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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
September 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 $1.11 par value common stock as
of November 10, 2004 was 5,533,887.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except share data)
September 30, September 30, December 31,
2004 2003 2003
Unaudited Unaudited Audited
--------- --------- -------
ASSETS
CASH AND DUE FROM BANKS ........................................................... $ 9,693 $ 13,445 $ 9,164
INTEREST-BEARING DEPOSITS IN OTHER BANKS .......................................... 891 1,023 214
FEDERAL FUNDS SOLD ................................................................ 803 15,003 11,865
--------- --------- ---------
Total cash and cash equivalents .............................................. 11,387 29,471 21,243
SECURITIES
Available for sale ........................................................... 62,302 79,462 78,714
Held for investment (market value of $7,493, $5,188 and $3,417) .............. 7,424 5,069 5,632
Other investments, at cost ................................................. 1,814 2,146 2,147
LOANS-less allowance for loan losses of $3,627, $3,745 and $3,438 ................. 317,537 279,844 292,814
MORTGAGE LOANS HELD FOR SALE ...................................................... 9,642 13,417 5,101
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization ................................................ 11,222 10,111 10,231
ACCRUED INTEREST RECEIVABLE ....................................................... 1,702 1,785 1,821
CASH SURRENDER VALUE OF LIFE INSURANCE ............................................ 8,963 2,279 2,294
OTHER ASSETS ...................................................................... 2,262 2,103 1,759
--------- --------- ---------
TOTAL ASSETS ............................................................. $ 434,255 $ 425,687 $ 421,756
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS
Noninterest-bearing .......................................................... $ 50,020 $ 48,039 $ 42,289
Interest-bearing ............................................................. 299,763 308,325 311,040
--------- --------- ---------
Total deposits ........................................................... 349,783 356,364 353,329
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS ................................................................... 31,908 24,903 24,390
FEDERAL FUNDS PURCHASED ........................................................... 378 - -
NOTES PAYABLE TO FEDERAL HOME LOAN BANK ........................................... 11,500 5,000 5,000
ACCRUED INTEREST PAYABLE .......................................................... 1,214 1,553 1,604
OTHER LIABILITIES ................................................................. 1,748 1,752 1,272
--------- --------- ---------
Total Liabilities ........................................................ 396,531 389,572 385,595
--------- --------- ---------
SHAREHOLDERS' EQUITY *
Common Stock - 15,000,000 shares authorized, $1.11
Par value per share, 5,533,887 shares, 5,261,866 shares
and 5,524,131 shares outstanding, respectively ............................ 6,143 5,841 6,132
Additional paid-in capital ........................................................ 29,577 25,775 29,523
Retained Earnings ................................................................. 2,223 4,483 444
Accumulated other comprehensive income (loss) ..................................... (219) 16 62
--------- --------- ---------
Total Shareholders' Equity ............................................... 37,724 36,115 36,161
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 434,255 $ 425,687 $ 421,756
========= ========= =========
* Share data has been restated to reflect the 3-for-2 stock split effected 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)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans .................................. $ 4,791 $ 4,620 $ 13,844 $ 13,688
Interest on securities
Taxable ................................................. 456 506 1,434 1,807
Tax-exempt .............................................. 62 45 172 132
Interest on federal funds ................................... 15 65 70 130
---------- ---------- ---------- ----------
Total interest income .......................................... 5,324 5,236 15,520 15,757
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits ........................................ 1,423 1,727 4,400 5,184
Interest on federal funds purchased and securities
sold under repurchase agreements ........................ 89 83 219 323
Interest on notes payable Federal Home Loan Bank ........... 72 62 198 216
---------- ---------- ---------- ----------
Total interest expense ......................................... 1,584 1,872 4,817 5,723
---------- ---------- ---------- ----------
Net interest income ............................................ 3,740 3,364 10,703 10,034
PROVISION FOR LOAN LOSSES ...................................... 153 549 436 1,007
---------- ---------- ---------- ----------
Net interest income after provision for loan losses ............ 3,587 2,815 10,267 9,027
NON-INTEREST INCOME
Service fees and other income ............................... 816 628 2,435 1,915
Gain on sale of mortgage loans held for sale ................ 376 2,478 1,463 7,350
Gain on sale of available for sale securities ............... 1 6 128 13
---------- ---------- ---------- ----------
1,193 3,112 4,026 9,278
NON-INTEREST EXPENSES
Salaries and benefits ....................................... 1,985 2,347 6,239 6,492
Occupancy ................................................... 172 156 498 454
Equipment ................................................... 320 323 937 799
Marketing and advertising ................................... 70 99 219 272
Communications .............................................. 39 71 156 199
Printing and supplies ....................................... 54 75 150 206
Bank paid loan costs ........................................ 80 108 224 362
Director fees ............................................... 69 67 210 210
Executive retirement benefit expense ........................ 29 53 477 132
Other operating expenses .................................... 480 574 1,436 1,671
---------- ---------- ---------- ----------
Total noninterest expenses ........................ 3,298 3,873 10,546 10,797
---------- ---------- ---------- ----------
Income before income taxes .................................. 1,482 2,054 3,747 7,508
PROVISION FOR INCOME TAXES ..................................... 460 749 1,187 2,735
---------- ---------- ---------- ----------
Net income .................................................. $ 1,022 $ 1,305 $ 2,560 $ 4,773
========== ========== ========== ==========
INCOME PER COMMON SHARE *
BASIC ....................................................... $ 0.18 $ 0.24 $ 0.46 $ 0.86
========== ========== ========== ==========
DILUTED ..................................................... $ 0.18 $ 0.23 $ 0.45 $ 0.83
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES *
BASIC ....................................................... 5,533,887 5,524,960 5,527,383 5,524,960
========== ========== ========== ==========
DILUTED ..................................................... 5,768,689 5,743,546 5,732,573 5,731,307
========== ========== ========== ==========
CASH DIVIDENDS PAID PER COMMON SHARE ........................... $ 0.07 $ 0.07 $ 0.21 $ 0.21
========== ========== ========== ==========
* Share data has been restated to reflect the 3-for-2 stock split effected 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 nine months ended September 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 ........................................ 4,773 4,773
Other comprehensive income, net of tax:
Unrealized holding gains on
securities available for sale .................. (661) (661)
Less reclassification
adjustments for gains
included in net income, net of
Income taxes of $2 ............................. (8) (8)
----------
Comprehensive income .............................. 4,104
Cash Dividends .................................... (736) (736)
--------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2003 * ..................... 5,261,866 $ 5,841 $ 25,775 $ 4,483 $ 16 $ 36,115
========== ========== ========== ========== ========== ==========
Balance, December 31, 2003 * ...................... 5,523,842 $ 6,132 $ 29,523 $ 444 $ 62 $ 36,161
Net Income ........................................ 2,560 2,560
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale .................. (197) (197)
Less reclassification
adjustments for gains
included in net income, net of
income taxes of $43 ............................ (84) (84)
----------
Comprehensive income .............................. 2,279
Cash in lieu of fractional shares ................. (7) (7)
On 3-for-2 stock split
Cash dividends .................................... (774) (774)
Proceeds from stock options exercised ............. 10,045 11 54 65
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2004 * ..................... 5,533,887 $ 6,143 $ 29,577 $ 2,223 $ (219) $ 37,724
========== ========== ========== ========== ========== ==========
* Share data has been restated to reflect the 3-for-2 stock split effected in
October 2004 and the 5% common stock dividend issued in November 2003.
3
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months Ended
September 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .............................................................................. $ 2,560 $ 4,773
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Gain on sale of premises and equipment .................................................. (14) (6)
Gain on sale of securities available for sale ........................................... (128) (13)
Gain on sale of mortgage loans held for sale ............................................ (1,463) (7,350)
Provision for loan losses ............................................................... 436 1,007
Depreciation and amortization ........................................................... 776 641
Amortization and accretion (net of premiums and
discounts on securities) .............................................................. 199 298
Origination of mortgage loans held for sale ............................................. (138,537) (421,939)
Sale of mortgage loans held for sale .................................................... 135,459 470,898
Decrease in accrued interest receivable ................................................. 119 192
Increase in other assets ................................................................ (352) (753)
Decrease in accrued interest payable .................................................... (390) (23)
Increase in other liabilities ........................................................... 476 733
--------- ---------
Net cash provided (used in) by operating activities ................................... (859) 48,458
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ............................................. (2,139) (635)
Purchases of securities available for sale .............................................. (23,486) (73,629)
Purchase of other investments ........................................................... (139) (195)
Proceeds from the principal pay downs on securities available for sale .................. 4,143 13,241
Proceeds from the maturity of securities held to maturity ............................... 320 275
Proceeds from the maturity of securities available for sale ............................. 472 3,700
Proceeds from the sale of securities available for sale ................................. 9,834 6,999
Proceeds from the call of securities available for sale ................................. 25,445 48,515
Purchase of cash surrender value life insurance ......................................... (6,669) -
Net increase in loans ................................................................... (25,159) (33,214)
Proceeds from the sale of premises and equipment ........................................ 33 44
Purchase of premises and equipment ...................................................... (1,786) (1,257)
--------- ---------
Net cash used in investing activities ................................................. (19,131) (36,156)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ..................................................... (3,546) 28,191
Net increase (decrease) in securities sold under repurchase
agreements ............................................................................ 7,518 (10,428)
Net increase in federal funds purchased ................................................. 378 -
Net increase (decrease) in notes payable to Federal Home Loan Bank ...................... 6,500 (12,000)
Proceeds from the sale of stock and exercise of stock options ........................... 65 -
Cash dividend ........................................................................... (781) (736)
--------- ---------
Net cash provided by financing activities ............................................. 10,134 5,027
--------- ---------
Net increase (decrease) in cash and cash equivalents .................................. (9,856) 17,329
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............................................... 21,243 12,142
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................... $ 11,387 $ 29,471
========= =========
CASH PAID FOR
Interest .............................................................................. $ 5,207 $ 5,745
========= =========
Income Taxes .......................................................................... $ 1,051 $ 2,617
========= =========
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, June 18, 2004, and September 20, 2004
payable April 2, 2004, July 9, 2004 and October 1, 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 common share is
calculated by dividing net income by the weighted average number of common
shares outstanding for each period presented. The weighted average number of
common shares outstanding for basic net income per common share for the nine
months ended September 30, 2004 and 2003 was 5,527,383 and 5,524,960
respectively. The weighted average number of common shares outstanding for
diluted net income per common share was 5,732,573 and 5,731,307 for the nine
months ended September 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 Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported ................................... $ 1,022 $ 1,305 $ 2,560 $ 4,773
Deduct: total stock-based employee compensation
expense determined under fair value based method
for all awards, Net of related tax effects .............. (27) (17) (82) (39)
----------- ------------ ------------ ---------
Pro forma net income ...................................... $ 995 $ 1,228 $ 2,478 $ 4,734
=========== ============ ============ =========
Net income per common share
Basic - as reported ..................................... $ 0.18 $ 0.24 $ 0.46 $ 0.86
=========== ============ ============ =========
Basic - pro forma ....................................... $ 0.18 $ 0.23 $ 0.45 $ 0.86
=========== ============ ============ =========
Diluted - as reported ................................... $ 0.18 $ 0.23 $ 0.45 $ 0.86
=========== ============ ============ =========
Diluted - pro forma ..................................... $ 0.17 $ 0.22 $ 0.43 $ 0.83
=========== ============ ============ =========
5
The Company issued a five-percent common stock dividend in November 2003
and effected 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 filed articles of amendment to its Articles of Incorporation increasing
its authorized shares from 10,000,000 to 15,000,000 and decreasing its par value
from $1.67 per share to $1.11 per share.
MANAGEMENT'S OPINION
The accompanying unaudited consolidated 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 nine-month periods ending September 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
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
7
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 third quarter of 2004 was
$1,022,000 or $0.18 per diluted share compared to $1,305,000 or $0.23 per
diluted share for the third quarter of 2003, a decrease of $283,000 or 21.7%.
Net income for the nine months ended September 30, 2004 was $2,560,000 or $0.45
per diluted share compared to $4,773,000 or $0.83 per diluted share for the nine
months ended September 30, 2003, a decrease of $2,213,000 or 46.4%. Return on
average equity for the nine months and three months ended September 30, 2004 was
9.22% and 10.86% respectively, compared to 20.38% and 14.59% respectively for
the nine months and three months ended September 30, 2003. Return on average
assets for the nine months and three months ended September 30, 2004 was 0.79%
and 0.95% respectively, compared to 1.64% and 1.20% respectively for the nine
months and three months ended September 30, 2003. The decreases in the Company's
net income, diluted earnings per share, return on average equity, and return on
average assets in 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. The Peoples
National Bank recorded net earnings of $1,511,000 for the nine months ended
September 30, 2004 compared to net earnings of $3,640,000 for the nine months
ended September 30, 2003, a decrease of 58.5%. Bank of Anderson, N. A. recorded
net earnings of $803,000 for the nine months ended September 30, 2004 compared
to net earnings of $838,000 for the nine months ended September 30, 2003, a
decrease of 4.2%. Seneca National Bank recorded net earnings of $248,000 for the
nine months ended September 30, 2004 compared to net earnings of $326,000 for
the nine months ended September 30, 2003, a decrease of 23.9%.
Throughout the first nine months of 2004 The Company made significant
changes to the wholesale mortgage division of The Peoples National Bank,
including a steady and gradual reduction in the number of employees working in
this department. During the third quarter of 2004, management made the decision
to completely exit the wholesale mortgage business by the end of the year. On
October 15, 2004 nine of the remaining wholesale mortgage loan employees
formally ended their employment with The Peoples National Bank and were employed
by an unaffiliated company performing similar services relating to wholesale
mortgage lending. The Company intends to retain its retail mortgage lending
operations and will continue to originate mortgage loans for sale to third
parties. The Company will utilize the services of the unaffiliated company to
perform some of the services previously performed internally by its wholesale
mortgage lending division.
9
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 $376,000 or 11.2% to $3,740,000 in the quarter ended
September 30, 2004 compared to $3,364,000 in the quarter ended September 30,
2003. For the nine months ended September 30, 2004 net interest income before
provision for loan losses increased $669,000 or 6.7% to $10,703,000 compared to
$10,034,000 for the nine months ended September 30, 2003. The Company's net
interest margin for the three months and nine months ending September 30, 2004
was 3.71% and 3.57% respectively, compared to 3.26% and 3.33% respectively for
the three months and nine months ended September 30, 2003.
The Company's total interest income for the third quarter of 2004 was
$5,324,000 compared to $5,236,000 for the third quarter of 2003, an increase of
$88,000 or 1.7%. Total interest income for the nine months ended September 30,
2004 was $15,520,000 compared to $15,757,000 for the nine months ended September
30, 2003, a decrease of $237,000 or 1.5%. Interest and fees on loans, the
largest component of total interest income, increased $171,000 in the third
quarter of 2004 to $4,791,000 compared to $4,620,000 for the third quarter of
2003, an increase of 3.7%. Interest and fees on loans increased $156,000 for the
nine months ended September 30, 2004 to $13,844,000 compared to $13,688,000 for
the nine months ended September 30, 2003, an increase of 1.1%. Interest on
taxable securities, the second largest component of total interest income
decreased $50,000 in the third quarter of 2004 to $456,000 compared to $506,000
for the third quarter of 2003, a decrease of 9.9%. Interest on taxable
securities decreased $373,000 for the nine months ended September 30, 2004 to
$1,434,000 compared to $1,807,000 for the nine months ended September 30, 2003,
a decrease of 20.6%. The decreases in interest on taxable securities for the
three- and nine-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 third quarter of 2004 was
$1,584,000 compared to $1,872,000 for the third quarter of 2003, a decrease of
$288,000 or 15.4%. Total interest expense for the nine months ended September
30, 2004 was $4,817,000 compared to $5,723,000 for the nine months ended
September 30, 2003, a decrease of $906,000 or 15.8%. Interest expense on
deposits, the largest component of total interest expense, decreased $304,000 in
the third quarter of 2004 to $1,423,000 compared to $1,727,000 for the third
quarter of 2003, a decrease of 17.6%. Interest expense on deposits decreased
$784,000 for the nine months ended September 30, 2004 to $4,400,000 compared to
$5,184,000 for the nine months ended September 30, 2003, a decrease of 15.1%.
Interest on federal funds purchased and securities sold under repurchase
10
agreements, the second largest component of total interest expense, increased
$6,000 or 7.2% to $89,000 in the third quarter of 2004 compared to $83,000 for
the third quarter of 2003. Interest on federal funds purchased and securities
sold under repurchase agreements decreased $104,000 or 32.2% to $219,000 in the
first nine months of 2004 compared to $323,000 for the first nine months of
2003. Interest on notes payable to the Federal Home Loan Bank, the third largest
component of total interest expense, increased $10,000 or 16.1% to $72,000 in
the third quarter of 2004 compared to $62,000 for the third quarter of 2003.
Interest on notes payable to the Federal Home Loan Bank decreased $18,000 or
8.3% to $198,000 in the first nine months of 2004 compared to $216,000 for the
first nine months of 2003. The overall decrease in interest expense among the
various types of interest-bearing liabilities is largely attributable to
generally lower market interest rates experienced at the Company's bank
subsidiaries during the first nine months of 2004 when compared to the same
period 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 nine months ended September 30, 2004 was $153,000 and $436,000 respectively,
compared to $549,000 and $1,007,000 respectively for the three months and nine
months ended September 30, 2003. The changes in the Company's provision for loan
losses for the third quarter and first nine months 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 nine months of
2004, The Peoples National Bank made a provision of $200,000 compared to
$775,000 for the first nine months of 2003. Bank of Anderson, N.A. made
provision of $180,000 for the first nine months of 2004, compared to $140,000
for the same period of 2003. Seneca National Bank made provision of $56,000
during the first nine months of 2004 compared to $92,000 for the first nine
months of 2003.
Non-interest Income
Non-interest income decreased $1,919,000 or 61.7% to $1,193,000 for the
third quarter of 2004 compared to $3,112,000 for the third quarter of 2003.
Non-interest income decreased $5,252,000 or 56.6% to $4,026,000 for the first
nine months of 2004 compared to $9,278,000 for the first nine months of 2003.
Service fees and other income, the largest component of non-interest income in
2004, increased $188,000 or 29.9% to $816,000 for the third quarter of 2004
compared to $628,000 for the third quarter of 2003. Service fees and other
income increased $520,000 or 27.2% to $2,435,000 for the first nine months of
2004 compared to $1,915,000 for the first nine months of 2003. The increases in
service fees and other income are largely attributable to non-recurring income
from life insurance death benefits resulting from the death of the Company's
former Chairman, President and CEO, increased earnings on bank-owned life
insurance policies at each of the subsidiary banks from additional policies
purchased in the first quarter of 2004, and increased income from customers'
deposit accounts.
Gains on mortgage loans held for sale, the second largest component of
non-interest income in 2004, decreased $2,102,000 or 84.8% to $376,000 for the
11
third quarter of 2004 compared to $2,478,000 for the third quarter of 2003. Gain
on mortgage loans held for sale decreased $5,887,000 or 80.1% to $1,463,000 for
the first nine months of 2004 compared to $7,350,000 for the same period of
2003. The decrease resulted as a consequence of reduced mortgage loan
originations as refinancing activity declined. Gains on available-for-sale
securities were $1,000 for the third quarter of 2004 compared to $6,000 for the
third quarter of 2003, a decrease of $5,000. Gains on available-for-sale
securities were $128,000 for the first nine months of 2004 compared to $13,000
for the first nine months of 2003, an increase of $115,000.
Non-interest Expense
Total non-interest expense decreased $575,000 or 14.9% to $3,298,000 for
the third quarter of 2004 from $3,873,000 for the third quarter of 2003. Total
non-interest expense decreased $251,000 or 2.3% to $10,546,000 for the first
nine months of 2004 from $10,797,000 for the first nine months of 2003. Salaries
and benefits, the largest component of non-interest expense, decreased $362,000
or 15.4%, to $1,985,000 for the third quarter of 2004 from $2,347,000 for the
third quarter of 2003. Salaries and benefits decreased $253,000 or 3.9% to
$6,239,000 for the first nine months of 2004 from $6,492,000 for the first nine
months of 2003. The decreases in salaries and benefits are primarily due to a
reduction in commissions paid and changes in personnel due to decreased volume
of mortgage loans originated, and partially offset by normal salary increases
and other changes in personnel throughout the company.
Occupancy and furniture and equipment expenses increased $13,000 or 2.7% to
$492,000 in the third quarter of 2004 compared to $479,000 in the third quarter
of 2003. Occupancy and furniture and equipment expenses increased $182,000 or
14.5%, to $1,435,000 for the first nine months of 2004 from $1,253,000 for the
first nine months of 2003. The increase is primarily attributable to the opening
of a new branch office of Bank of Anderson, N.A. in August 2003, the purchase of
additional office space by The Peoples National Bank in Easley, South Carolina
in January 2004, and the completion of an expansion and renovation to the main
office of Bank of Anderson, N.A. in the third quarter of 2004.
Executive retirement benefit expense decreased $24,000 or 45.3% to $29,000
in the third quarter of 2004 compared to $53,000 in the third quarter of 2003.
This decrease is attributable to a reduction of the number of executives covered
from two to one, due to the death of the Company's former Chairman, President
and CEO. Executive retirement benefit expense increased $345,000 to $477,000 for
the first nine months of 2004 from $132,000 for the first nine months 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 $202,000 or 20.3% to $792,000 for the
third quarter of 2004 from $994,000 for the third quarter of 2003. Other
12
non-interest expenses decreased $525,000 or 18.0% to $2,395,000 for the first
nine months of 2004 from $2,920,000 for the first nine months of 2003. The
decrease in other non-interest expenses was principally attributable to
decreases in expenses associated with the significant decrease in the volume of
mortgage loans originated in the first nine months of 2004 when compared to the
first nine months of 2003.
BALANCE SHEET REVIEW
Loans
Outstanding loans (which excludes mortgage loans held for sale) represent
the largest component of earning assets at 79.5% of total earning assets. As of
September 30, 2004, the Company held total gross loans outstanding of
$321,164,000. Gross loans increased $24,912,000 or 8.4% from $296,252,000 in
total gross outstanding loans at December 31, 2003 and increased $37,575,000 or
13.3% from $283,589,000 in total gross loans outstanding at September 30, 2003.
The increase resulted from new loans generated by the Company's three banking
subsidiaries. The following table summarizes outstanding loans by purpose and
collateral type:
Loan Portfolio Composition September 30, December 31,
------------- ------------
(Dollars in Thousands) 2004 2003 2003
---- ---- ----
Commercial and Industrial - not secured by real estate .................... $ 37,237 $ 38,886 $ 44,306
Commercial and Industrial - secured by real estate ........................ 92,670 84,232 84,805
Residential real estate - mortgage ........................................ 102,594 84,518 90,299
Residential real estate - construction .................................... 67,139 52,833 55,139
Consumer loans ............................................................ 21,524 23,120 21,703
-------- -------- --------
Gross Loans .......................................................... $321,164 $283,589 $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 nine months and three months ended
September 30, 2004 was 5.75% and 5.81% respectively, compared to 5.81% and 5.80%
respectively for the nine months and three months ended September 30, 2003. A
large portion of the Company's adjustable rate loans, which constitutes 51.2% 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 loans that are pre-sold at origination
13
to third parties. The Company formerly also purchased mortgage loans through a
wholesale mortgage loan division of The Peoples National Bank, which loans were
pre-sold at origination to third parties. These loans are classified as loans
held for sale for reporting purposes. In the first nine months of 2004, the
Company originated $138,537,000 and sold $135,459,000 in mortgage loans held for
sale. As of September 30, 2004 the Company had mortgage loans held for sale of
$9,642,000, an increase of $4,541,000 or 89.0% from the $5,101,000 in mortgage
loans held for sale at December 31, 2003, and a decrease of $3,775,000 or 28.1%
from the $13,417,000 in mortgage loans held for sale at September 30, 2003. The
changes in the levels of mortgage loans held for sale resulted from fluctuations
in the volume of mortgage loan originations. Due to the fact that management has
made the decision to completely exit the wholesale mortgage business by the end
of the year, it is expected that mortgage loans held for sale will decline
further and eventually be eliminated.
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
September 30, 2004 approximately $8,312,000 or 22.3% of commercial loans were
unsecured.
The Company's direct consumer loans consist primarily of secured
installment loans to individuals for personal, family and household purposes,
including automobile loans to individuals and pre-approved lines of credit.
Management believes that the loan portfolio is adequately diversified. The
Company has no foreign loans or loans for highly leveraged transactions. The
Company has very few agricultural loans.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2004 was $3,627,000 or 1.13%
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
$3,745,000 or 1.32% of loans outstanding at September 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.
14
At September 30, 2004 the Company had $560,000 in non-accruing loans, no
restructured loans, no loans more than ninety days past due and still accruing
interest, and $768,000 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 September 30, 2003, the Company had
$1,008,000 in non-accruing loans, no restructured loans, and $318,000 in loans
more than ninety days past due and still accruing interest, and $193,000 in
other real estate owned. Non-performing loans at September 30, 2004 consisted of
$23,000 in commercial loans, $461,000 in mortgage loans, and $76,000 in consumer
loans. Non-performing assets as a percentage of loans and other real estate
owned was 0.39%, 0.49%, and 0.51% at September 30, 2004, December 31, 2003, and
September 30, 2003, respectively.
Net charge-offs during the first nine months of 2004 were $247,000 compared
to net charge-offs of $112,000 for the first nine 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 648%, 362%, and 282% as
of September 30, 2004, December 31, 2003, and September 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 $340,000 in
impaired loans at September 30, 2004, no impaired loans at December 31, 2003,
and $362,000 in impaired loans at September 30, 2003.
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 September 30, 2004 securities totaled $71,540,000, which represents
17.7% of total earning assets. Securities held at September 30, 2004 decreased
$14,953,000 or 17.3% from $86,493,000 invested as of December 31, 2003 and
decreased $15,137,000 or 17.5% from $86,677,000 invested as of September 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 $25,325,000 and
the sale of available-for-sale, mortgage-backed securities in the amount of
$9,834,000 at the Company's bank subsidiaries.
At September 30, 2004 the Company's total investments classified as
available for sale had an amortized cost of $62,634,000 and a market value of
15
$62,302,000 for an unrealized loss of $332,000. This compares to an amortized
cost of $79,437,000 and a market value of $79,462,000 for an unrealized gain of
$25,000 on the Company's investments classified as available for sale at
September 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 $8,963,000 at
September 30, 2004, an increase of $6,669,000 or 290.7% from the $2,294,000 held
at December 31, 2003 and an increase of $6,684,000 or 293.3% from the $2,279,000
held at September 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 decreased $9,856,000 or 46.4%
to $11,387,000 at September 30, 2004 from $21,243,000 at December 31, 2003 and
decreased $18,084,000 or 61.4% from $29,471,000 at September 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 decreased $3,546,000 or 1.0% to $349,783,000 at
September 30, 2004 from $353,329,000 at December 31, 2003 and decreased
$6,581,000 or 1.9% from $356,364,000 at September 30, 2003. Competition for
deposit accounts is primarily based on the interest rates paid, location
convenience, and services offered.
During the first nine months of 2004, interest-bearing deposits
averaged $306,652,000 compared to $299,907,000 for the first nine 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 have primarily been used to fund Peoples National Bank's short-term
mortgage lending activities. On September 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 September 30, 2003 there were
no outstanding certificates garnered through the Internet, and brokered deposits
totaled $688,000. These deposits are an attractive alternative funding source
available to use while continuing efforts to maintain and grow the banks' local
deposit base.
16
The average interest rate paid on interest-bearing deposits was 1.92%
for the first nine months of 2004 compared to 2.31% for the first nine months of
2003. In pricing deposits, the Company considers its liquidity needs, the
direction and levels of interest rates, and local market conditions. At
September 30, 2004 interest-bearing deposits comprised 85.7% of total deposits
compared to 86.5% at September 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 77.2% and
76.9% for the nine months ended September 30, 2004 and September 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 September 30, 2004
short-term borrowings totaled $38,786,000 and were comprised of $31,908,000 in
securities sold under repurchase agreements, $378,000 in federal funds purchased
and $6,500,000 in short-term advances from the Federal Home Loan bank of
Atlanta. At December 31, 2003 and September 30, 2003 short-term borrowings
totaled $24,390,000 and $24,903,000 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 September 30, 2004, December 31, 2003, and September 30, 2003.
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 September 30, 2004 The Peoples
National Bank had total borrowing capacity from the Federal Home Loan Bank of
Atlanta equal to $37,741,000, and the unused portion of this line of credit was
$29,241,000. The Bank of Anderson had total borrowing capacity from the Federal
17
Home Loan Bank of Atlanta equal to $20,634,000, and the unused portion of this
line of credit was $17,634,000 at September 30, 2004. Seneca National Bank had
secured lines of credit with the Federal Home Loan Bank of Atlanta at September
30, 2004 of $2,913,000, all of which was unused. At September 30, 2004 the Banks
had unused federal funds lines of credit totaling $30,372,000.
Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs, and requires liquidity to pay limited operating expenses and
dividends only.
During the first nine months of 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
and approximately $793,000 associated with the expansion of the main office of
Bank of Anderson. The Company may additionally make other lesser capital
expenditures through the normal course of business during the remainder of 2004.
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
September 30, 2004, the Banks had issued commitments to extend credit (excluding
commitments for residential mortgage loans designated for sale) of $94,969,000
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.
In addition to commitments to extend credit, the Banks may also issue
standby letters of credit. A standby letter of credit is an assurance 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
$5,674,000 at September 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.
18
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 September
30, 2004 the Company had commitments outstanding to originate residential
mortgage loans under rate lock commitments from borrowers totaling $27,424,000.
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 September 30, 2004 for the Company was $131,000.
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 September 30, 2004.
19
CAPITAL ADEQUACY AND RESOURCES
The capital needs of the Company have been met through the retention of
earnings and from the proceeds of prior public stock offerings.
The Company and the Banks are required to maintain certain capital
ratios by federal banking regulators. The following table sets forth the capital
ratios for the Company and the Banks as of September 30, 2004:
CAPITAL RATIOS
(Amounts in Thousands)
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
------ ----------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
Total Risk-based Capital ................................... $41,542 12.34% $33,665 10.00% $26,932 8.00%
Tier 1 Risk-based Capital .................................. 37,943 11.27 20,200 6.00 13,467 4.00
Leverage Ratio ............................................. 37,943 8.77 21,632 5.00 17,306 4.00
Peoples National Bank:
Total Risk-based Capital ................................... $24,265 12.20% $19,889 10.00% $15,911 8.00%
Tier 1 Risk-based Capital .................................. 22,220 11.17 11,936 6.00 7,957 4.00
Leverage Ratio ............................................. 22,220 8.93 12,441 5.00 9,953 4.00
Bank of Anderson, N. A:
Total Risk-based Capital ................................... $10,962 10.67% $10,274 10.00% $ 8,219 8.00%
Tier 1 Risk-based Capital .................................. 9,848 9.58 6,168 6.00 4,112 4.00
Leverage Ratio ............................................. 9,848 7.19 6,848 5.00 5,479 4.00
Seneca National Bank:
Total Risk-based Capital ................................... $ 4,668 13.30% $ 3,510 10.00% $ 2,808 8.00%
Tier 1 Risk-based Capital .................................. 4,229 12.05 2,106 6.00 1,404 4.00
Leverage Ratio ............................................. 4,229 8.78 2,408 5.00 1,927 4.00
20
RECENTLY ISSUED ACCOUNTING STANDARDS
No recent authoritative pronouncements that affect accounting,
reporting, and disclosure of financial information by us have occurred during
the quarter ending September 30, 2004, other than the items described below.
In November 2003, the Emerging Issues Task Force ("EITF") reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as available for
sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired
at the balance sheet date but for which other-than-temporary impairment has not
been recognized. Accordingly EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments."
This issue addresses the meaning of other-than-temporary impairment and its
application to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance determining the amount of
impairment and additional quantitative and qualitative disclosures. The guidance
for determining the amount of impairment was scheduled to be effective for
periods ending after June 15, 2004, but has been delayed indefinitely pending
implementation guidance by the FASB. The disclosure provisions of EITF No. 03-1
were effective for fiscal years ending after December 15, 2003. Adopting the
disclosure provisions of EITF No. 03-1 did not have any impact on the Company's
financial position or results of operations.
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, was scheduled to 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. On October 16, 2004, the FASB delayed the effective
date of this proposal by six months and anticipates it will be effective for by
the third quarter of 2005. Retrospective application of this Statement is not
permitted. The adoption of this Statement, if approved, could have an 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.
21
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
interest-bearing liabilities. The relationship of rate-sensitive earning assets
to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate-sensitive assets and liabilities are those that can be
repriced to current market rates within a relatively short time period.
Management monitors the rate sensitivity of earning assets and interest-bearing
liabilities over the entire life of these instruments, but places particular
emphasis on the next twelve months. At September 30, 2004, rate-sensitive
liabilities exceeded rate-sensitive assets by $38,197,000 through 12 months on a
cumulative basis. This liability-sensitive position is largely attributable to
the Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $116,210,000, $51,795,000 and $42,546,000, respectively,
at September 30, 2004. Companies in a liability-sensitive position would expect
rising interest rates to have a negative impact on net interest income and
falling interest rates to have a positive impact.
22
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 such controls and
procedures, as of the end of the period covered by this quarterly report, were
effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
23
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period ended September 30, 2004 the Company issued shares
of common stock to the following classes of persons upon the exercise
of options issued pursuant to the Company's 1993 Stock Option Plan.
The securities were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 because the
issuance did not involve a public offering.
Aggregate
Class of # of Shares Exercise
Date Issued Purchasers Issued Price
----------- ---------- ------ -----
9/23/2004 Employees 6,697 $65,000
Item 6. Exhibits
Exhibits.
3 Articles of Incorporation as amended
10 Non-competition, Severance and Employment Agreement entered
into between Registrant and C. Kyle Thomas (incorporated by
reference to exhibits to Form 8-K filed September 20, 2004).
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORPORATION, INC.
Dated: November 10, 2004 By: /s/ R. Riggie Ridgeway
------------------------
R. Riggie Ridgeway
President and CEO
Dated: November 10, 2004 By: /s/ Robert E. Dye, Jr.
------------------------
Robert E. Dye, Jr.
Sr. Vice President & CFO
(principal financial officer)
25
Exhibit Index
Exhibit No. Description of Exhibit
3 Articles of Incorporation as amended
10 Non-competition, Severance and Employment Agreement entered
into between Registrant and C. Kyle Thomas (incorporated by
reference to exhibits to Form 8-K filed September 20, 2004).
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
31.2 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
26