the second quarter of 2004
compared to $2,761,000 for the second quarter of 2003. Gain on mortgage loans
held for sale decreased $3,785,000 or 77.7% to $1,087,000 for the first half of
2004 compared to $4,872,000 for the first half of 2003. The decrease resulted as
a consequence of reduced mortgage originations as refinancing activity declined.
Gains of $34,000 and $6,000, respectively, were realized on the sale of
available-for-sale securities during the second quarters of 2004 and 2003. Gains
on available-for-sale securities were $127,000 for the first six months of 2004
compared to $7,000 for the first six months of 2003, an increase of $120,000.
Non-interest Expense
Total non-interest expense decreased $74,000 or 2.1% to $3,456,000 for the
second quarter of 2004 from $3,530,000 for the second quarter of 2003. Total
non-interest expense increased $324,000 or 4.7% to $7,248,000 for the first half
of 2004 from $6,924,000 for the first half of 2003. Salaries and benefits, the
largest component of non-interest expense, decreased $20,000 or 0.9%, to
$2,099,000 for the second quarter of 2004 from $2,119,000 for the second quarter
of 2003. Salaries and benefits increased $109,000 or 2.6%, to $4,254,000 for the
first half of 2004 from $4,145,000 for the first half of 2003. The changes in
salaries and benefits are primarily due to normal salary increases, changes in
personnel, and a reduction in commissions paid due to decreased volume of
mortgage loans originated.
Occupancy and furniture and equipment expenses increased $116,000 or 31.1%
to $489,000 in the second quarter of 2004 compared to $373,000 in the second
quarter of 2003. Occupancy and furniture and equipment expenses increased
11
$169,000 or 21.8%, to $943,000 for the first half of 2004 from $774,000 for the
first half 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 decreased $12,000 or 29.3% to $29,000
in the second quarter of 2004 compared to $41,000 in the second quarter of 2003.
Executive retirement benefit expense increased $369,000 to $448,000 for the
first half of 2004 from $79,000 for the first half of 2003. This increase is
attributable to a one-time, non-recurring charge incurred in the first quarter
of 2004 in the amount 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 SFAS
No. 112 in accordance with generally accepted accounting principles.
Other non-interest expenses decreased $158,000 or 15.8% to $839,000 for the
second quarter of 2004 from $997,000 for the second quarter of 2003. Other
non-interest expenses decreased $323,000 or 16.8% to $1,603,000 for the first
half of 2004 from $1,926,000 for the first half 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
originated in the first half of 2004 when compared to the first half of 2003.
BALANCE SHEET REVIEW
Loans
Outstanding loans (which excludes mortgage loans held for sale) represent
the largest component of earning assets at 77.9% of total earning assets. As of
June 30, 2004, the Company held total gross loans outstanding of $310,936,000.
Gross loans increased $14,684,000 or 5.0% from $296,252,000 in total gross
outstanding loans at December 31, 2003 and increased $31,755,000 or 11.4% from
$279,181,000 in total gross loans outstanding at June 30, 2003. The increase
resulted from new loans generated by the Company's three banking subsidiaries.
The following table summarizes outstanding loans by collateral type:
Loan Portfolio Composition June 30, December 31,
-------- ------------
(Dollars in Thousands) 2004 2003 2003
---- ---- ----
Commercial and Industrial - not secured by real estate .............. $ 39,312 $ 37,866 $ 44,306
Commercial and Industrial - secured by real estate ........................ 91,860 82,457 84,805
Residential real estate - mortgage ........................................ 97,992 81,409 90,299
Residential real estate - construction .................................... 59,894 55,785 55,139
Consumer loans ............................................................ 21,878 21,664 21,703
-------- -------- --------
Gross Loans .......................................................... $310,936 $279,181 $296,252
======== ======== ========
12
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 six months and three months ended June 30,
2004 was 5.74% and 5.82% respectively, compared to 5.87% and 5.74% respectively
for the six months and three months ended June 30, 2003. Interest rates are at
historically low levels. During 2003, the Federal Reserve lowered the federal
funds target one time in June by 25 points and recently increased the federal
funds target by 25 points on July 1, 2004. A large portion of the Company's
adjustable rate loans, which constitutes 53.2% 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 half of 2004, the Company
originated $97,539,000 and sold $99,678,000 in mortgage loans held for sale. As
of June 30, 2004 the Company had mortgage loans held for sale of $4,049,000, a
decrease of $1,052,000 or 20.6% from the $5,101,000 in mortgage loans held for
sale at December 31, 2003, and a decrease of $36,288,000 or 90.0% from the
$40,337,000 in mortgage loans held for sale at June 30, 2003. The decreases
resulted from reduced mortgage originations as refinancing activity declined at
the Banks.
The Company's commercial lending activity is directed principally towards
businesses whose demands for funds fall within each Banks' legal lending limits
and which are potential deposit customers of the Banks. This category of loans
includes loans made to individuals, partnerships, and corporations, 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
June 30, 2004 approximately $9,079,000 or 23.1% 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.
13
Management believes that the loan portfolio is adequately diversified. The
Company has no foreign loans or loans for highly leveraged transactions. The
Company has very few agricultural loans.
Allowance for Loan Losses
The allowance for loan losses at June 30, 2003 was $3,607,000 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 compared to
$3,220,000 or 1.15% of loans outstanding at June 30, 2003. The allowance for
loan losses is based upon management's continuing evaluation of the
collectibility of 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 the collateral securing
non-performing and problem loans, and other factors deserving recognition.
At June 30, 2004 the Company had $705,000 in non-accruing loans, no
restructured loans, $66,000 in loans more than ninety days past due and still
accruing interest, and $704,000 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 June 30, 2003, the
Company had $914,000 in non-accruing loans, no restructured loans, no loans more
than ninety days past due and still accruing interest, and $393,000 in other
real estate owned. Non-performing loans at June 30, 2004 consisted of $23,000 in
commercial loans, $650,000 in mortgage loans, and $32,000 in consumer loans.
Non-performing assets as a percentage of loans and other real estate owned was
0.47%, 0.49%, and 0.41% at June 30, 2004, December 31, 2003, and June 30, 2003,
respectively.
Net charge-offs during the first six months of 2004 were $114,000 compared
to net charge-offs of $88,000 for the first six months of 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 468%, 362%, and 352% as
of June 30, 2004, December 31, 2003, and June 30, 2003, respectively.
The Company accounts for impaired loans in accordance with the
provisions of SFAS No.114, Accounting by Creditors for Impairment of a Loan.
SFAS No. 114, as amended by SFAS No. 118, requires that impaired loans be
measured based on the present value of expected future cash flows or the
underlying collateral values as defined in the pronouncement. When the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are then applied to principal. The Company had no impaired
loans at June 30, 2004 and December 31, 2003 and $367,000 in impaired loans at
June 30, 2003.
14
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 June 30, 2004 securities totaled $73,301,000, which represents 18.4%
of total earning assets. Securities held at June 30, 2004 decreased $13,192,000
or 15.3% from $86,493,000 invested as of December 31, 2003 and increased
$3,305,000 or 4.7% from $69,996,000 invested as of June 30, 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 $22,825,000 and the sale of
available-for-sale, mortgage-backed securities in the amount of $8,101,000 at
the Company's bank subsidiaries.
At June 30, 2004 the Company's total investments classified as
available for sale had an amortized cost of $65,508,000 and a market value of
$64,053,000 for an unrealized loss of $1,455,000. This compares to an amortized
cost of $62,348,000 and a market value of $63,094,000 for an unrealized gain of
$746,000 on the Company's investments classified as available for sale at June
30, 2003. At December 31, 2003 the Company's total investments classified as
available for sale had an amortized cost of $78,620,000 and a market value of
$78,714,000 for an unrealized gain of $94,000.
Cash Surrender Value of Life Insurance
The Company's cash surrender value of life insurance was $9,522,000 at June
30, 2004, an increase of $7,228,000 or 315.1% from the $2,294,000 held at
December 31, 2003 and an increase of $7,269,000 or 322.6% from the $2,253,000
held at June 30, 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 $1,347,000 or 6.3% to
$22,590,000 at June 30, 2004 from $21,243,000 at December 31, 2003 and decreased
$7,299,000 or 24.4% from $29,889,000 at June 30, 2003. The 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 $1,689,000 or 0.5% to $355,018,000 at June 30,
2004 from $353,329,000 at December 31, 2003 and decreased $3,976,000 or 1.1%
from $358,994,000 at June 30, 2003. The increase resulted from deposits
15
generated by all of the Banks. Competition for deposit accounts is primarily
based on the interest rates paid, location convenience and services offered.
During the first six months of 2004, interest-bearing deposits averaged
$308,080,000 compared to $293,717,000 for the first six months 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 are primarily
being used to fund Peoples National Bank's short-term mortgage lending
activities. On June 30, 2004 there were no outstanding certificates garnered
through the Internet, and brokered deposits totaled $6,558,000. At December 31,
2003 there were no outstanding certificates garnered through the Internet, and
no brokered deposits. On June 30, 2003 there were no outstanding certificates
garnered through the Internet, and brokered deposits totaled $15,594,000. These
deposits are an attractive alternative funding source available to use while
continuing efforts to maintain and grow the banks' local deposit base.
The average interest rate paid on interest-bearing deposits was 1.94%
for the first six months of 2004 compared to 2.35% for the first six months of
2003. In pricing deposits, the Company considers its liquidity needs, the
direction and levels of interest rates, and local market conditions. At June 30,
2004 interest-bearing deposits comprised 86.6% of total deposits compared to
87.6% at June 30, 2003.
The Company's core deposit base consists largely of consumer time
deposits, savings, 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 77.1% and
74.1% for the six months ended June 30, 2004 and June 30, 2003, respectively.
The Company closely monitors its reliance on certificates greater than $100,000,
which are generally considered 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 June 30, 2004 short-term
borrowings totaled $32,856,000 and were comprised of $32,589,000 in securities
sold under repurchase agreements and $267,000 in Federal Funds Purchased. At
December 31, 2003 and June 30, 2003 short-term borrowings totaled $24,390,000
and $29,233,000 respectively and were comprised entirely of 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 June
30, 2004, December 31, 2003, and June 30, 2003.
16
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 June 30, 2004 The Peoples National
Bank had total borrowing capacity from the Federal Home Loan Bank of Atlanta
equal to $42,915,900, and the unused portion of this line of credit was
$37,915,900. The Company's other two bank subsidiaries, Bank of Anderson and
Seneca National Bank, each had secured lines of credit with the Federal Home
Loan Bank of Atlanta at June 30, 2004 of $18,516,000 and $3,656,000
respectively, all of which was unused. At June 30, 2003 the Banks had unused
federal funds lines of credit totaling $23,483,000.
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 six 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 additional capital expenditures during the
remainder of 2004. This includes the expansion of the main office of Bank of
Anderson for an estimated total cost of $800,000. This expansion was begun in
the third quarter of 2003, with approximately $648,000 being spent through June
30, 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 specified periods of time. At June
30, 2004, the Banks had issued commitments to extend credit (excluding
commitments for residential mortgage loans designated for sale) of $94,668,000
through various types of arrangements. These 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.
17
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 $5,298,000 at June 30, 2004. Past
experience indicates that many of these standby letters of credit will expire
unused. 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 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 June 30,
2004 the Company had commitments outstanding to originate residential mortgage
loans under rate lock commitments from borrowers totaling $22,093,000.
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, 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 June 30, 2004.
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 June 30, 2004:
CAPITAL RATIOS
(Amounts in Thousands)
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
Total Risk-based Capital ................................... $40,722 12.37% $32,920 10.00% $26,336 8.00%
Tier 1 Risk-based Capital .................................. 37,123 11.28 19,746 6.00 13,164 4.00
Leverage Ratio ............................................. 37,123 8.57 21,659 5.00 17,327 4.00
Peoples National Bank:
Total Risk-based Capital ................................... $23,939 12.42% $19,275 10.00% $15,420 8.00%
Tier 1 Risk-based Capital .................................. 21,836 10.32 12,695 6.00 8,464 4.00
Leverage Ratio ............................................. 21,836 8.93 12,226 5.00 9,781 4.00
Bank of Anderson, N. A:
Total Risk-based Capital ................................... $10,603 10.53% $10,069 10.00% $ 8,055 8.00%
Tier 1 Risk-based Capital .................................. 9,550 9.48 6,044 6.00 4,030 4.00
Leverage Ratio ............................................. 9,550 7.00 6,821 5.00 5,457 4.00
Seneca National Bank:
Total Risk-based Capital ................................... $ 4,598 12.97% $ 3,545 10.00% $ 2,836 8.00%
Tier 1 Risk-based Capital .................................. 4,155 11.72 2,127 6.00 1,418 4.00
Leverage Ratio ............................................. 4,155 8.49 2,447 5.00 1,958 4.00
19
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 SFAS No.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 material 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 market 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
20
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 June 30, 2004, on a cumulative basis
through 12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$52,381,000. This liability-sensitive position is largely attributable to the
Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $131,657,000, $53,975,000 and $42,951,000, respectively,
at June 30, 2004.
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 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).
22
PART II. OTHER INFORMATION
Item 4. Submission to a Vote of Security Holders
Annual Meeting of Shareholders
On May 18, 2004, The Company held its Annual Meeting of Shareholders. The
results of the 2004 Annual Meeting of Shareholders follows.
Proposal #1 - Election of Directors
The following persons were elected as Directors to serve for a three-year term
with 2,710,135 shares voted, representing 73.6% of the total voting shares:
Broker
For Withheld Abstain Non-Votes
--- -------- ------- ---------
David C. King 2,709,021 1,114 0 0
Andrew M. McFall, III 2,709,153 982 0 0
Eugene W. Merritt, Jr. 2,709,153 982 0 0
George B. Nalley, Jr. 2,709,153 982 0 0
Nell W. Smith 2,707,818 2,317 0 0
A. J. Thompson, Jr. 2,708,082 2,053 0 0
Proposal #2 - Approval of the Peoples Bancorporation, In. 2004 Stock Option Plan
The shareholders approved the Peoples Bancorporation, Inc. 2004 Stock Option
Plan with 2,616,694 or 96.6% voting in favor, 84,394 shares voting against,
9,047 shares abstaining and 521,294 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10 2004 Stock Option Plan (incorporated by reference to the Company's
Proxy Statement in connection with the May 18, 2004 Annual
Meeting of Shareholders.)
31.1 Rule 13a-14(a)/15d-14(a) Certifications
31.2 Rule 13a-14(a)/15d-14(a) Certifications
32 Section 1350 Certifications
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: August 10, 2004 By: /s/ R. Riggie Ridgeway
------------------------
R. Riggie Ridgeway
President and CEO
Dated: August 10, 2004 By: /s/ Robert E. Dye, Jr.
------------------------
Robert E. Dye, Jr.
Sr. Vice President & CFO
(principal financial officer)
24
Exhibit Index
Exhibit No. Description of Exhibit
10 2004 Stock Option Plan (incorporated by reference to the Company's
Proxy Statement in connection with the May 18, 2004 Annual
Meeting of Shareholders.)
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