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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File No. 000-20616
Peoples Bancorporation, Inc.
(Exact name of Registrant as specified in its charter)
South Carolina 57-0951843
-------------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1818 East Main Street, Easley, South Carolina 29640
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code: (864) 859-2265
Securities Registered Pursuant to Section 12 (b) of
the Securities Exchange Act of 1934:
None
Securities Registered Pursuant to Section 12 (g) of
the Securities Exchange Act of 1934:
Common Stock, $1.11 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant (24,050,481 shares) on June 30, 2004 was
approximately $61,081,250. The aggregate market value of the voting and
non-voting common equity held by nonaffiliates of the Registrant (4,224,891
shares) on March 15, 2005 was approximately $86,610,265. As of such dates, no
organized trading market existed for the common stock of the Registrant. For the
purpose of this response, officers, directors and holders of 5% or more of the
Registrant's common stock are considered affiliates of the Registrant.
The number of shares outstanding of the Registrant's common stock, as of March
15, 2005: 5,910,069 shares of $1.11 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of
Shareholders - Part III
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products and similar matters. All statements that are not
historical facts are "forward-looking statements." Words such as "estimate,"
"project," "intend," "expect," "believe," "anticipate," "plan," and similar
expressions identify forward-looking statements. These forward-looking
statements are based on current expectations, estimates and projections about
our industry, management's beliefs, and assumptions made by management. Such
information includes, without limitation, discussions as to estimates,
expectations, beliefs, plans, strategies, and objectives concerning the
Company's future financial and operating performance. These statements are not
guarantees of future performance and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual results may differ
materially from those expressed or forecasted in such 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 filing regarding the demand for the Company's
products and services, changing economic conditions, interest rates, consumer
spending and numerous other factors may be forward-looking statements and are
subject to uncertainties and risks.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this report might not occur.
PART I
ITEM 1. BUSINESS
The Company
Peoples Bancorporation, Inc. (the "Company") was incorporated under
South Carolina law on March 6, 1992, for the purpose of becoming a bank holding
company by acquiring all of the common stock of The Peoples National Bank,
Easley, South Carolina. The Company commenced operations on July 1, 1992 upon
2
effectiveness of the acquisition of The Peoples National Bank. In 2000, the
Company elected to become a financial holding company, but it has not yet
engaged in any activities permitted to financial holding companies that are
impermissible for bank holding companies. The Company has three wholly-owned
subsidiaries: The Peoples National Bank, Easley, South Carolina, a national bank
which commenced business operations in August 1986; Bank of Anderson, National
Association, Anderson, South Carolina, a national bank which commenced business
operations in September 1998; and, Seneca National Bank, Seneca, South Carolina,
a national bank which commenced business operations in February 1999 (sometimes
referred to herein as "the Banks").
The Company engages in no significant operations other than the
ownership of its three subsidiaries and the support thereof. The Company
conducts its business from seven banking offices located in the Upstate Area of
South Carolina.
The principal offices of the Company are located at 1818 East Main
Street, Easley, South Carolina 29640. The Company's telephone number is (864)
859-2265. The principal office of The Peoples National Bank is located at 1800
East Main Street, Easley, South Carolina 29640. The principal office of Bank of
Anderson, National Association is located at 201 East Greenville Street,
Anderson, South Carolina 29621, and the principal office of Seneca National Bank
is located at 201 Bypass 123, Seneca, South Carolina 29678.
General Business
Some of the major services which the Company provides through its
banking subsidiaries include checking accounts; NOW accounts; savings and other
time deposits of various types; daily repurchase agreements; alternative
investment products such as annuities, mutual funds, stocks and bonds; loans for
business, agriculture, real estate, personal uses, home improvement and
automobiles; residential mortgage loan origination; credit cards; letters of
credit; home equity lines of credit; an accounts receivable financing program;
safe deposit boxes; bank money orders; wire transfer services; Internet banking
and use of ATM facilities. The Banks do not have trust powers. The Company has
no material concentration of deposits from any single customer or group of
customers. No significant portion of its loans is concentrated within a single
industry or group of related industries and the Company does not have any
foreign loans. There are no material seasonal factors that would have an adverse
effect on the Company.
As a financial holding company, the Company is a legal entity separate
and distinct from its subsidiaries. The Company coordinates the financial
resources of the consolidated enterprises and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends and fees for services performed.
3
Territory Served and Competition
The Peoples National Bank serves its customers from four locations; two
offices in the city of Easley and one office in the city of Pickens, South
Carolina, which are located in Pickens County, and one office in the
unincorporated community of Powdersville, South Carolina, which is located in
the northeast section of Anderson County, South Carolina. Easley, South Carolina
is located approximately 10 miles west of Greenville, South Carolina. Pickens,
South Carolina is located approximately 8 miles north of Easley, and
Powdersville, South Carolina is located approximately 12 miles southeast of
Easley.
Bank of Anderson, National Association, serves its customers from one
location in the City of Anderson and another location in Anderson County, South
Carolina. Anderson is located approximately 25 miles southwest of Greenville,
South Carolina and approximately 25 miles south of Easley in Anderson County,
South Carolina.
Seneca National Bank serves its customers from one location in the City
of Seneca, South Carolina. Seneca is located approximately 30 miles northwest of
Easley, South Carolina in Oconee County, South Carolina.
Each subsidiary of the Company is a separately chartered bank, and
therefore each bank is responsible for developing and maintaining its own
customers and accounts. Located in Easley, South Carolina, The Peoples National
Bank's customer base has been primarily derived from Pickens County, South
Carolina and the northeast section of Anderson County, South Carolina. Bank of
Anderson's primary service area is Anderson County, South Carolina, more
particularly, the City of Anderson. Seneca National Bank derives most of its
customer base from the City of Seneca and surrounding Oconee County, South
Carolina.
The Banks compete with several major banks, which dominate the
commercial banking industry in their service areas and in South Carolina
generally. In addition, the Banks compete with other community banks, savings
institutions and credit unions. In Pickens County, there are thirty (30)
competitor bank branches, one (1) savings institution branch, and two (2) credit
union branches. In Anderson County there are fifty-seven (57) competitor bank
branches and five (5) credit union branches. In Oconee County, there are fifteen
(15) competitor bank branches, four (4) savings institution branches, and one
(1) credit union branch. The Peoples National Bank has approximately 13.84% of
the deposits of FDIC insured institutions in Pickens County. The Peoples
National Bank and Bank of Anderson, combined, have approximately 8.23% of the
deposits of FDIC insured institutions in Anderson County. Seneca National Bank
has approximately 4.85% of the deposits of FDIC insured institutions in Oconee
County.
Many competitor institutions have substantially greater resources and
higher lending limits than the Banks, and they perform certain functions for
their customers, including trust services and investment banking services, which
none of the Banks is equipped to offer directly. However, the Banks do offer
4
some of these services through correspondent banks. In addition to commercial
banks, savings institutions and credit unions, the Banks compete for deposits
and loans with other financial intermediaries and investment alternatives,
including, but not limited to, mortgage companies, captive finance companies,
money market mutual funds, brokerage firms, insurance companies, governmental
and corporation bonds and other securities. Several of these non-bank
competitors are not subject to the same regulatory restrictions as the Company
and its subsidiaries and many have substantially greater resources than the
Company.
The extent to which other types of financial institutions compete with
commercial banks has increased significantly within the past few years as a
result of federal and state legislation that has, in several respects,
deregulated financial institutions. The full impact of existing legislation and
subsequent laws that deregulate the financial services industry cannot be fully
assessed or predicted.
5
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER'S EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following is a presentation of the average consolidated balance
sheets of the Company for the years ended December 31, 2004, 2003 and 2002. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:
AVERAGE CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
Assets
Cash and Due from Banks ....................................... $ 12,159 $ 11,539 $11,721
Taxable Securities ............................................ 68,952 75,300 57,915
Tax-Exempt Securities ......................................... 6,953 4,837 3,419
Federal Funds Sold ............................................ 6,443 15,784 20,454
Mortgage Loans Held for Sale .................................. 6,377 32,511 28,572
Gross Loans ................................................... 311,524 275,424 229,523
Less: Loan Loss Reserve ...................................... 3,558 3,299 2,649
-------- -------- --------
Net Loans ..................................................... 307,966 272,125 226,874
-------- -------- --------
Other Assets .................................................. 22,332 15,447 13,807
-------- -------- --------
Total Assets .................................................. $431,182 $427,543 $362,762
======== ======== ========
Liabilities and
Shareholders' Equity
Noninterest-bearing Deposits .................................. $ 47,795 $ 50,352 $40,778
Interest-bearing Deposits:
Interest Checking ......................................... 42,917 37,650 32,657
Savings Deposits .......................................... 10,945 9,513 7,487
Money Market .............................................. 53,735 61,048 57,897
Certificates of Deposit ................................... 172,283 171,155 140,730
Individual Retirement Accounts ............................ 25,079 23,500 17,732
-------- -------- --------
Total Interest-bearing Deposits ............................... 304,959 302,866 256,503
-------- -------- --------
Short-term Borrowings ......................................... 33,393 31,747 27,150
Long-term Borrowings .......................................... 5,000 5,000 5,000
Other Liabilities ............................................. 2,704 2,830 3,079
-------- -------- --------
Total Liabilities ......................................... 393,851 392,795 332,510
-------- -------- --------
Common Stock .................................................. 6,174 5,903 5,615
Additional Paid-in Capital .................................... 29,738 26,334 23,275
Retained Earnings ............................................. 1,419 2,511 1,362
-------- -------- --------
Total Shareholders' Equity ................................ 37,331 34,748 30,252
-------- -------- --------
Total Liabilities and Shareholders'
Equity ........................................................ $431,182 $427,543 $362,762
======== ======== ========
6
The following is a presentation of an analysis of the net interest
income of the Company for the years ended December 31, 2004, 2003 and 2002 with
respect to each major category of interest-earning assets and each major
category of interest-bearing liabilities:
Year Ended December 31, 2004
----------------------------
(dollars in thousands)
Average Interest Average
Amount Earned/Paid Yield/Rate
------ ----------- ----------
Assets
Securities - Taxable ............................................... $ 68,952 $1,866 2.71%
Tax-Exempt ............................................ 6,953 233 5.08%*
Interest-bearing deposits at other banks ........................... 729 9 1.23%
Federal Funds Sold ................................................. 6,443 88 1.37%
Mortgage loans held for sale ....................................... 6,377 318 4.99%
Gross Loans ........................................................ 311,524 18,549 5.95%
-------- -------
Total Earning Assets ........................................... $400,978 $21,063 5.28%*
======== =======
Liabilities
Interest Checking .................................................. $ 42,917 $ 88 0.21%
Savings Deposits ................................................... 10,945 18 0.16%
Money Market ....................................................... 53,735 401 0.75%
Certificates of Deposit ............................................ 172,283 4,506 2.62%
Individual Retirement Accounts ..................................... 25,079 815 3.25%
-------- -------
304,959 5,828
Short-term Borrowings .............................................. 33,393 368 1.10%
Long-term Borrowings ............................................... 5,000 245 4.90%
-------- -------
Total Interest-bearing Liabilities ............................. $343,352 $ 6,441 1.88%
======== =======
Excess of interest-earning assets
over interest-bearing liabilities ................................ $ 57,626
========
Net interest income ................................................ $14,622
=======
Interest rate spread ............................................... 3.40%*
Net yield on earning assets ........................................ 3.67%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest-earning assets is calculated by dividing net
interest earnings by total interest-earning assets.
7
Year Ended December 31, 2003
----------------------------
(dollars in thousands)
Average Interest Average
Amount Earned/Paid Yield/Rate
------ ----------- ----------
Assets
Securities - Taxable ............................................... $ 75,300 $ 2,392 3.18%
Tax-Exempt ............................................ 4,837 180 5.64%*
Interest-bearing deposits at other banks ........................... 379 4 1.06%
Federal Funds Sold ................................................. 15,784 176 1.12%
Mortgage loans held for sale ....................................... 32,511 1,002 3.08%
Gross Loans ........................................................ 275,424 17,153 6.23%
-------- ---------
Total Earning Assets ........................................... $404,235 $ 20,907 5.19%*
======== =========
Liabilities
Interest Checking .................................................. $ 37,650 $ 150 0.40%
Savings Deposits ................................................... 9,513 43 0.45%
Money Market ....................................................... 61,048 752 1.23%
Certificates of Deposit ............................................ 171,155 5,069 2.96%
Individual Retirement Accounts ..................................... 23,500 844 3.59%
-------- --------
302,866 6,858
Short-term Borrowings .............................................. 31,747 427 1.35%
Long-term Borrowings ............................................... 5,000 241 4.82%
-------- --------
Total Interest-bearing Liabilities ............................. $339,613 $ 7,526 2.22%
======== ========
Excess of interest-earning assets
over interest-bearing liabilities ................................ $64,622
========
Net interest income ................................................ $ $13,381
========
Interest rate spread ............................................... 2.97%*
Net yield on earning assets ........................................ 3.33%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest-earning assets is calculated by dividing net
interest earnings by total interest-earning assets.
8
Year Ended December 31, 2002
----------------------------
(dollars in thousands)
Average Interest Average
Amount Earned/Paid Yield/Rate
------ ----------- ----------
Assets
Securities - Taxable ............................................... $ 57,915 $ 2,646 4.57%
Tax-Exempt ............................................ 3,419 151 6.69%*
Interest-bearing deposits at other banks ........................... 16 1 6.25%
Federal Funds Sold ................................................. 20,454 375 1.83%
Mortgage loans held for sale ....................................... 28,572 1,069 3.74%
Gross Loans ........................................................ 229,523 16,364 7.13%
-------- -------
Total Earning Assets ........................................... $339,899 $ 20,606 6.08%*
======== ========
Liabilities
Interest Checking .................................................. $ 32,657 $ 231 0.71%
Savings Deposits ................................................... 7,487 43 0.57%
Money Market ....................................................... 57,897 1,422 2.46%
Certificates of Deposit ............................................ 140,730 4,777 3.39%
Individual Retirement Accounts ..................................... 17,732 751 4.24%
-------- --------
256,503 7,224
Short-term Borrowings .............................................. 27,150 532 1.96%
Long-term Borrowings ............................................... 5,000 241 4.82%
-------- --------
Total Interest-bearing Liabilities ............................. $288,653 $ 7,997 2.77%
======== ========
Excess of interest-earning assets
over interest-bearing liabilities ................................ $51,246
========
Net interest income ................................................ $12,609
=======
Interest rate spread ............................................... 3.31%*
Net yield on earning assets ........................................ 3.73%*
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
For purposes of these analyses, non-accruing loans are included in the average
balances. Loan fees included in interest earned are not material to the
presentation. Net yield on interest-earning assets is calculated by dividing net
interest earnings by total interest-earning assets.
9
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The effect of changes in average balances (volume) and rates on
interest income, interest expense and net interest income, for the periods
indicated, is shown below. The effect of a change in average balance has been
determined by applying the average rate in the earlier period to the change in
average balance in the later period, as compared with the earlier period. The
effect of a change in the average rate has been determined by applying the
average balance in the earlier period to the change in the average rate in the
later period, as compared with the earlier period.
Year Ended December 31,
2004 compared to 2003
---------------------
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable ........................................................ $ (241) $ (285) $ (526)
Tax-Exempt ..................................................... 72 (19) 53
Interest-bearing deposits at other banks ............................ 4 1 5
Federal Funds Sold .................................................. (121) 33 (88)
Mortgage Loans Held for Sale ........................................ (1,087) 403 (684)
Gross Loans ......................................................... 2,174 (778) 1,396
------- ------- -------
Total Interest Income ............................................... 801 (645) 156
------- ------- -------
Interest paid on:
Interest Checking .............................................. 19 (81) (62)
Savings Deposits ............................................... 6 (31) (25)
Money Market ................................................... (106) (245) (351)
Certificates of Deposit ........................................ 33 (596) (563)
Individual Retirement Accounts ................................. 54 (83) (29)
------- ------- -------
6 (1,036) (1,030)
Short-term Borrowings ............................................... 21 (80) (59)
Long-term Borrowings ................................................ - 4 4
------- ------- -------
Total Interest Expense .............................................. 27 (1,112) (1,085)
------- ------- -------
Change in Net Interest Income ....................................... $ 774 $ 467 $ 1,241
======= ======= =======
Note: Changes that are not solely attributable to volume or rate have been
allocated to volume and rate on a pro-rata basis.
As reflected in the table above, most of the increase in net interest
income of $1,241,000 during 2004 was due to the change in volume. Substantially
all the $156,000 increase in interest income was related to the volume growth in
the loan portfolios, and was lessened by the change in rates. In reviewing the
Company's deposits, substantially all the $1,085,000 decrease in interest
expense was due to the decreases in the rates paid on all deposit accounts,
principally Money Market accounts and Certificates of Deposit.
10
Year Ended December 31,
2003 compared to 2002
---------------------
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable ........................................................ $ 674 $ (928) $ (254)
Tax-Exempt ..................................................... 55 (26) 29
Interest-bearing deposits at other banks ............................ 4 (1) 3
Federal Funds Sold .................................................. (132) (67) (199)
Mortgage Loans Held for Sale ........................................ 136 (203) (67)
Gross Loans ......................................................... 3,019 (2,230) 789
------- ------- -------
Total Interest Income ............................................... 3,756 (3,455) 301
------- ------- -------
Interest paid on:
Interest Checking .............................................. 31 (112) (81)
Savings Deposits ............................................... 10 (10) 0
Money Market ................................................... 74 (744) (670)
Certificates of Deposit ........................................ 950 (658) 292
Individual Retirement Accounts ................................. 219 (126) 93
------- ------- -------
1,284 (1,650) (366)
Short-term Borrowings ............................................... 80 (185) (105)
Long-term Borrowings ................................................ - - -
------- ------- -------
Total Interest Expense .............................................. 1,364 (1,835) (471)
------- ------- -------
Change in Net Interest Income ....................................... $ 2,392 $(1,620) $ 772
======= ======= =======
Note: Changes that are not solely attributable to volume or rate have been
allocated to volume and rate on a pro-rata basis.
As reflected in the table above, the increase in 2003 net interest
income of $773,000 was due to the increase in volume, and was partially offset
by the change in rates. The $302,000 increase in interest income was related to
the volume growth in the loan portfolios, again partially offset by the change
in rates. In reviewing the Company's deposits, the $471,000 decrease in interest
expense was due to the decreases in the rates paid on Money Market accounts and
Certificates of Deposit, and partially offset by the increase in volume.
LOAN PORTFOLIO
The Company engages, through the Banks, in a full complement of lending
activities, including commercial, consumer, installment, and real estate loans.
Commercial lending is directed principally towards businesses whose
demands for funds fall within each Bank's legal lending limits and which are
potential deposit customers of the Banks. This category of loans includes loans
made to individuals, partnerships or corporate borrowers, and which are obtained
for a variety of business purposes. Particular emphasis is placed on loans to
11
small and medium-sized businesses. The Company's commercial loans are spread
throughout a variety of industries, with no industry or group of related
industries accounting for a significant portion of the commercial loan
portfolio. Commercial loans are made on either a secured or unsecured basis.
When taken, security usually consists of liens on inventories, receivables,
equipment, and furniture and fixtures. Unsecured commercial loans are generally
short-term with emphasis on repayment strengths and low debt to worth ratios. At
December 31, 2004, approximately $12,534,000, or 5.5%, of commercial loans were
unsecured compared to approximately $14,878,000 or 7.1% at December 31, 2003.
The Company's real estate loans are primarily construction loans and
loans secured by real estate, both commercial and residential, located within
the Company's trade areas. The Company does not actively pursue long-term,
fixed-rate mortgage loans for retention in its loan portfolio. The Banks do
employ mortgage loan originators who originate loans that are pre-sold at
origination 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 2004, the Company originated
$149,881,000 and sold $156,689,000 in mortgage loans held for sale. Due to the
fact that management made the decision to completely exit the wholesale mortgage
business by the end of the year, there were no mortgage loans held for sale at
December 31, 2004, a decrease of 100.0% from the $5,101,000 in mortgage loans
held for sale at December 31, 2003.
The Banks' direct consumer loans consist primarily of secured
installment loans to individuals for personal, family and household purposes,
including automobile loans to individuals, and pre-approved lines of credit.
Management believes the loan portfolio is adequately diversified. Real
estate lending (both mortgage and construction loans) continues to be the
largest component of the loan portfolio, representing $264,925,000 or 81% of
total loans at December 31, 2004, compared to $230,243,000 or 76% at year-end
2003. There are no foreign loans and few agricultural loans. The following table
presents various categories of loans contained in the Company's loan portfolio
and the total amount of all loans at December 31, 2004, 2003, 2002, 2001 and
2000.
Loan Portfolio Composition
(dollars in thousands) December 31,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Commercial and industrial - not secured by
real estate ......................................... $ 39,723 $ 44,306 $ 35,548 $ 26,997 $ 24,084
Commercial and industrial - secured by real
estate ............................................... 95,965 84,805 72,600 53,445 45,668
Real Estate - mortgage .................................. 105,580 90,299 69,579 60,881 58,540
Real estate - construction .............................. 63,380 55,139 48,452 48,099 37,308
Consumer loans .......................................... 21,255 21,703 24,308 23,114 19,426
-------- -------- -------- -------- --------
Loans held for investment ............................... 325,903 296,252 250,487 212,536 185,026
Loans held for sale ..................................... 0 5,101 55,026 40,925 16,992
Less: Allowance for loan losses ....................... 3,691 3,438 2,850 2,288 2,023
-------- -------- -------- -------- --------
Net Loans ............................................... $322,212 $297,915 $302,663 $251,173 $199,995
======== ======== ======== ======== ========
12
Percentage of Loans Held for Investment
---------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Commercial and Industrial - not secured by real estate ............ 12.18% 14.95% 14.19% 12.70% 13.02%
Commercial and industrial - secured by realestate ................. 29.45% 28.63% 28.98% 25.15% 24.68%
Real Estate - mortgage ............................................ 32.40% 30.48% 27.78% 28.64% 31.64%
Real estate - construction ........................................ 19.45% 18.61% 19.34% 22.63% 20.16%
Consumer loans .................................................... 6.52% 7.33% 9.71% 10.88% 10.50%
------ ------ ------ ------ ------
Total ........................................................ 100.00% 100.00% 100.00% 100.00% 100.00%
The following is a presentation of an analysis of maturities of loans
as of December 31, 2004:
Loan Maturity and Interest Sensitivity
(dollars in thousands)
Due After 1
Due in 1 Year up to Due after
Type of Loans Year or less 5 years 5 years Total
------------ ------- ------- -----
Commercial and Industrial .......................... $ 7,457 $ 30,661 $ 1,605 $ 39,723
Real Estate ........................................ 78,344 111,929 74,652 264,925
Consumer Loans ..................................... 5,590 13,134 2,531 21,255
------- -------- -------- --------
Total .......................................... $91,391 $155,724 $ 78,788 $325,903
All loans are recorded according to original terms, and demand loans,
overdrafts, and loans having no stated repayment terms or maturity are reported
as due in one year or less.
At December 31, 2004, the amount of loans due after one year with
predetermined interest rates totaled approximately $71,242,000 while the amount
of loans due after one year with floating interest rates totaled approximately
$163,270,000.
The following table presents information on non-performing loans and
real estate acquired in settlement of loans:
December 31,
------------
(dollars in thousands)
Non-performing Assets 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Non-performing loans:
Non-accrual loans ........................... $ 670 $ 829 $ 926 $ 993 $ 993
Past due 90 days or more .................... 838 122 5 - 108
Other restructured loans .................... - - - 8 67
------ ------ ------ ------ ------
Total non-performing loans .................... 1,508 951 931 1,001 1,168
Real estate acquired in
settlement of loans ......................... 756 517 193 950 478
------ ------ ------ ------ ------
Total non-performing assets ................... $2,264 $1,468 $1,124 $1,951 $1,646
====== ====== ====== ====== ======
Non-performing assets as a
Percentage of loans and
other real estate ........................... 0.69% 0.49% 0.37% 0.77% 0.82%
Allowance for loan losses as
a percentage of non-
performing loans ............................ 245% 362% 306% 229% 173%
13
In an effort to more accurately reflect the status of the Company's
loan portfolio, accrual of interest is discontinued on a loan that displays
certain problem indications which might jeopardize full and timely collection of
principal and/or interest. The Company's Loan Policy drives the administration
of problem loans. Loans are monitored through continuing review by credit
managers, monthly reviews of exception reports, and ongoing analysis of asset
quality trends, economic and business factors. Credit management activities,
including specific reviews of new large credits, are reviewed by the Directors'
Loan Committees of each banking subsidiary, which meet monthly.
With respect to the loans accounted for on a non-accrual basis and
restructured loans, the gross interest income that would have been recorded if
the loans had been current in accordance with their original terms and
outstanding throughout the period or since origination amounts to $46,000 for
the year ended December 31, 2004. The interest on those loans that was included
in net income for 2004 amounts to $20,000.
As of December 31, 2004, there were no potential problem loans
classified for regulatory purposes as doubtful, substandard or special mention
that have not been disclosed above, which (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources of the Company, or (ii)
represent material credits about which management is aware of any information
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("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 discounted at the loan's effective interest rate, the market price of the
loan, if available, or the underlying collateral values as defined in the
pronouncement. The Company complies with the provisions of SFAS No. 114, as
necessary, when determining the adequacy of the allowance for loan losses. When
the ultimate collectability of an impaired loan's principal is in doubt, wholly
or partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the loan
agreement. Once the recorded principal balance has been reduced to zero, future
cash receipts are applied to interest income, to the extent that any interest
has been foregone. Further cash receipts are recorded as recoveries on any
amounts previously charged off. There were no impaired loans at each of December
31, 2004 and December 31, 2003.
14
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
The purpose of the Company's allowance for loan losses is to absorb
loan losses that occur in the loan portfolios of its bank subsidiaries.
Management determines the adequacy of the allowance quarterly and considers a
variety of factors in establishing a level of the allowance for losses and the
related provision, which is charged to expense. Factors considered in
determining the adequacy of the allowance for loan losses include: historical
loan losses experienced by the Company, current economic conditions affecting a
borrower's ability to repay, the volume of outstanding loans, the trends in
delinquent, non-accruing and potential problem loans, and the quality of
collateral securing non-performing and problem loans. By considering the above
factors, management attempts to determine the amount of reserves necessary to
provide for inherent losses in the loan portfolios of its subsidiaries. However,
the amount of reserves may change in response to changes in the financial
condition of larger borrowers, changes in the Company's local economies and
expected industry trends.
The allowance for loan losses for each portfolio segment is set at an
amount that reflects management's best judgment of the extent to which
historical loss levels are more or less accurate indicators of current losses in
the loan portfolios of its bank subsidiaries. While it is the Company's policy
to charge off in the current period loans in which a loss is considered
probable, there are inherent losses that cannot be quantified precisely or
attributed to particular loans or classes of loans. Because the state of the
economy, industry trends, and conditions affecting individual borrowers may
affect the amount of such losses, management's estimate of the appropriate
amount of the allowance is necessarily approximate and imprecise. The Company
and its bank subsidiaries are also subject to regulatory examinations and
determinations as to adequacy of the allowance for loan losses, which may take
into account such factors as the methodology used to calculate the allowance for
loan losses and the size of the allowance for loan losses in comparison to a
group of peer companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies
predominantly on its ongoing review of the loan portfolio, including historical
charge-offs, which is undertaken both to ascertain whether there are probable
losses that must be charged off and to assess the risk characteristics of the
portfolio in the aggregate. The Company utilizes its credit administration
department, as well as the services of an outside consultant from time to time,
to perform quality reviews of its loan portfolio. The review considers the
judgments and estimates of management and also those of bank regulatory agencies
that review the loan portfolio as part of their regular examination process. The
Comptroller of the Currency, as part of its routine examination process of
national banks, including the Company's Banks, may require additions to the
allowance for loan losses based upon the regulators' credit evaluations
differing from those of management. The Company's management believes they have
in place the controls and personnel to adequately monitor its loan portfolios
and the adequacy of the allowance for loan losses.
15
Management does not segregate the allowance by loan category and the
entire allowance is available to absorb losses from all loan categories.
At December 31, 2004 the allowance for loan losses was $3,691,000, or
1.13% of gross outstanding loans (excluding mortgage loans held for sale),
compared to $3,438,000, or 1.16% of gross outstanding loans (excluding mortgage
loans held for sale), at December 31, 2003. During 2004, the Company experienced
net charge-offs of $336,000, or 0.11% of average loans, compared to net
charge-offs of $518,000, or 0.19% of average loans during 2003. Consumer loan
net charge-offs were $61,000 in 2004 compared to net charge-offs of $110,000 in
2003. Commercial loan net charge-offs were $166,000 in 2004 compared to net
charge-offs of $229,000 in 2003. Mortgage loan net charge-offs were $109,000 in
2004 compared to net charge-offs of $179,000 in 2003.
The Company made provisions for loan losses of $589,000 in fiscal 2004
compared to $1,106,000 for fiscal 2003.
Management continues to closely monitor the levels of non-performing
and potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of non-performing and potential problem loans
accelerate from the current trend, management intends to adjust the methodology
for determining the allowance for loan losses and will increase the provision
and allowance for loan losses. This would likely decrease net income.
The following table summarizes the allowance for loan loss balances of
the Company at the beginning and end of each period, changes in the allowance
arising from charge-offs and recoveries by category and additions to the
allowance, which have been charged to expense.
Analysis of the Allowance for Loan Losses
(dollars in thousands) Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Balance at beginning of year ..................................... $3,438 $2,850 $2,288 $2,023 $1,581
Charge-offs:
Commercial and industrial - not secured by real estate ............ 212 28 277 406 104
Commercial and industrial - secured by real estate ................ 0 33 0 53 0
Real estate - mortgage ............................................ 169 358 47 67 17
Real estate - construction ........................................ 0 0 0 0 0
Consumer loans .................................................... 67 146 86 129 127
------ ------ ------ ------ ------
448 565 410 655 248
------ ------ ------ ------ ------
Recoveries:
Commercial and industrial - not secured by real estate ............ 46 8 5 3 3
Commercial and industrial - secured by real estate ............... 0 0 2 0 0
Real estate - mortgage ............................................ 60 3 4 1 1
Real estate - construction ........................................ 0 0 0 0 0
Consumer loans .................................................... 6 36 17 24 5
------ ------ ------ ------ ------
112 47 28 28 9
------ ------ ------ ------ ------
Net Charge-offs ................................................... 336 518 382 627 239
Provision for loan losses ......................................... 589 1,106 944 892 681
------ ------ ------ ------ ------
Balance at end of year ............................................ $3,691 $3,438 $2,850 $2,288 $2,023
====== ====== ====== ====== ======
16
The following table sets forth ratios of net charge-offs or the
allowance for loan losses to the items stated:
Asset Quality Ratios:
Year Ended December 31,
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Net charge-offs to average loans
outstanding during the year ..................... 0.11% 0.19% 0.17% 0.32% 0.14%
Net charge-offs to total loans
outstanding at end of year ...................... 0.10% 0.17% 0.15% 0.30% 0.13%
Allowance for loan losses to
average loans ................................... 1.18% 1.25% 1.24% 1.16% 1.21%
Allowance for loan losses to
total loans at end of year ..................... 1.13% 1.16% 1.14% 1.08% 1.09%
Net charge-offs to allowance for
loan losses at end of year ..................... 9.10% 15.07% 13.40% 27.40% 11.81%
Net charge-offs to provision for
loan losses .................................... 57.05% 46.84% 40.47% 70.29% 35.10%
The allowance for loan losses is increased by direct charges to
operating expense, through the provision for loan losses. Losses on loans are
charged against the allowance in the period in which management determines it is
more likely than not that the full amounts of such loans have become
uncollectable. Recoveries of previously charged-off loans are credited to the
allowance.
Management considers the allowance for loan losses adequate to cover
inherent losses on the loans outstanding at December 31, 2004. In the opinion of
management, there are no material risks or significant loan concentrations in
the present portfolio. It must be emphasized, however, that the determination of
the allowance for loan losses using the Company's procedures and methods rests
upon various judgments, estimates and assumptions about present and future
economic conditions and other factors affecting loans. No assurance can be given
that the Company will not sustain loan losses in any particular period which are
sizable in relation to the amount reserved or that subsequent evaluation of the
loan portfolio, in light of conditions and factors then prevailing, will not
require significant changes in the allowance for loan losses or future charges
to earnings. The allowance for loan losses is also subject to review and
approval by various regulatory agencies through their periodic examinations of
the Company's subsidiaries. Such examinations could result in required changes
to the allowance for loan losses.
INVESTMENTS
The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities and in certain obligations of states and municipalities. The
Banks enter into federal funds transactions with their principal correspondent
banks and usually act as net sellers of such funds. The sale of federal funds
amounts to a short-term loan from the selling bank to the other bank.
17
The following table summarizes the book and market values of investment
securities held by the Company at December 31, 2004, 2003 and 2002.
Securities Portfolio Composition
(dollars in thousands)
2004 2003 2002
---- ---- ----
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
AVAILABLE FOR SALE
Obligations of U.S. Government
Agencies and Corporations ................... $62,749 $62,052 $78,620 $78,714 $79,125 $80,163
State and Political Subdivisions ............... - - - - - -
------- ------- ------- ------- ------- -------
Total Available for Sale ....................... 62,749 62,052 78,620 78,714 79,125 80,163
------- ------- ------- ------- ------- -------
HELD FOR INVESTMENT
State and Political Subdivisions ............... 7,386 7,451 5,632 5,752 4,123 4,248
------- ------- ------- ------- ------- -------
Other Investments .............................. 1,809 1,809 2,147 2,147 1,884 1,884
------- ------- ------- ------- ------- -------
Total ................................. $71,944 $71,312 $86,399 $86,613 $85,132 $86,295
======= ======= ======= ======= ======= =======
The Company accounts for investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Investments
classified as available for sale are carried at market value. Unrealized holding
gains or losses are reported as a component of shareholders' equity net of
deferred income taxes in comprehensive income. Securities classified as held for
investment are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts. In order to qualify as held for investment, the
Company must have the ability and intent to hold the securities to maturity. The
Company has no trading securities.
At December 31, 2004 the Company's total investment portfolio
classified as available for sale had a book value of $62,749,000 and a market
value of $62,052,000 for an unrealized net loss of $697,000.
18
The following table indicates the respective maturities and
weighted-average yields of securities as of December 31, 2004:
Securities Maturity Schedule
(dollars in thousands)
Amortized Weighted
Cost Average Yield**
---- ---------------
AVAILABLE FOR SALE
Obligations of U.S. Treasury and other Government agencies:
0-1 Year .................................................................... $ 500 1.56%
1-5 Years ................................................................... 49,499 2.43%
5-10 Years .................................................................. 9,532 3.69%
Greater than 10 Years ....................................................... 3,218 4.32%
-------------
$ 62,749 2.71%
=============
HELD FOR INVESTMENT
State and political subdivisions:
0-1 Year .................................................................... $ 1,056 6.19%*
1-5 Years ................................................................... 3,145 4.35%*
5-10 Years .................................................................. 2,980 3.97%*
Greater than 10 Years ....................................................... 205 2.30%*
-------------
Total .............................................................. $ 7,386 4.40%*
=============
* Calculated on a fully taxable equivalent basis using a federal tax rate of
34%.
** Weighted average yields on available for sale securities are based on
amortized cost.
DEPOSITS
The Company offers a full range of interest-bearing and
noninterest-bearing accounts, including commercial and retail checking accounts,
negotiable orders of withdrawal ("NOW") accounts, public funds accounts, money
market accounts, individual retirement accounts, including Keogh plans with
stated maturities, regular interest-bearing statement savings accounts and
certificates of deposit with fixed rates and a range of maturity date options.
The sources of deposits are residents, businesses and employees of businesses
within the Company's market areas obtained through the personal solicitation of
the Company's officers and directors, direct mail solicitations and
advertisements published in the local media. From time to time the Company
garners deposits from sources outside of its normal trade areas through the
Internet or through brokers. These deposits are short-term in nature and are
used to manage the Company's short-term liquidity position. These brokered
deposits are generally more volatile than deposits acquired in the local market
areas. There were no Internet deposits at December 31, 2004 and December 31,
2003. There were no brokered deposits at December 31, 2004 and December 31,
2003. During 2004 and 2003 the Company reduced its dependence on these
nontraditional deposits, replacing them with core deposits obtained through
several deposit gathering campaigns. The Company pays competitive interest rates
on interest checking, savings, money market, time and individual retirement
accounts. In addition, the Banks have implemented a service charge fee schedule
competitive with other financial institutions in the Banks' market areas,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.
19
The Company's average deposits in 2004 were $352,754,000 compared to
$353,218,000 the prior year, a decrease of $464,000 or 0.1%. In 2004 the average
noninterest-bearing deposits decreased approximately $2,557,000 or 5%, average
interest-bearing checking accounts increased $5,267,000 or 14%, average savings
accounts increased $1,432,000 or 15%, average money market accounts decreased
$7,313,000 or 12%, average certificates of deposit increased $1,128,000 or 1%,
and individual retirement accounts increased $1,579,000 or 7%. Competition for
deposit accounts is primarily based on the interest rates paid, service charge
structure, location convenience and other services offered.
The following table presents, for the years ended December 31, 2004,
2003 and 2002, the average amount of, and average rate paid on, each of the
following deposit categories:
Deposit Category Average Amount Average Rate Paid
-------------- -----------------
(dollars in thousands)
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Noninterest-bearing Deposits ...................... $ 47,795 $ 50,352 $ 40,778 - - -
Interest-bearing Deposits
Interest Checking ............................. 42,917 37,650 32,657 0.21% 0.40% 0.71%
Savings Deposits .............................. 10,945 9,513 7,487 0.16% 0.45% 0.57%
Money Market .................................. 53,735 61,048 57,897 0.75% 1.23% 2.46%
Certificates of Deposit ....................... 172,283 171,155 140,730 2.62% 2.96% 3.39%
Individual Retirement Accounts ................ 25,079 23,500 17,732 3.25% 3.59% 4.24%
The Company's core deposit base consists of consumer time deposits less
than $100,000, savings accounts, NOW accounts, money market accounts and
checking accounts. Although such core deposits are becoming increasingly
interest-sensitive for both the Company and the industry as a whole, such core
deposits continue to provide the Company with a large and stable source of
funds. Core deposits as a percentage of average total deposits averaged
approximately 75% in 2004 compared to approximately 77% in 2003. The Company
closely monitors its reliance on certificates of deposits greater than $100,000,
which are generally considered less stable and less reliable than core deposits.
However, local customers hold virtually all of these certificates of deposit
over $100,000.
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities as of December 31,
2004:
Time Certificates of Deposit
----------------------------
(dollars in thousands)
3 months or less $ 17,813
4-6 months 6,663
7-12 months 20,666
Over 12 months 35,873
-----------
Total $ 81,015
===========
20
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity
for the years ended December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002
----- ----- -----
Return on average assets ..................... 0.82% 1.18% 1.21%
Return on average equity ..................... 9.45% 14.52% 14.49%
Average equity to average assets ratio ....... 8.66% 8.13% 8.34%
Dividend payout ratio (1) .................... 30.36%(2) 19.96% 17.98%
(1) Includes cash-in-lieu of fractional shares paid on 5% stock dividend.
(2) Includes cash-in-lieu of fractional shares paid on 3-for-2 stock split.
SHORT-TERM BORROWINGS
The following table summarizes the Company's short-term borrowings for
the years ended December 31, 2004, 2003 and 2002. These borrowings consist of
federal funds purchased and securities sold under agreements to repurchase,
which generally mature on a one-business-day basis.
Weighted
Maximum Weighted Average
Outstanding Annual Average Interest
at any Average Interest Year End Rate at
Year Ended December 31, Month End Balance Rate Balance Year End
----------------------- --------- ------- ---- ------- --------
(dollars in thousands)
2004:
Federal funds purchased .......................... $ 1,854 $ 345 2.30% $ 572 2.64%
Securities sold under repurchase agreements ...... $ 36,243 $ 31,479 1.07% $ 33,953 1.57%
2003:
Federal funds purchased .......................... $ 1,579 $ 152 2.99% $ - 1.37%
Securities sold under repurchase agreements ...... $ 33,035 $ 28,783 1.34% $ 24,390 0.94%
2002:
Federal funds purchased .......................... $ 4,363 $ 364 1.67% $ - 1.64%
Securities sold under repurchase agreements ...... $ 35,331 $ 25,597 2.44% $ 35,331 1.52%
21
MARKET RISK - INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the
fair value of financial instruments due to a change in interest rates, exchange
rate and equity prices. The Company's primary risk is interest rate risk.
The primary objective of Asset/Liability Management at the Company is
to manage interest-rate risk and achieve reasonable stability in net interest
income throughout interest-rate cycles in order to maintain adequate liquidity.
This is achieved by maintaining the proper balance of rate-sensitive earning
assets and rate-sensitive liabilities. The relationship of rate-sensitive
earning assets to rate-sensitive liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate-sensitive assets and rate-sensitive liabilities are those
that can be repriced to current market rates within a relatively short time
period. Management monitors the rate sensitivity of earning assets and
interest-bearing liabilities over the entire life of these instruments, but
places particular emphasis on the first year. At December 31, 2004,
approximately 53% of the Company's interest-earning assets were scheduled to
reprice or to mature within one year compared to approximately 76% of
interest-bearing liabilities.
The following table shows the Company's rate-sensitive position at
December 31, 2004 as measured by gap analysis (the difference between the
interest-earning asset and interest-bearing liability amounts scheduled to be
repriced to current market rates in subsequent periods). Over the next 12 months
approximately $44 million more interest-bearing liabilities than
interest-earning assets can be repriced to current market rates at least once.
As a result, at December 31, 2004 the ratio of rate-sensitive assets to
rate-sensitive liabilities within the one-year time frame was 83%, indicating a
"liability-sensitive" position. 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
The following table sets forth the Company's interest sensitivity
position as of December 31, 2004.
Interest Sensitivity Analysis
(dollars in thousands)
Within 3 4-12 Over 5
Months months 1-5 years Years Total
------ ------ --------- ----- -----
INTEREST-EARNING ASSETS:
Federal Funds Sold ................................. $ 2,631 $ - $ - $ - $ 2,631
Investment Securities (1) .......................... 410 1,146 52,643 17,744 71,943
Interest Bearing Deposits in Other Banks ........... 548 380 100 - 1,028
Total loans ........................................ 182,818 23,993 $104,528 14,564 325,903
-------- -------- -------- ------- --------
Total Interest-Earning Assets ........................ $186,407 $ 25,519 $157,271 $32,308 $401,505
-------- -------- -------- ------- --------
INTEREST-BEARING LIABILITIES:
Interest Checking ................................ $ - $ 45,456 $ - $ - $45,456
Savings Deposits ................................. - 11,964 - - 11,964
Money Market ..................................... 50,148 - - - 50,148
Time Deposits .................................... 43,888 66,410 76,517 255 187,070
Other Borrowings ................................. 38,025 - - 5,000 43,025
--------- -------- -------- ------- --------
Total Interest-Bearing Liabilities ................... $132,061 $123,830 $ 76,517 $ 5,255 $337,663
-------- -------- -------- ------- --------
Interest sensitive gap ............................... $ 54,346 $(98,311) $ 80,754 $27,053
Cumulative interest sensitive gap .................... $ 54,346 $(43,965) $ 36,789 $63,842
RSA/RSL .............................................. 141% 21%
Cumulative RSA/RSL ................................... 141% 83%
RSA - rate sensitive assets; RSL - rate sensitive liabilities (1) Values based
on amortized cost of available-for-sale securities.
It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Company seeks to invest the largest portion of its assets in commercial,
consumer and real estate loans.
Each of the Company's banking subsidiaries has established an
Asset/Liability Management Committee. These committees use a variety of tools to
analyze interest rate sensitivity, including a static gap presentation and a
simulation model. A "static gap" presentation reflects the difference between
total interest-sensitive assets and liabilities within certain time periods.
While the static gap is a widely used measure of interest rate sensitivity, it
is not, in management's opinion, the best indicator of a company's true
sensitivity position. Accordingly, the Company's banking subsidiaries also use
an earnings simulation model that estimates the variations in interest income
under different interest rate environments to measure and manage the bank's
short-term interest rate risk. Additionally, each of the Company's banking
subsidiaries measures anticipated changes in its economic value of equity, in
order to ascertain its long-term interest rate risk. This is done by calculating
the difference between the theoretical market value of the bank's assets and
liabilities and subjecting the balance sheet to different interest rate
environments to measure and manage long-term interest rate risk.
23
It is the responsibility of the Asset/Liability Committees to establish
parameters for various interest risk measures, to set strategies to control
interest rate risk within those parameters, to maintain adequate and stable net
interest income, and to direct the implementation of tactics to facilitate
achieving their objectives.
Management is not aware of any known events or uncertainties that will
have or are reasonably likely to have a material effect on the Company's
liquidity, capital resources or results of operations. Management is not aware
of any current recommendations by the regulatory authorities, which if they were
to be implemented, would have a material effect on the Company's liquidity,
capital resources or results of operations.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company's liquidity position is primarily dependent upon its need
to respond to short-term demand for funds caused by withdrawals from deposit
accounts and upon the liquidity of its assets. The Company's primary liquidity
sources include cash and due from banks, federal funds sold and "securities
available for sale." In addition, the Company (through the Banks) has the
ability, on a short-term basis, to borrow funds from the Federal Reserve System
and to purchase federal funds from other financial institutions. At December 31,
2004 the Banks, in aggregate, had unused federal funds lines of credit totaling
$30,178,000 with various correspondent banks. The Banks are also members of the
Federal Home Loan Bank System and have the ability to borrow both short- and
long-term funds on a secured basis. At December 31, 2004 The Peoples National
Bank had $5,000,000 in long-term borrowings and no short-term borrowings from
the Federal Home Loan Bank of Atlanta. At December 31, 2004, The Peoples
National Bank had unused borrowing capacity from the Federal Home Loan Bank of
Atlanta of $33,090,000. At December 31, 2004, Bank of Anderson, N. A. had no
long-term borrowings and $2,500,000 in short-term borrowings from the Federal
Home Loan Bank of Atlanta. At December 31, 2004, Bank of Anderson, N. A. had
unused borrowing capacity from the Federal Home Loan Bank of Atlanta of
$17,449,000. Seneca National Bank had no long-term borrowings and $1,000,000 in
short-term borrowings from the Federal Home Loan Bank of Atlanta at December 31,
2004. Seneca National Bank had unused borrowing capacity from the Federal Home
Loan Bank of Atlanta of $2,406,000 at December 31, 2004. The Federal Home Loan
Bank requires that investment securities, qualifying mortgage loans and stock of
the Federal Home Loan Bank owned by the Banks be pledged to secure any advances
from the Federal Home Loan Bank. The unused borrowing capacity currently
available assumes that the Banks' $1,296,400 investment in Federal Home Loan
Bank stock as well as certain securities and qualifying mortgages would be
pledged to secure future borrowings. Management believes that it could obtain
additional borrowing capacity from the Federal Home Loan Bank by identifying
additional qualifying collateral that could be pledged.
24
Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs outside of those of its subsidiaries. Peoples Bancorporation
requires liquidity to pay limited operating expenses and cash dividends. The
parent company's liquidity needs are fulfilled through management fees assessed
each subsidiary bank and from dividends passed up to the parent company from The
Peoples National Bank.
The Company plans to meet its future cash needs through the liquidation
of temporary investments, maturities or sales of loans and investment
securities, generation of deposits, and Federal Home Loan Bank advances. Company
management believes its liquidity sources are adequate to meet its operating
needs and does not know of any trends that may result in the Company's liquidity
materially increasing or decreasing.
OFF-BALANCE SHEET ARRANGEMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company, through the operations of the Banks, makes contractual
commitments to extend credit in the ordinary course of its business activities.
These commitments are legally binding agreements to lend money to customers of
the Banks at predetermined interest rates for a specified period of time. At
December 31, 2004 the Banks had issued commitments to extend credit of
$91,847,000 through various types of arrangements, described further in the
table below.
The commitments generally expire in one year. Past experience indicates
that many of these commitments to extend credit will expire not fully used.
However, as described under Liquidity, the Company believes that it has adequate
sources of liquidity to fund commitments that are drawn upon by the borrower.
December 31, 2004
-----------------
(dollars in thousands)
Unused Commitments
Lines of credit secured by residential properties ..... $ 36,894
Lines of credit secured by commercial properties ...... 21,702
Other unused commitments .............................. 33,251
----------
Total .............................................. $ 91,847
==========
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 $6,077,000 at December 31,
2004. Past experience indicates that many of these standby letters of credit
will expire unused. However, through its various sources of liquidity, the
Company believes that it will have the necessary resources to meet these
obligations should the need arise. Various types of collateral secure most of
the standby letters of credit. The Company believes that the risk of loss
associated with standby letters of credit is comparable to the risk of loss
associated with its loan portfolio. Moreover, the fair value associated with any
standby letters of credit issued by the Company is immaterial to the Company.
25
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. Until October 15, 2004 and in years
prior the Company engaged in the origination, funding and sale of residential
mortgage loans and entered 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 was determined prior
to funding (rate lock commitments). Beginning October 16, 2004 the Company no
longer engaged in the funding or selling of residential mortgage loans. The
Company continues to originate residential mortgage loans, which are committed
to and funded by unaffiliated third parties. Therefore, at December 31, 2004 the
Company had no commitments outstanding to originate residential mortgage loans
under rate lock commitments and no commitments to sell mortgage loans to third
parties under rate lock commitments. At December 31, 2003 the Company had
commitments outstanding to originate residential mortgage loans under rate lock
commitments from borrowers totaling $10,754,000. Simultaneously, the Company had
commitments to sell these loans to third parties under rate lock commitments.
The Company did not collect any upfront fees when issuing a mortgage loan
commitment to a potential borrower, and mortgages were sold to third parties at
par value. The cumulative effect under SFAS No. 133 for rate lock commitments as
of December 31, 2003 for the Company was immaterial.
Neither the Company nor its subsidiaries are involved in other
off-balance sheet arrangements or transactions that could result in liquidity
needs or other commitments or significantly impact earnings. The Company did not
maintain any obligations under non-cancelable operating lease agreements at
December 31, 2004. Refer to Note 11 and Note 12 of the Company's consolidated
financial statements for discussion on commitments and contingencies and
financial instruments with off-balance sheet risk.
CAPITAL ADEQUACY AND RESOURCES
The capital needs of the Company have been met through the retention of
earnings and from the proceeds of prior public stock offerings.
For bank holding companies with total assets of more than $150 million,
such as the Company, capital adequacy is evaluated on a consolidated basis. The
Company's banking subsidiaries must separately meet additional regulatory
capital requirements. Generally, the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") expects bank holding companies to operate
above minimum capital levels. The Office of the Comptroller of the Currency
("Comptroller") regulations establish the minimum leverage capital ratio
requirement for national banks at 3% in the case of a national bank that has the
highest regulatory examination rating and is not contemplating significant
26
growth or expansion. All other national banks are expected to maintain a ratio
of at least 1% to 2% above the stated minimum. Furthermore, the Comptroller
reserves the right to require higher capital ratios in individual banks on a
case-by-case basis when, in its judgment, additional capital is warranted by a
deterioration of financial condition or when high levels of risk otherwise
exist. The Banks have not been notified that they must maintain capital levels
above regulatory minimums. The Company's leverage capital ratio was 8.92% at
December 31, 2004 compared to 8.46% at December 31, 2003. The leverage capital
ratio for The Peoples National Bank was 9.10% at December 31, 2004 compared to
8.47% at December 31, 2003. Bank of Anderson's leverage capital ratio was 7.21%
at December 31, 2004 compared to 7.17% at December 31, 2003. Seneca National
Bank's leverage capital ratio was 9.11% at December 31, 2004 compared to 7.92%
at December 31, 2003. The increases in the Company's and Banks' leverage capital
ratios resulted primarily from the retention of earnings net of dividends paid
during 2004.
The Federal Reserve Board has adopted a risk-based capital rule that
requires bank holding companies to have qualifying capital to risk-weighted
assets of at least 8%, with at least 4% being "Tier 1" capital. Tier 1 capital
consists principally of common shareholders' equity, non-cumulative preferred
stock, qualifying perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain intangible
assets. "Tier 2" (or supplementary) capital consists of general loan loss
reserves (subject to certain limitations), certain types of preferred stock and
subordinated debt, and certain hybrid capital instruments and other debt
securities such as equity commitment notes. A bank holding company's qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital components, provided that the maximum amount of
Tier 2 capital that may be treated as qualifying capital is limited to 100% of
Tier 1 capital. The Comptroller imposes a similar standard on national banks.
The regulatory agencies expect national banks and bank holding companies to
operate above minimum risk-based capital levels. The Company's risk-based
capital ratio was 12.35% and its Tier 1 capital to risk weighted assets ratio
was 11.27% at December 31, 2004, compared to 12.37% and 11.30%, respectively, at
December 31, 2003. The Peoples National Bank's risk-based capital ratio was
12.61% and its Tier 1 capital to risk weighted assets ratio was 11.57% at
December 31, 2004, compared to 12.58% and 11.47%, respectively, at December 31,
2003. Bank of Anderson's risk-based capital ratio was 10.26% and its Tier 1
capital to risk weighted assets ratio was 9.19% at December 31, 2004 compared to
10.61% and 9.63%, respectively at December 31, 2003. Seneca National Bank's
risk-based capital ratio was 12.59% and its Tier 1 capital to risk weighted
assets ratio was 11.34% at December 31, 2004 compared to 11.79% and 10.64%,
respectively at December 31, 2003. The increase in The Peoples National Bank's
risk-based capital ratio and their Tier 1 capital to risk-weighted assets ratio
in 2004 resulted from the fact that the retention of earnings increased capital
faster than growth and changes in the asset mix changed risk-weighted assets.
Bank of Anderson, N. A. and Seneca National Bank experienced decreases in those
ratios because their growth in assets experienced during 2004 exceeded their
growth in capital. The Company's risk-based capital ratio and its Tier 1 capital
to risk-weighted assets ratios in 2004 decreased as a result of the growth in
assets experienced by both Bank of Anderson N. A. and Seneca National Bank.
27
(See "Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operation).
During 2004 and 2003, the retention of earnings net of dividends paid
increased the Company's capital by $2,601,000 and $4,037,000 respectively.
PAYMENT OF DIVIDENDS
If a national bank's surplus fund equals the amount of its capital
stock, the directors may declare quarterly, semi-annual or annual dividends out
of the bank's net profits, after deduction of losses and bad debts. If the
surplus fund does not equal the amount of capital stock, a dividend may not be
paid until one-tenth of the bank's net profits of the preceding half year, in
the case of quarterly or semi-annual dividends, or the preceding two years, in
the case of an annual dividend, are transferred to the surplus fund.
The approval of the Comptroller is required if the total of all
dividends declared by a national bank in any calendar year will exceed the total
of its retained net profits of that year combined with its retained net profits
for the preceding two years, less any required transfers to surplus or a fund
for the retirement of any preferred stock. The Comptroller's regulations provide
that provisions for possible credit losses cannot be added back to net income
and charge-offs cannot be deducted from net income in calculating the level of
net profits available for the payment of dividends.
The payment of dividends by the Banks may also be affected or limited
by other factors, such as the requirements to maintain adequate capital above
regulatory guidelines. If, in the opinion of the Comptroller, a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the Comptroller may require, after notice and
hearing, that such bank cease and desist from such practice. The Comptroller has
indicated that paying dividends that deplete a national bank's capital base to
an inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve, the Comptroller and the FDIC have issued policy statements that provide
that bank holding companies and insured banks should generally only pay
dividends out of current operating earnings.
The Company's primary sources of funds with which to pay dividends to
shareholders are the dividends it receives from its subsidiary banks. In 2004
The Peoples National Bank paid dividends of $1,050,861 to the Company, which in
turn paid those dividends to its shareholders, compared to $994,454 in 2003.
Bank of Anderson and Seneca National Bank paid no dividends to the Company in
2004 or 2003.
28
MONETARY POLICIES AND EFFECT OF INFLATION
The earnings of bank holding companies are affected by the policies of
regulatory authorities, including the Federal Reserve Board, in connection with
its regulation of the money supply. Various methods employed by the Federal
Reserve Board include open market operations in U. S. Government securities,
changes in the discount rate on member bank borrowings and changes in reserve
requirements against member bank deposits. These methods are used in varying
combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may also affect interest rates charged
on loans or paid on deposits. The monetary policies of the Federal Reserve Board
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
The consolidated financial statements have been prepared in accordance
with accounting principals generally accepted in the United States of America
which require the measurement of financial position and results of operations in
terms of historical dollars, without consideration of changes in the relative
purchasing power over time due to inflation. Unlike companies in most other
industries, virtually all of the assets and liabilities of financial
institutions are monetary in nature. As a result, interest rates generally have
a more significant effect on a financial institution's performance than does the
effect of inflation. Interest rates do not necessarily change in the same
magnitude as do the prices of goods and services.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses that have large investments in plant and
inventories, it does have some effect. During periods of high inflation, there
are normally corresponding increases in the money supply, and banks will
normally experience above-average growth in assets, loans and deposits. Also,
general increases in the prices of goods and services will result in increased
operating expenses. Inflation that affects the Banks' customers may also have an
indirect affect on the Banks.
CORRESPONDENT BANKING
Correspondent banking involves the provision of services by one bank to
another bank, which cannot provide that service for itself, or chooses not to,
from an economic, regulatory or practical standpoint. The Banks purchase
correspondent services offered by larger banks, including check collections, the
sale and purchase of federal funds, security safekeeping, investment services,
over-line and liquidity loan participations and sales of loans to or
participations with correspondent banks.
The Banks have the option to sell loan participations to correspondent
banks with respect to loans that exceed the Banks' lending limits. Management of
the Banks has established correspondent banking relationships with Wachovia
Bank, N. A., Charlotte, North Carolina; The Bankers Bank, Atlanta, Georgia;
Community Bankers Bank, Midlothian, Virginia; and National Bank of Commerce,
Birmingham, Alabama. As compensation for services provided by correspondents,
the Banks may maintain certain balances with such correspondents in non-interest
bearing accounts.
29
DATA PROCESSING
The Company has a data-processing department, which performs a full
range of data-processing services for the Banks. Such services include an
automated general ledger, deposit accounting, loan accounting and data
processing. In February of 2002 the Company made a decision to replace its data
processing system with a new system. The new system was installed during the
third quarter of 2002 at a cost of approximately $1,250,000.
SUPERVISION AND REGULATION
The Company and the Banks operate in a highly regulated environment,
and their business activities are governed by statute, regulation and
administrative policies. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and the
Banks.
General
The business activities of the Company and Banks are closely supervised
by a number of federal regulatory agencies, including the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board"), the Comptroller of the
Currency (the "Comptroller") and the Federal Deposit Insurance Corporation (the
"FDIC"). As a bank holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require pursuant to the Bank Holding Company Act. The Federal Reserve Board may
also make examination of the Company and any subsidiaries.
The Company is regulated by the Federal Reserve Board under the Federal
Bank Holding Company Act of 1956, as amended (the "BHCA"). Under the BHCA, a
bank holding company is generally prohibited from acquiring control of any
company that is not a bank and from engaging in any business other than the
business of banking or managing and controlling banks. However, there are
certain activities which have been identified by the Federal Reserve Board to be
so closely related to banking as to be a proper incident thereto, and are thus
permissible for bank holding companies, including the following activities:
acting as an investment or financial advisor to subsidiaries and certain outside
companies; leasing personal and real property or acting as a broker with respect
thereto; providing management consulting advice to nonaffiliated banks and
non-bank depository institutions; operating collection agencies and credit
bureaus; acting as a futures commission merchant; providing data processing and
data transmission services; acting as an insurance agent or underwriter with
30
respect to limited types of insurance; performing real estate appraisals;
arranging commercial real estate equity financing; providing securities
brokerage services; and underwriting and dealing in obligations of the United
States, the states and their political subdivisions. The BHCA also requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before acquiring more than 5% of the voting shares of any bank or all or
substantially all of the assets of a bank, and before merging or consolidating
with another bank holding company.
As discussed below under the caption "Gramm-Leach-Bliley Act," Congress
has adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a new type of bank holding company with powers that greatly exceed
those of standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. Although
the Company elected to become a financial holding company as of June 23, 2000,
neither the Company nor the Banks has yet made a decision as to how to adapt the
new legislation to their use. Accordingly, the following discussion relates to
the supervisory and regulatory provisions that apply to the Company and the
Banks as they currently operate.
The Company also is subject to limited regulation by the South Carolina
State Board of Financial Institutions (the "State Board"). Consequently, the
Company must give notice to, or receive the approval of, the State Board
pursuant to applicable law and regulations prior to engaging in the acquisition
of South Carolina banking institutions or holding companies. The Company also
may be required to file with the State Board periodic reports with respect to
its financial condition and operation, management and inter-company relations
between the Company and its subsidiaries.
Obligations of the Company to its Subsidiary Banks
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended
("FDIA"), require insured depository institutions under common control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the FDIC as a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the FDIC to a commonly
31
controlled insured depository institution in danger of default. The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best interest of the SAIF or the BIF or both. The FDIC's claim for
damages is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision gives depositors a preference over general and subordinated creditors
and shareholders in the event a receiver is appointed to distribute the assets
of any of the Banks.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions among the Company and its
affiliates, including the amount of the Banks' loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its affiliates
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
Capital Adequacy Guidelines for Bank Holding Companies and National Banks
Both the Company and the Banks are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller (see
"CAPITAL ADEQUACY AND RESOURCES"). Failure to meet capital guidelines could
subject the Banks to a variety of enforcement remedies, including the
termination of deposit insurance by the FDIC and placing the Banks in
receivership.
A joint rule promulgated by the Federal Reserve Board, the FDIC and the
Comptroller provides that the banking agencies must include in their evaluations
of a bank's capital adequacy an assessment of the exposure to declines in the
economic value of the bank's capital due to changes in interest rates. The
agencies have issued statements that describe the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. Another joint rule promulgated by the financial
institution regulators further provides that the risk-based capital guidelines
must take account of concentration of credit risk and the risk of
32
non-traditional activities. The rule explicitly identifies concentration of
credit risk and the risk arising from other sources, as well as an institution's
overall capital adequacy.
Bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
However, management of the Company is unable to predict whether and when higher
capital requirements would be imposed and, if so, at what levels and on what
schedule.
The Company and each of the Banks exceeded all applicable capital
requirements at December 31, 2004.
Payment of Dividends
The Company is a legal entity separate and distinct from the Banks.
Most of the revenues of the Company are expected to continue to result from
dividends paid to the Company by the Banks. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its shareholders. See "PAYMENT OF DIVIDENDS."
Regulation of the Banks
As national banks, the Banks are subject to supervision by the
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, the Banks may establish branch offices anywhere
within the State of South Carolina. In addition, the Banks are subject to
various other state and federal laws and regulations, including state usury
laws, laws relating to fiduciaries, consumer credit and laws relating to branch
banking. The Banks' loan operations are subject to certain federal consumer
credit laws and regulations promulgated thereunder, including, but not limited
to; the federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers; the Home Mortgage Disclosure Act, requiring financial
institutions to provide certain information concerning their mortgage lending;
the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain prohibited factors in extending credit;
the Fair Credit Reporting Act, governing the use and provision of information to
credit reporting agencies; the Bank Secrecy Act, dealing with, among other
things, the reporting of certain currency transactions; and the Fair Debt
Collection Act, governing the manner in which consumer debts may be collected by
collection agencies. The deposit operations of the Banks are subject to the
Truth in Savings Act, requiring certain disclosures about rates paid on savings
accounts; the Expedited Funds Availability Act, which deals with disclosure of
the availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
33
The Banks are also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital,
surplus and allowance for loan losses to any person or entity. In addition, a
national bank may grant loans and extensions of credit to a single person up to
10% of its unimpaired capital, surplus and allowance for loan losses, provided
that the transactions are fully secured by readily marketable collateral having
a market value determined by reliable and continuously available price
quotations. This 10% limitation is separate from, and in addition to, the 15%
limitation for unsecured loans. Loans and extensions of credit may exceed the
general lending limits if they qualify under one of several exceptions. Such
exceptions include, among others, certain loans or extensions of credit arising
from the discount of commercial or business paper, the purchase of banker's
acceptances, loans secured by documents of title, loans secured by U. S.
obligations and loans to or guaranteed by the federal government.
As national banks, the Banks are subject to examinations and reviews by
the Comptroller. These examinations are typically completed on site, and the
Banks are subject to off-site review as well. The Banks also submit to the FDIC
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.
FDIC Insurance Assessments
The Banks are required to pay semiannual assessments to the FDIC. Since January
1997, the assessments imposed on all FDIC deposits for deposit insurance has an
effective rate ranging from 0 to 27 basis points per $100 of insured deposits,
depending on the institution's capital position and other supervisory factors.
Legislation enacted in 1996 also requires that both SAIF-insured and BIF-insured
deposits pay a pro rata portion of the interest due on the obligations issued by
the Financing Corporation ("FICO"). The FICO assessment is adjusted quarterly to
reflect changes in the assessment bases of the respective funds based on
quarterly Call Report and Thrift Financial Report submissions.
34
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA: restricting payment of capital distributions and management fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital restoration plan; restricting the growth of the bank's
assets and requiring prior approval of certain expansion proposals. A bank that
is "significantly undercapitalized" is also subject to restrictions on
compensation paid to senior management of the bank, and a bank that is
"critically undercapitalized" is further subject to restrictions on the
activities of the bank and restrictions on payments of subordinated debt of the
bank. The purpose of these provisions is to require banks with less than
adequate capital to act quickly to restore their capital and to have the FDIC
move promptly to take over banks that are unwilling or unable to take such
steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegel-Neal Interstate Banking and Branching Efficiency Act
of 1994, the Company, and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentages and
other restrictions. The legislation also provides that in any state that has not
previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multi-state bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if the laws of the host state expressly
permit it. The authority of a bank to establish, and operate branches within a
state continue to be subject to applicable state branching laws. South Carolina
law was amended effective July 1, 1996, to permit such interstate branching, but
not de novo branching by an out-of-state bank.
The Riegel-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger customers. These advantages
35
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Company does not generally
attempt to compete for the banking relationships of large corporations and
businesses, but concentrates its efforts on small to medium-sized businesses and
on individuals. The Company believes it has competed effectively in this market
segment by offering quality, personal service.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (the "Act"), which makes it easier for
affiliations between banks, securities firms and insurance companies to take
place, became effective in March 2000. The Act removes Depression-era barriers
that had separated banks and securities firms, and seeks to protect the privacy
of consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
financial subsidiary. The legislation created a new type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also created another new type of entity called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also established the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
36
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirmed that states are the regulators for
insurance activities of all persons, including federally chartered banks, the
Act prohibits states from preventing depository institutions and their
affiliates from conducting insurance activities.
The Act also established a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how financial institutions may use
personal financial information. The privacy provisions of the Act have been
implemented by regulations of various federal agencies.
The Act and the regulations adopted pursuant to the Act create new
opportunities for the Company to offer expanded services to customers in the
future. The Company elected to become a financial holding company effective June
23, 2000, but it has not yet used that status to engage in any activities that
are not also permissible for bank holding companies. Furthermore, the Company
has not yet determined what the nature of the expanded services it could offer
might be or when the Company might find it feasible to offer them. The Act has
increased competition from larger financial institutions that are currently more
capable than the Company of taking advantage of the opportunity to provide a
broader range of services. However, the Company continues to believe that its
commitment to providing high quality, personalized service to customers will
permit it to remain competitive in its market area.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act was signed into law on July 30, 2002, and
mandated extensive reforms and requirements for public companies. The SEC has
adopted extensive new regulations pursuant to the requirements of the
Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's new regulations have
increased the Company's cost of doing business, particularly its fees for
internal and external audit services and legal services, and the law and
regulations are expected to continue to do so. However, the Company does not
believe that it will be affected by Sarbanes-Oxley and the new SEC regulations
in ways that are materially different or more onerous than those of other public
companies of similar size and in similar businesses.
37
Legislative Proposals
Proposed legislation which could significantly affect the business of
banking is introduced in Congress and the General Assembly of South Carolina
from time to time. Management of the Company cannot predict the future course of
such legislative proposals or their impact on the Company and the Banks should
they be adopted.
EMPLOYEES
The Company and the Banks employed one hundred nineteen (119) full-time
and twenty-nine (29) part-time persons as of December 31, 2004. Management
believes that its employee relations are good.
EXECUTIVE OFFICERS
The executive officers of the Company are R. Riggie Ridgeway, President
and Chief Executive Officer; William B. West, Executive Vice President and
Treasurer; Robert E. Dye, Jr., Senior Vice President, Chief Financial Officer
and Secretary; and Patricia A. Jensen, Senior Vice President and Controller.
Information about all of the executive officers except Patricia A. Jensen is set
forth in Item 10, part III of this report on Form 10-K.
Patricia A. Jensen, age 51, was promoted to Senior Vice President
during 2003. Prior to that time, she served as Vice President of the Company
since its formation in 1992. Mrs. Jensen has served as Vice President and
Cashier of The Peoples National Bank since August 1986. Prior to joining The
Peoples National Bank, Mrs. Jensen served as Vice President of First Union
National Bank.
38
ITEM 2. PROPERTIES
The Company's corporate office is located at 1818 East Main Street in
Easley, South Carolina. The property consists of a three-story brick building
containing approximately 10,670 square feet on 0.665 acres of land owned by The
Peoples National Bank. This building houses some of the Company's support
functions, including administration, accounting, financial reporting, human
resources, training, marketing, risk management, internal audit, compliance,
facilities management, security, and purchasing. The Company also utilizes an
adjacent office building located at 1814 East Main Street in Easley, South
Carolina. The property consists of a two-story brick building containing
approximately 6,624 square feet on 0.566 acres of land owned by The Peoples
National Bank. This building houses some of the Company's support functions
including operations, data processing, and information technology. The Peoples
National Bank also owns several portions of an adjacent office building located
at 1824 East Main Street in Easley, South Carolina. The property consists of
approximately 6,600 square feet of office space located in a one-story brick
building containing approximately 9,000 square feet on 0.704 acres of land.
Peoples National Bank is using portions of this facility as office space and
file storage, and a portion is currently being leased to a tenant.
The main office of The Peoples National Bank is located at 1800 East
Main Street in Easley, South Carolina. The property consists of a two-story
brick building of approximately 10,412 square feet, which is constructed on 1.75
acres of land owned by The Peoples National Bank. Improvements include a
three-lane drive-through teller installation, vault, night depository,
safe-deposit facilities, and a drive-through automated teller machine.
The Peoples National Bank owns and operates three branch facilities:
one in Powdersville, South Carolina located approximately seven miles east of
the Bank's main office containing approximately 3,158 square feet in a one-story
brick building situated on 0.812 acres of land; a second branch office in
Pickens, South Carolina located approximately ten miles west of the Bank's main
office containing approximately 6,688 square feet in a two-story building on
0.925 acres of land; and a third branch office in Easley located approximately 2
miles west of the Bank's main office containing approximately 3,523 square feet
in a one and one-half story building situated on l.077 acres of land. All branch
facilities have improvements including drive-through teller installations,
drive-through automated teller machines, vault, night depository, and safe
deposit facilities.
The main office of Bank of Anderson, National Association is located at
201 East Greenville Street in Anderson, South Carolina. The property consists of
a two-story brick building with approximately 11,696 square feet, which is
constructed on 1.935 acres of land owned by Bank of Anderson. Improvements
include a three-lane drive-through teller installation, vault, night depository,
safe-deposit facilities, and a drive-through automated teller machine.
39
Bank of Anderson owns and operates one branch facility in Anderson
County, South Carolina located approximately five miles northwest of the Bank's
main office containing approximately 3,036 square feet in a one-story brick
building situated on 0.86 acres of land. The branch facility has improvements
including a drive-through teller installation, drive-through automated teller
machine, vault, night depository, and safe deposit box facilities.
Seneca National Bank, located at 201 By-Pass 123, Seneca, South
Carolina, operates out of a two-story brick building containing approximately
6,688 square feet situated on 1.097 acres of land in Seneca, South Carolina,
which is owned by Seneca National Bank.
All locations of the Company and the Banks are considered suitable and
adequate for their intended purposes. Management believes that insurance
coverage on the foregoing properties is adequate.
40
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that
arise in the ordinary course of its business. In the opinion of management based
on consultation with external legal counsel, the outcome of any currently
pending litigation is not expected to materially affect the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2004 to a vote of
security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded over-the-counter. Quotations
of bid and ask information are provided electronically by the National
Association of Securities Dealers, Inc.'s Over-The-Counter Bulletin Board under
the symbol "PBCE.OB." The reported high and low bid prices for each quarter of
2004 and 2003 are shown in the following table. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
Sales Price of the Company's Common Stock
Quarter Ended Low High
------------- --- ----
March 31, 2003 $ 12.86 $ 13.40
June 30, 2003 $ 13.23 $ 13.67
September 30, 2003 $ 13.47 $ 14.91
December 31, 2003 $ 14.41 $ 18.76
March 31, 2004 $ 15.14 $ 16.42
June 30, 2004 $ 15.08 $ 17.42
September 30, 2004 $ 16.08 $ 17.42
December 31, 2004 $ 17.00 $ 17.42
As of March 1, 2005, the number of holders of record of the Company's
common stock was 1,085 and the number of issued and outstanding shares was
5,896,572.
During 2004 the Company paid four quarterly cash dividends. A cash
dividend of $0.07 per common share was declared by the Company's Board of
Directors to shareholders of record on each of March 19th, June 18th, and
September 17th. A cash dividend of $0.05 per common share was declared by the
Company's Board of Directors to shareholders of record December 13th. In
addition, on each of July 13, 1992, July 12, 1993, December 12, 1994, November
30, 1995, November 8, 1996, October 31, 1997, December 7, 1998, January 14,
2000, January 5, 2001, January 4, 2002, November 18, 2002, November 17, 2003 and
41
January 4, 2005 the Company paid 5% stock dividends to shareholders (historical
prices have been adjusted for stock splits). It is the policy of the Board of
Directors of the Company to reinvest earnings for such periods of time as is
necessary to the successful operations of the Company and of the Banks. Future
dividends will depend on the Company's earnings, capital requirements, financial
condition and other factors considered relevant by the Board of Directors of the
Company. Payment of dividends is also subject to regulatory restrictions (see
Item 1, "PAYMENT OF DIVIDENDS").
The information required by Item 201(d) of Regulation S-K is set forth
under Item 12 of this Form 10-K.
Unregistered Sales of Equity Securities and Use of Proceeds
During the period ended December 31, 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 stock option plans. 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
----------- ---------- ------ -----
12/02/2004 Employees 6,702 $23,198
12/29/2004 Employees 1,950 $14,415
12/30/2004 Employees 1,363 $15,470
12/30/2004 Non-Employees 2,602 $25,875
Purchases of Equity Securities by the Company and Affiliated Purchasers
Neither the Company nor any "affiliated purchaser" as defined in 17
C.F.R. 240.10b-18(a)(3) purchased any shares or units of any class of the
Company's equity securities that is registered pursuant to Section 12 of the
Exchange Act during the fourth quarter of 2004. Accordingly, no disclosure is
required pursuant to 17 C.F.R. ss.229.703.
42
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(All amounts, except per share data, in thousands)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Net interest income ......................... $ 14,622 $ 13,381 $ 12,609 $ 9,899 $ 9,561
Provision for loan losses ................... 589 1,106 944 892 681
Other operating income ...................... 4,996 10,302 6,564 5,267 2,631
Other operating expenses .................... 13,847 14,665 11,380 9,567 7,803
Net income .................................. 3,528 5,044 4,383 3,069 2,431
PER SHARE DATA (1)
Net income per common share -
Basic .................................... $ 0.61 $ 0.87 $ 0.75 $ 0.53 $ 0.42
Diluted .................................. $ 0.58 $ 0.84 $ 0.73 $ 0.52 $ 0.41
Cash dividends declared ..................... $ 0.26 $ 0.28 $ 0.23 $ 0.18 $ 0.15
BALANCE SHEET DATA
Total Assets ................................ $429,796 $421,756 $416,122 $312,166 $259,500
Total Deposits .............................. 346,145 353,329 328,174 236,802 205,634
Total Loans (Net) ........................... 322,212 297,915 302,663 251,173 199,995
Investment Securities ....................... 71,247 86,493 86,170 35,493 36,515
Total Earning Assets ........................ 400,809 399,925 394,351 296,181 239,756
Shareholders' Equity ........................ 38,240 36,161 32,747 28,551 25,815
OTHER DATA
Return on average assets .................... 0.82% 1.18% 1.21% 1.07% 1.01%
Return on average equity .................... 9.45% 14.52% 14.49% 11.31% 9.78%
(1) Per share data has been restated to reflect 5% stock dividends in 2000,
2001, 2002, 2003, and 2004, and the 3-for-2 stock split issued in October
2004.
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion is intended to assist in understanding the
financial condition and results of operations of the Company and should be read
in conjunction with the consolidated financial statements of the Company
included herein.
CRITICAL ACCOUNTING POLICIES
The Company has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's consolidated financial statements. The
significant accounting policies of the Company are described in Item 8, Note 1
to the consolidated financial statements.
Certain accounting policies involve significant judgments and
assumptions by management, which have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates and could have a material impact on the carrying
values of assets and liabilities and the results of operations of the Company.
Of these significant accounting policies, the Company considers its
policies regarding the allowance for loan losses (the "Allowance") to be its
most critical accounting policy due to the significant degree of management
judgment involved in determining the amount of Allowance. The Company has
developed policies and procedures for assessing the adequacy of the Allowance,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers, which
is not known to management at the time of the issuance of the consolidated
financial statements. Refer to the discussion under "Provision and Allowance for
Loan Losses, Loan Loss Experience" in Part I, Item 1 for a detailed description
of the Company's estimation process and methodology related to the allowance for
loan losses.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
Total assets increased $8,040,000 or 1.9% from $421,756,000 at December
31, 2003 to $429,796,000 at December 31, 2004.
The Company experienced significant loan growth during 2004 as the
total outstanding loans (excluding mortgage loans held for sale), the largest
44
single category of assets, increased $29,651,000 or 10.0% from $296,252,000 at
December 31, 2003 to $325,903,000 at December 31, 2004, as a result of an
increase in the amount of outstanding loans at the Company's three bank
subsidiaries.
During the fourth quarter of 2004 the Company completely exited the
wholesale mortgage lending business. As a result of the discontinuance of this
business, there were no mortgage loans held for sale at December 31, 2004
compared to $5,101,000 in mortgage loans held for sale at December 31, 2003.
The Company's securities portfolio collectively, at amortized cost,
decreased $14,455,000 or 16.7% from $86,399,000 at December 31, 2003 to
$71,944,000 at December 31, 2004. The majority of this decrease was attributable
to the sale of U.S. Government agencies and mortgage-backed securities in the
available-for-sale portfolio amounting to approximately $10,028,000. The sale of
these securities resulted in realized gains of $128,000 in 2004. Maturities,
calls, and principal pay-downs on all securities amounted to $31,714,000. The
Company made purchases of $25,375,000 in available-for-sale securities, and
purchases of $2,302,000 in securities held for investment. The Company does not
engage in, and does not expect to engage in, hedging activities.
Cash and due from banks balances decreased $534,000 or 5.8% from
$9,164,000 at December 31, 2003 to $8,630,000 at December 31, 2004. The amount
of federal funds sold as of December 31, 2004 was $2,631,000, a decrease of
$9,234,000 or 77.8% from the $11,865,000 of federal funds sold as of December
31, 2003. The swings in the levels of cash and federal funds sold are due to
fluctuations in the Banks' needs and sources for immediate and short-term
liquidity.
Cash surrender value of life insurance increased $6,755,000 or 294.5%
from $2,294,000 at December 31, 2003 to $9,049,000 at December 31, 2004. This
increase in cash surrender value of life insurance 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 informally used to partially offset the cost of
certain employee-related benefits.
Other assets, comprised largely of prepaid expenses, other real estate
owned, and deferred income taxes, increased $335,000 or 19.0% to $2,094,000 at
December 31, 2004 from $1,759,000 at December 31, 2003. This increase is largely
attributable to an increase of $212,000 or 26.3% in deferred income taxes to
$1,018,000 at December 31, 2004 from $806,000 at December 31, 2003, an increase
of $239,000 or 46.2% in other real estate owned to $756,000 at December 31, 2004
from $517,000 at December 31, 2003, and an increase in prepaid expenses of
$57,000 or 22.7% to $306,000 at December 31, 2004 from $249,000 at December 31,
2003. The previous increases were partially offset by a decrease of $148,000 in
the fair value of mortgage loan commitments considered derivatives and recorded
on the Company's balance sheet at December 31, 2003 in accordance with FASB
Statement No. 133.
45
Total liabilities increased $5,961,000 or 1.6% from $385,595,000 at
December 31, 2003 to $391,556,000 at December 31, 2004. Total deposits decreased
$7,184,000 or 2.0% to $346,145,000 at December 31, 2004 from $353,329,000 at
December 31, 2003. Of the $7,184,000 decrease in total deposits, there was a
$16,402,000 decline in interest-bearing deposits, largely certificates of
deposit and interest-bearing transaction accounts, which was partially offset by
$9,218,000 of growth in noninterest-bearing deposits. Securities sold under
repurchase agreements increased $9,563,000 or 39.2% from $24,390,000 at December
31, 2003 to $33,953,000 at December 31, 2004. Federal Home Loan Bank advances
increased $3,500,000 or 70.0% from $5,000,000 at December 31, 2003 to $8,500,000
at December 31, 2004. At both December 31, 2004 and December 31, 2003,
$5,000,000 represents a long-term advance purchased in December 2000, which will
mature in December 2010. The overall increase in these other interest-bearing
liabilities is largely attributable to the need to fund the growth in loan
volume at each of the Banks.
Shareholders' equity increased $2,079,000 or 5.8% from $36,161,000 at
December 31, 2003 to $38,240,000 at December 31, 2004. This increase comes
primarily as a result of net earnings for the period of $3,528,000, which was
partially offset by the declaration and payment of $1,051,000 in cash dividends
and the payment of $20,000 of cash in lieu of fractional shares for the 3-for-2
stock split and the 5% stock dividend during 2004.
46
EARNINGS PERFORMANCE
2004 Compared to 2003
Overview
The consolidated Company's operations for the twelve months ended
December 31, 2004 resulted in net income of $3,528,000 or $0.61 per basic share
($0.58 per diluted share), compared to $5,044,000 or $0.87 per basic share
($0.84 per diluted share) for the twelve months ended December 31, 2003. The
decrease in the Company's net income of $1,516,000 or 30.1% for 2004 resulted
largely from a significant decrease in non-interest income during 2004,
primarily from the slowing of the Company's residential mortgage-lending
activities because of the major reduction in demand.
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased $1,241,000 or 9.3% to
$14,622,000 for the year ended December 31, 2004 compared to $13,381,000 for the
year ended December 31, 2003.
The Company's total interest income increased $156,000 or 0.8% to
$21,063,000 in 2004 compared to $20,907,000 for 2003. This increase is largely
attributable to an increase in interest income and fees on loans of $712,000
resulting from an increase in outstanding loans at the Company's three bank
subsidiaries. This increase is partially offset by a decrease in interest income
on taxable investments of $521,000 or 21.7% resulting from lower market rates
and lower average balances experienced at the Company's three bank subsidiaries
during 2004 when compared to 2003. The increase is also partially offset by a
decrease in interest income on federal funds sold of $88,000 or 50.0% resulting
from lower average balances of this account.
Total interest expense decreased $1,085,000 or 14.4% to $6,441,000 in
2004 compared to $7,526,000 for 2003. The decreases in the amount of interest
paid on the various categories of interest-bearing liability accounts in 2004
are largely attributable to lower market rates experienced at the Company's
three bank subsidiaries during 2004 when compared to 2003.
Provision and Allowance for Loan Losses
The Company's provision for loan losses was $589,000 in 2004 compared
to $1,106,000 for 2003, a $517,000 or 46.7% decrease. This decrease is largely
attributable to slower loan growth at the Banks, coupled with an $182,000
decrease in net charged-off loans. During 2004 the Company experienced net
charge-offs of $336,000, or 0.11% of average outstanding loans (excluding loans
held for sale), compared to net charge-offs of $518,000, or 0.19% of average
outstanding loans in 2003. At December 31, 2004 the allowance for loan losses
was 1.13% as a percentage of outstanding loans (excluding loans held for sale)
compared to 1.16% at December 31, 2003.
47
At December 31, 2004 the Company had $670,000 in non-accrual loans, no
restructured loans, $838,000 in loans past due 90 days or more but still
accruing interest, and $756,000 in real estate acquired in settlement of loans,
compared to $829,000, $0, $122,000, and $517,000 respectively at December 31,
2003. Non-performing assets as a percentage of all loans and other real estate
owned were 0.70% and 0.49% at December 31, 2004 and 2003, respectively.
In the cases of non-performing loans, management of the Company has
reviewed the carrying value of any underlying collateral. In those cases where
the collateral value may be less than the carrying value of the loan the Company
has taken specific write-downs to the loan, even though such loan may still be
performing. Management of the Company does not believe it has any non-accrual
loan that individually could materially impact the allowance for loan losses or
long-term future operating results of the Company.
The Company records real estate acquired through foreclosure at the
lower of cost or estimated market value less estimated selling costs. Estimated
market value is based upon the assumption of a sale in the normal course of
business and not on a quick liquidation or distressed basis. Estimated market
value is established by independent appraisal at the time of foreclosure.
Management believes that other real estate owned at December 31, 2004 will not
require significant write-downs in future accounting periods, and therefore will
not have a significant effect on the Company's future operations.
Other Income
Total consolidated other income, including securities transactions,
decreased $5,306,000 or 51.5% from $10,302,000 in 2003 to $4,996,000 in 2004.
This decrease is largely attributable to a decrease of $5,936,000 or 77.7% from
the gain on sale of residential mortgage loans from $7,643,000 in 2003 to
$1,707,000 in 2004, and was partially offset by an increase of $224,000 or
203.6% in earnings on bank owned life insurance from $110,000 in 2003 to
$334,000 in 2004, and an increase of $79,000 or 4.1% in service charges on
deposit accounts from $1,923,000 in 2003 to $2,002,000 in 2004. The Company
recorded a $128,000 gain on the sale of securities in 2004, an increase of
$115,000 or 884.6% from the gain of $13,000 recorded in 2003.
Other Expenses
Total consolidated other expenses decreased $818,000 or 5.6% to
$13,847,000 in 2004 compared to $14,665,000 in 2003. Salaries and benefits, the
largest component of non-interest expense, decreased $777,000 or 8.7% to
$8,167,000 in 2004 compared to $8,944,000 in 2003. The decrease in salaries and
benefits for the comparative periods is primarily attributable to the reduced
staffing associated with the residential mortgage lending personnel, 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.
48
Occupancy expense increased $59,000 or 9.7% to $668,000 in 2004
compared to $609,000 in 2003. Equipment expense increased $139,000 or 12.1% to
$1,290,000 in 2004 compared to $1,151,000 in 2003. The increases in occupancy
and equipment expenses are 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 increased $321,000 or 184.5% to
$495,000 in 2004 compared to $174,000 in 2003. This increase is primarily due 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 in
April 2004. This charge is required by SFAS No. 112 in accordance with generally
accepted accounting principles. The increase was partially offset by a reduction
of the number of executives covered from two to one, resulting in lower expenses
for the remainder of the year.
Bank paid loan costs decreased $147,000 or 32.2% to $310,000 in 2004
compared to $457,000 in 2003. The decrease in bank paid loan costs for the two
comparative periods is principally attributable to the significant decrease in
the volume of mortgage loans originated during 2004 when compared to 2003.
Miscellaneous other operating expenses decreased $413,000 or 12.4% to
$2,917,000 in 2004 compared to $3,330,000 in 2003. Marketing and advertising
expense decreased $95,000 or 24.2% to $297,000 in 2004 compared to $392,000 in
2003. This decrease is the result of a decision by management to curtail
expenditures in this area. Communications expense decreased $66,000 or 24.3% to
$206,000 in 2004 compared to $272,000 in 2003. This decrease is largely
attributable to a redesign of telephone systems that incorporated newer
technologies and allowed cost savings.
Other operating expenses decreased $183,000 or 8.7% to $1,930,000 in
2004, compared to $2,113,000 in 2003. This decrease is attributable to decreases
in postage expense; printing and supplies; and impact fees. Postage expense
decreased $90,000 or 31.5% to $196,000 in 2004 compared to $286,000 in 2003,
largely due to the decrease in postage associated with reduced activity in the
mortgage loan department. Printing and supplies decreased $67,000 or 24.4% to
$208,000 in 2004 compared to $275,000 in 2003, also largely associated with
reduced activity in the mortgage loan department. Impact fees, which were paid
to a consultant that assisted with the design and implementation of our
overdraft privilege service, decreased by $109,000 or 80.7% to $26,000 in 2004
compared to $135,000 in 2003 due to the expiration of that contract.
Other expenses include legal and professional fees; ATM and debit card
expense; insurance expense; travel and administration expense; and other sundry
expenses. Legal and professional fees increased $51,000 or 24.4% to $260,000 in
2004 compared to $209,000 in 2003 largely due to consultation and revisions
49
regarding articles of incorporation, bylaws, stock option plans, and executive
employment contracts. ATM and debit card expense increased $26,000 or 12.4% to
$236,000 in 2004 compared to $210,000 in 2003. This increase is largely
attributable to growth in the number of transactions and vendor fee increases
that occurred 2004. Insurance expense for directors and officers, bond,
property, workers compensation, liability, etc. increased $22,000 or 20.2% to
$131,000 in 2004 compared to $109,000 in 2003 as the result of increased
insurance coverage. Travel and administration expense decreased $13,000 or 13.3%
to $85,000 in 2004 compared to $98,000 in 2003. The retreat that was held for
the Board of Directors in 2003 was not repeated in 2004, largely contributing to
the decrease in travel and administration expense.
50
EARNINGS PERFORMANCE
2003 Compared to 2002
Overview
The consolidated Company's operations for the twelve months ended
December 31, 2003 resulted in net income of $5,044,000 or $0.87 per basic share
($0.84 per diluted share), compared to $4,383,000 or $0.75 per basic share
($0.73 per diluted share) for the twelve months ended December 31, 2002. The
increase in the Company's net income of $661,000 or 15.1% for 2003 resulted
largely from a significant increase in non-interest income during 2003,
primarily from the Company's mortgage lending activities.
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased $772,000 or 6.1% to
$13,381,000 for the year ended December 31, 2003 compared to $12,609,000 for the
year ended December 31, 2002.
The Company's total interest income increased $301,000 or 1.5% to
$20,907,000 in 2003 compared to $20,606,000 for 2002. This increase is largely
attributable to an increase in interest income on loans of $722,000 resulting
from an increase in outstanding loans at the Company's three bank subsidiaries.
This increase is partially offset by a decrease in interest income on taxable
investments of $251,000 or 9.5% resulting from lower market rates experienced at
the Company's three bank subsidiaries during 2003 when compared to 2002. The
increase is also partially offset by a decrease in interest income on federal
funds sold of $199,000 or 53.1% resulting from lower average balances of this
account.
Total interest expense decreased $471,000 or 5.9% to $7,526,000 in 2003
compared to $7,997,000 for 2002. The decreases in the amount of interest paid on
the various categories of interest-bearing liability accounts in 2003 are
largely attributable to lower market interest rates experienced at the Company's
three bank subsidiaries during 2003 when compared to 2002, and were partially
offset by higher average balances in those types of accounts.
51
Provision and Allowance for Loan Losses
The Company's provision for loan losses was $1,106,000 in 2003 compared
to $944,000 for 2002, a $162,000 or 17.2% increase. This increase is largely
attributable to the increase in the amount of loan growth during 2003 when
compared to 2002, coupled with a $136,000 increase in net charged-off loans.
During fiscal year 2003 the Company experienced net charge-offs of $518,000, or
0.19% of average outstanding loans (excluding loans held for sale), compared to
net charge-offs of $382,000, or 0.17% of average outstanding loans in fiscal
year 2002. At December 31, 2003 the allowance for loan losses was 1.16% as a
percentage of outstanding loans (excluding loans held for sale) compared to
1.14% at December 31, 2002.
At December 31, 2003 the Company had $829,000 in non-accrual loans, no
restructured loans, $122,000 in loans past due 90 days or more but still
accruing interest, and $517,000 in real estate acquired in settlement of loans,
compared to $926,000, $0, $5,000, and $193,000 respectively at December 31,
2002. Non-performing assets as a percentage of all loans and other real estate
owned were 0.49% and 0.37% at December 31, 2003 and 2002, respectively.
Other Income
Total consolidated other income, including securities transactions,
increased $3,738,000, or 56.9% from $6,564,000 in 2002 to $10,302,000 in 2003.
This increase is largely attributable to an increase of $3,422,000, or 81.1%,
from the gain on sale of residential mortgage loans from $4,221,000 in 2002 to
$7,643,000 in 2003; an increase of $221,000, or 12.9%, in service charges on
deposit accounts from $1,702,000 in 2002 to $1,923,000 in 2003; and an increase
of $123,000, or 20.5%, in other miscellaneous income from $600,000 in 2002 to
$723,000 in 2003. The Company recorded a $13,000 gain on the sale of securities
in 2003, a decrease of $28,000 or 68.3% from the gain of $41,000 recorded in
2002.
Other Expenses
Total consolidated other expenses increased $3,285,000 or 28.9% to
$14,665,000 in 2003 compared to $11,380,000 in 2002. The increase in overall
non-interest expense is indicative of the Company's continued growth and normal
expense increases throughout the Company. Salaries and benefits, the largest
component of non-interest expense, increased $2,176,000 or 32.1% to $8,944,000
in 2003 compared to $6,768,000 in 2002. The increase in salaries and benefits
for the comparative periods is primarily attributable to the additional staffing
associated with the Company and its subsidiary banks, higher levels of incentive
pay for residential mortgage lending personnel, and normal salary increases
throughout the Company during 2003.
Occupancy expense increased $61,000 or 11.1% to $609,000 in 2003
compared to $548,000 in 2002. The increase in occupancy expense for the two
comparative periods is attributable to the addition of a leased office in
52
September 2002 that was used for the origination of residential mortgages and
the opening of a new branch office of Bank of Anderson, N.A. in August 2003.
Equipment expense increased $331,000 or 40.4% to $1,151,000 in 2003 compared to
$820,000 in 2002. The increase for the comparative periods is partially
attributable to the new branch office of Bank of Anderson, N.A. and a full year
of depreciation and other expenses associated with the conversion to a new data
processing system during the third quarter of 2002.
Miscellaneous other operating expenses increased $717,000 or 22.1% to
$3,961,000 in 2003 compared to $3,244,000 in 2002. Marketing and advertising
expense increased $59,000 or 17.8% to $392,000 in 2003 compared to $333,000 in
2002. This increase is largely attributable to advertising associated with the
Company's mortgage lending activities as well as the promotion of some new bank
products. Communications expenses increased $37,000 or 15.7% to $272,000 in 2003
compared to $235,000 in 2002. This increase is largely attributable to
telecommunication improvements and costs associated with the operations of
additional facilities in 2003. Bank paid loan costs decreased $163,000 or 26.3%
to $457,000 in 2003 compared to $620,000 in 2002. This decrease is largely the
result of the Company's underwriting its mortgage loans in-house versus
outsourcing this service as in prior years.
Other operating expenses increased $784,000 or 44.0% to $2,565,000 in
2003, compared to $1,781,000 in 2002. This increase is attributable to increases
in legal and professional fees; bank-owned life insurance expense; Internet
expense; ATM and debit card expense; director fees and other sundry expenses.
Legal and professional fees increased $112,000 or 115.5% to $209,000 in 2003
compared to $97,000 in 2002 largely due to increased oversight and consultation
over the residential mortgage area. Bank-owned life insurance expense increased
$119,000 or 216.4% to $174,000 in 2003 compared to $55,000 in 2002 primarily due
to the additional purchase of life insurance on key executives in December 2002.
Internet expense increased $78,000 or 156.0% to $128,000 in 2003 from $50,000 in
2002 in part due to the timing of actual payments to the Internet banking
vendor. ATM and debit card expense increased $76,000 or 56.7% to $210,000 in
2003 compared to $134,000 in 2002. This increase is largely attributable to
growth in the number of transactions and vendor fee increases that occurred late
in 2002. Director's fees increased $62,000 or 28.7% to $278,000 in 2003 compared
to $216,000 in 2002 as the result of increased fees paid to the directors of the
Company's bank subsidiaries and the addition of fees paid for attendance at
committee meetings to outside directors only. Expenses of $255,000 associated
with residential mortgage lending activity were incurred in 2003 due to
management's assessment of the collectibility of certain items and additional
potential miscellaneous charges associated with the residential mortgage lending
function.
53
LIQUIDITY AND CAPITAL RESOURCES
Reference is made to the sections "Liquidity" and "Capital Adequacy and
Resources" included in "Business" under Item 1 of this Annual Report on Form
10-K.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Reference is made to the section "Off-Balance Sheet Arrangements and
Derivative Financial Instruments" included in "Business" under Item 1 of this
Annual Report on Form 10-K.
The following table summarizes the Company's contractual obligations as
of December 31, 2004.
CONTRACTUAL OBLIGATIONS
(dollars in thousands) Payments Due by Period
----------------------
Less than 1-3 4-5 After 5
--------- --- --- -------
Total 1 Year Years Years Years
Long-term debt obligations .................. $ 5,000 $ - $ - $ - $ 5,000
========= ========= ========= ========= ==========
The Peoples National Bank has a $5,000,000 advance from the Federal Home Loan
Bank of Atlanta at a 4.82 percent interest rate that matures in December 2010.
This obligation was entered into in December 2000 to provide liquidity to meet
the needs of its customers.
54
ITEM 7A QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the section "Market Risk - Interest Rate
Sensitivity" included in "Business" under Item 1 of this Annual Report on Form
10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed with this report:
- - Report of Independent Registered Public Accounting Firm.
- - Consolidated Balance Sheets as of December 31, 2004 and 2003.
- - Consolidated Statements of Income for the years ended December 31, 2004,
2003 and 2002.
- - Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002.
- - Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002.
- - Notes to Consolidated Financial Statements.
55
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
56 (the next page is numbered 59)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Peoples Bancorporation, Inc.
Easley, South Carolina
We have audited the accompanying consolidated balance sheets of
Peoples Bancorporation, Inc. and Subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Peoples Bancorporation, Inc. and Subsidiaries as of December 31, 2004 and 2003
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Greenville, South Carolina
January 28, 2005
59
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share information)
DECEMBER 31,
------------
2004 2003
---- ----
ASSETS
CASH AND DUE FROM BANKS ....................................................................... $ 8,630 $ 9,164
INTEREST - BEARING DEPOSITS IN OTHER BANKS .................................................... 1,028 214
FEDERAL FUNDS SOLD ............................................................................ 2,631 11,865
--------- ---------
Total cash and cash equivalents ...................................................... 12,289 21,243
SECURITIES
Available for sale ...................................................................... 62,052 78,714
Held for investment (fair value of $7,451 (2004) and $5,752 (2003)) ..................... 7,386 5,632
Other investments, at cost .............................................................. 1,809 2,147
MORTGAGE LOANS HELD FOR SALE .................................................................. - 5,101
LOANS, net of allowance for loan losses of $3,691 (2004) and $3,438 (2003) .................... 322,212 292,814
PREMISES AND EQUIPMENT, net of accumulated depreciation ....................................... 11,075 10,231
ACCRUED INTEREST RECEIVABLE ................................................................... 1,830 1,821
CASH SURRENDER VALUE OF LIFE INSURANCE ........................................................ 9,049 2,294
OTHER ASSETS .................................................................................. 2,094 1,759
--------- ---------
$ 429,796 $ 421,756
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing ....................................................................... $ 51,507 $ 42,289
Interest-bearing .......................................................................... 294,638 311,040
--------- ---------
Total deposits ...................................................................... 346,145 353,329
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS ................................................... 33,953 24,390
FEDERAL FUNDS PURCHASED ....................................................................... 572 -
ADVANCES FROM FEDERAL HOME LOAN BANK .......................................................... 8,500 5,000
ACCRUED INTEREST PAYABLE ...................................................................... 1,154 1,604
OTHER LIABILITIES ............................................................................. 1,232 1,272
--------- ---------
Total liabilities .................................................................... 391,556 385,595
--------- ---------
COMMITMENTS AND CONTINGENCIES - Notes 11 and 12
SHAREHOLDERS' EQUITY
Common stock - 15,000,000 shares authorized; $1.11 par value per
share; 5,822,608 (2004) shares and 5,523,842 (2003) shares
issued and outstanding ................................................................ 6,463 6,131
Additional paid-in capital ................................................................ 32,237 29,524
Retained earnings ......................................................................... - 444
Accumulated other comprehensive income (loss) ............................................. (460) 62
--------- ---------
Total shareholders' equity ........................................................... 38,240 36,161
--------- ---------
$ 429,796 $ 421,756
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
60
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share information)
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
INTEREST INCOME
Interest and fees on loans .................................................. $18,867 $18,155 $17,433
Interest on securities
Taxable ................................................................... 1,875 2,396 2,647
Tax-exempt ................................................................ 233 180 151
Interest on federal funds sold .............................................. 88 176 375
------- ------- -------
Total interest income .................................................. 21,063 20,907 20,606
------- ------- -------
INTEREST EXPENSE
Interest on deposits ........................................................ 5,828 6,858 7,224
Interest on federal funds purchased and securities sold
under repurchase agreements ............................................... 348 391 511
Interest on advances from Federal Home Loan Bank ............................ 265 277 262
------- ------- -------
Total interest expense ................................................. 6,441 7,526 7,997
------- ------- -------
Net interest income .................................................... 14,622 13,381 12,609
PROVISION FOR LOAN LOSSES ....................................................... 589 1,106 944
------- ------- -------
Net interest income after provision for loan losses .................... 14,033 12,275 11,665
------- ------- -------
NONINTEREST INCOME
Service fees and other ...................................................... 3,161 2,646 2,302
Gain on sale of mortgage loans held for sale ................................ 1,707 7,643 4,221
Gain on sale of securities available for sale ............................... 128 13 41
------- ------- -------
Total noninterest income ............................................... 4,996 10,302 6,564
------- ------- -------
NONINTEREST EXPENSES
Salaries and benefits ....................................................... 8,167 8,944 6,768
Occupancy ................................................................... 668 609 548
Equipment ................................................................... 1,290 1,151 820
Marketing and advertising ................................................... 297 392 333
Communications .............................................................. 206 272 235
Printing and supplies ....................................................... 208 275 275
Bank paid loan costs ........................................................ 310 457 620
Other post employment benefits .............................................. 495 174 55
Directors fees .............................................................. 276 278 216
Other operating ............................................................. 1,930 2,113 1,510
------- ------- -------
Total noninterest expenses ............................................. 13,847 14,665 11,380
------- ------- -------
Income before income taxes ............................................. 5,182 7,912 6,849
PROVISION FOR INCOME TAXES ...................................................... 1,654 2,868 2,466
------- ------- -------
Net income ............................................................. $ 3,528 $ 5,044 $ 4,383
======= ======= =======
BASIC NET INCOME PER COMMON SHARE ............................................... $ 0.61 $ 0.87 $ 0.75
======= ======= =======
DILUTED NET INCOME PER COMMON SHARE ............................................. $ 0.58 $ 0.84 $ 0.73
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
61
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2004, 2003 and 2002
(Amounts in thousands except share information)
Accumu-
lated
other
compre- Total
Common stock Additional hensive share-
------------ paid-in Retained income holders'
Shares Amount capital earnings (loss) equity
------ ------ ------- -------- ------ ------
BALANCE, DECEMBER 31, 2001 .............................. 4,979,176 $5,540 $22,805 $ 32 $ 174 $28,551
Net income .............................................. - - - 4,383 - 4,383
Other comprehensive income, net of tax:
Unrealized holding gains on securities
available for sale,
net of income taxes of $277 .................... - - - - 537 537
Less reclassification adjustment
for gains included in net
income, net of income taxes of $14 ............. - - - - (26) (26)
----- -------
Comprehensive income .................................... 4,894
Stock dividend (5%) ..................................... 262,302 278 2,903 (3,181) - -
Cash in lieu of fractional shares
on stock dividend ..................................... - - - (10) - (10)
Cash dividends ($.23 per share) ......................... - - - (778) - (778)
Proceeds from stock options exercised ................... 20,099 21 69 - - 90
--------- ------ ------- ------- ----- -------
BALANCE, DECEMBER 31, 2002 .............................. 5,261,577 5,839 25,777 446 685 32,747
Net income .............................................. - - - 5,044 - 5,044
Other comprehensive income, net of tax:
Unrealized holding losses on
securities available for sale,
net of income taxes of $316 .................... - - - - (614) (614)
Less reclassification adjustment
for gains included in net
income, net of income taxes of $4 .............. - - - - (9) (9)
----- -------
Comprehensive income .................................... 4,421
Stock dividend (5%) ..................................... 262,265 292 3,747 (4,039) - -
Cash in lieu of fractional shares
on stock dividend .................................... - - - (13) - (13)
Cash dividends ($.28 per share) ......................... - - - (994) - (994)
--------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 2003 .............................. 5,523,842 6,131 29,524 444 62 36,161
Net income .............................................. - - 3,528 3,528
Other comprehensive income, net of tax:
Unrealized holding losses on securities
available for sale, net of
income taxes of $224 .............................. - - - - (438) (438)
Less reclassification adjustmentfor
gains included in net income, net
of income taxes of $44 ............................ - - - - (84) (84)
----- -------
Comprehensive income .................................... 3,006
Stock dividend (5%) ..................................... 276,423 307 2,594 (2,901) - -
Cash in lieu of fractional shares
on 3-for-2 stock split ............................... - - - (7) - (7)
Cash in lieu of fractional
shares on stock dividend ............................. - - - (13) - (13)
Cash dividends ($.26 per share) ......................... - - - (1,051) - (1,051)
Proceeds from stock options exercised ................... 22,343 25 119 - - 144
--------- ------- ------- ------- ----- -------
BALANCE, DECEMBER 31, 2004 .............................. 5,822,608 $ 6,463 $32,237 $ - $(460) $38,240
========= ======= ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
62
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................................ $ 3,528 $ 5,044 $ 4,383
Adjustments to reconcile net income to net cash
provided by (used for) operating activities
(Gain) loss on sale of premises and equipment ................................... (20) (12) 53
Gain on sale of mortgage loans held for sale .................................... (1,707) (7,643) (4,221)
Gain on sale of securities available for sale ................................... (128) (13) (41)
Provision for loan losses ....................................................... 589 1,106 944
Benefit from deferred income taxes .............................................. (209) (97) (34)
Depreciation .................................................................... 1,075 967 614
Amortization and accretion (net) of premiums and discounts on securities ........ 168 369 133
Origination of mortgage loans held for sale ..................................... (149,881) (417,808) (400,545)
Sale of mortgage loans held for sale ............................................ 156,689 475,416 390,665
(Increase) decrease in accrued interest receivable .............................. (9) 155 (293)
(Increase) decrease in other assets ............................................. (558) (421) 416
Increase (decrease) in accrued interest payable ................................. (450) 29 357
Increase in other liabilities ................................................... 57 354 284
--------- --------- ---------
Net cash provided by (used for) operating activities ....................... 9,144 57,446 (7,285)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment ..................................... (2,302) (1,308) (784)
Purchases of securities available for sale ...................................... (25,375) (83,094) (102,704)
Sales (purchases) of other investments .......................................... 338 (263) (69)
Proceeds from principal pay downs on securities available for sale .............. 4,879 15,891 8,280
Proceeds from the maturities and calls of securities available for sale ......... 26,325 59,778 38,242
Proceeds from the sale of securities available for sale ......................... 10,028 6,999 5,790
Proceeds from maturity of securities held for investment ........................ 510 375 1,250
Investment in life insurance policies ........................................... (6,755) - (800)
Net increase in loans ........................................................... (29,371) (46,283) (38,333)
Proceeds from the sale of premises and equipment ................................ 53 24 113
Purchase of premises and equipment .............................................. (1,952) (1,671) (2,358)
--------- --------- ---------
Net cash used for investing activities ..................................... (23,622) (49,552) (91,373)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits ............................................. (7,184) 25,155 91,372
Net increase in federal funds purchased ......................................... 572 - -
Net increase (decrease) in securities sold under repurchase agreements .......... 9,563 (10,941) 14,685
Net increase (decrease) in advances from Federal Home Loan Bank ................. 3,500 (12,000) (6,985)
Proceeds from the exercise of stock options ..................................... 144 - 90
Cash dividends paid ............................................................. (1,051) (994) (778)
Cash in lieu of fractional shares on stock dividends and splits ................. (20) (13) (10)
--------- --------- ---------
Net cash provided by financing activities .................................. 5,524 1,207 98,374
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ....................... (8,954) 9,101 (284)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................................... 21,243 12,142 12,426
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR ................................................ $ 12,289 $21,243 $ 12,142
========= ========= =========
CASH PAID FOR
Interest .......................................................................... $ 6,432 $7,497 $ 7,640
========= ========= =========
Income taxes ...................................................................... $ 1,540 $3,078 $ 2,484
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
63
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Principles of consolidation and nature of operations
The consolidated financial statements include the accounts of Peoples
Bancorporation, Inc. (the "Company") and its wholly-owned subsidiaries, The
Peoples National Bank, Bank of Anderson, N.A., and Seneca National Bank
(collectively referred to as the "Banks"). All significant intercompany
balances and transactions have been eliminated. The Banks operate under
national bank charters and provide full banking services to customers. The
Banks are subject to regulation by the Office of the Comptroller of the
Currency. The Company is subject to regulation by the Federal Reserve
Board.
Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of interest and noninterest income and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
The Banks make loans to individuals and small businesses located primarily
in upstate South Carolina for various personal and commercial purposes. The
Banks have diversified loan portfolios and borrowers' abilities to repay
loans is not dependent upon any specific economic sector.
Securities
The Company accounts for securities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115 Accounting for Certain
Investments in Debt and Equity Securities. Debt securities are classified
upon purchase as available for sale, held for investment, or trading. Such
assets classified as available for sale are carried at fair value.
Unrealized holding gains or losses are reported as a component of
shareholders' equity (accumulated other comprehensive income (loss)) net of
deferred income taxes. Securities classified as held for investment are
carried at cost, adjusted for the amortization of premiums and the
accretion of discounts into interest income using a methodology which
approximates a level yield of interest over the estimated remaining period
until maturity. To qualify as held for investment, the Company must have
the ability and intent to hold the securities to maturity. Trading
securities are carried at market value. The Company has no trading
securities. Gains or losses on dispositions of securities are based on the
difference between the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method.
Loans and interest on loans
Loans are stated at the principal balance outstanding reduced by the
allowance for loan losses. Interest income is recognized over the term of
the loan based on the contractual interest rate and the principal balance
outstanding.
Loans generally are placed on non-accrual status when principal or interest
becomes ninety days past due, or when payment in full is not anticipated.
Interest payments received after a loan is placed on non-accrual status are
applied as principal reductions until such time the loan is returned to
accrual status. Generally, a loan is returned to accrual status when the
loan is brought current and the collectibility of principal and interest no
longer is in doubt.
(Continued)
64
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Allowance for loan losses
The Company provides for loan losses using the allowance method. Provisions
for loan losses are added to the allowance through charges to operating
expenses. Loans which are determined to be uncollectible are charged
against the allowance and recoveries on loans previously charged off are
added to the allowance. The provision for loan losses is the amount deemed
appropriate by management to establish an adequate allowance to meet the
estimated losses inherent in the current loan portfolio. Management's
judgment is based on periodic and regular evaluation of individual loans,
the overall risk characteristics of the various portfolio segments, past
experience with losses, delinquency trends, and prevailing and anticipated
economic conditions. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in
making the evaluation. The allowance for loan losses is subject to periodic
evaluation by various regulatory authorities and may be subject to
adjustment upon their examination.
A loan is considered to be impaired when full payment according to the
terms of the loan agreement is not probable or when the terms of a loan are
modified. The fair value of impaired loans may be determined based upon the
present value of expected cash flows discounted at the loan's effective
interest rate, the market price of the loan, if available, or value of the
underlying collateral if the loan is collateral-dependent. When the
ultimate collectibility of an impaired loan's principal is in doubt, wholly
or partially, all cash receipts are applied to principal. Once the reported
principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged-off.
Mortgage loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are provided for in a valuation allowance by charges
to operations. Gains and losses on sales of loans are recognized when the
loans are sold to secondary market investors. During 2004, the Company
reduced its origination and sale of loans in the secondary market.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Additions to premises and equipment
and major replacements or betterments are added at cost. Maintenance,
repairs, and minor replacements are charged to expense when incurred. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is
reflected in income.
Non-performing assets
Loans are placed in a non-accrual status when, in the opinion of
management, the collection of additional interest is questionable.
Thereafter, no interest is taken into income unless received in cash or
until such time as the borrower demonstrates the ability to pay principal
and interest.
Other real estate owned
Other real estate owned represents properties acquired through foreclosure
and is carried at the lower of cost or fair value, adjusted for net selling
costs. Fair values of real estate owned are reviewed regularly and
writedowns are recorded when it is determined that the carrying value of
real estate exceeds the fair value less estimated costs to sell. Costs
relating to the development and improvement of such property are
capitalized, whereas those costs relating to holding the property are
charged to expense. At December 31, 2004 and 2003 real estate owned by the
Company totaled $756,000 and $517,000, respectively, and is included in
other assets. During 2004 and 2003, the Company transferred loans to real
estate acquired in foreclosure of $616,000 and $450,000, respectively. At
December 31, 2004 and 2003, the Company recorded no allowance related to
its other real estate owned.
(Continued)
65
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Advertising and public relations expense
Advertising, promotional and other business development costs are generally
expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place.
External costs relating to direct mailing costs are expensed in the period
in which the direct mailings are sent.
Income taxes
The provision for income taxes includes deferred taxes on temporary
differences between the recognition of certain income and expense items for
tax and financial statement purposes. Income taxes are computed on the
liability method as described in SFAS No. 109, Accounting for Income Taxes.
Statements of cash flows
For the purposes of reporting cash flows, the Company considers cash and
cash equivalents to be those amounts included in the balance sheet captions
"Cash and Due From Banks", "Interest-bearing Deposits in Other Banks" and
"Federal Funds Sold". Cash and cash equivalents have an original maturity
of three months or less.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current presentation. These reclassifications have no effect on previously
reported net income or shareholders' equity.
Risk and uncertainties
In the normal course of its business the Company encounters two significant
types of risk: economic and regulatory. There are three main components of
economic risk: interest rate risk, credit risk, and market risk. The
Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from borrowers'
inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans
receivable, the valuation of real estate held by the Company, and the
valuation of loans held for sale and mortgage-backed securities available
for sale.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period.
The Company also undergoes periodic examinations by the regulatory
agencies, which may subject it to further changes with respect to asset
valuations, amounts of required loss allowances, and operating
restrictions, resulting from the regulators' judgments based on information
available to them at the time of their examination.
Stock option compensation plans
The Company has a stock option compensation plan through which the Board of
Directors may grant stock options to officers and employees to purchase
common stock of the Company at prices not less than 100 percent of the fair
value of the stock on the date of grant. The outstanding options become
exercisable in various increments beginning on the date of grant and
expiring ten years from the date of grant. The Company also has a
directors' stock option plan through which non-employee directors of the
Company shall be granted options to purchase 500 shares of common stock for
each year served on the board to a maximum of 5,000 options per director.
The option price shall not be less than 100 percent of the fair value of
the stock on the grant date. The outstanding options become exercisable on
the grant date and expire at the earlier of the end of the director's term
or ten years from the grant date.
The Company accounts for the plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
stock options granted under these plans had an exercise price equal to the
market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
(Continued)
66
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
(tabular amounts in thousands, except per share information) For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
Net income, as reported ........................................................ $3,528 $5,044 $4,383
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects .................................................. (120) (109) (45)
------ ------ ------
Pro forma net income ........................................................... $3,408 $4,935 $4,338
====== ====== ======
Net income per common share
Basic - as reported ......................................................... $ 0.61 $ 0.87 $ 0.75
====== ====== =======
Basic - pro forma ........................................................... $ 0.59 $ 0.85 $ 0.75
====== ====== =======
Diluted - as reported ....................................................... $ 0.58 $ 0.84 $ 0.73
====== ====== =======
Diluted - pro forma ......................................................... $ 0.57 $ 0.82 $ 0.72
====== ====== =======
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2004, 2003 and 2002: dividend yields from $.23 to
$.28 per share, expected volatility from 5 to 27 percent, risk-free
interest rates from 4.50 to 6.50 percent and expected life of 10 years.
Recently issued accounting pronouncements
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by
the Company:
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)"). SFAS No. 123(R) will require companies to
measure all employee stock-based compensation awards using a fair value
method and record such expense in its financial statements. In addition,
the adoption of SFAS No. 123(R) requires additional accounting and
disclosure related to the income tax and cash flow effects resulting from
share-based payment arrangements. SFAS No. 123(R) is effective beginning as
of the first interim or annual reporting period beginning after June 15,
2005. The Company is currently evaluating the impact that the adoption of
SFAS No. 123(R) will have on its financial position, results of operations
and cash flows. The cumulative effect of adoption, if any, will be measured
and recognized in the statement of operations on the date of adoption.
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 the 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 on quantitative and qualitative disclosures. The
disclosure requirements of EITF No. 03-1 are effective for annual financial
statements for fiscal years ending after June 15, 2004. The effective date
for the measurement and recognition guidance of EITF No. 03-1 has been
delayed. The FASB staff has issued a proposed Board-directed FASB Staff
Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed
for other-than-temporary impairment under the measurement and recognition
requirements of EITF No. 03-1.
(Continued)
67
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
The delay of the effective date for the measurement and recognition
requirements of EITF No. 03-1 will be superseded concurrent with the final
issuance of FSP EITF 03-1-a. 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 Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, Application of Accounting Principles to
Loan Commitments, to inform registrants of the Staff's view that the fair
value of the recorded loan commitments should not consider the expected
future cash flows related to the associated servicing of the future loan. The
provisions of SAB No. 105 must be applied to loan commitments accounted for
as derivatives that are entered into after March 31, 2004. The Staff will not
object to the application of existing accounting practices to loan
commitments accounted for as derivatives that are entered into on or before
March 31, 2004, with appropriate disclosures. The Company adopted the
provisions of SAB No. 105 on April 1, 2004. The adoption of SAB No. 105 did
not have a material impact on the Company's financial condition or results of
operations.
Other accounting standards that have been issued or proposed by the Public
Company Accounting Oversight Board ("PCAOB") or other standards-setting
bodies that do not require adoption until a future date are not expected to
have a material impact on the consolidated financial statements upon
adoption.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances with the
Federal Reserve Bank based upon a percentage of deposits. The average amounts
of reserve balances maintained by the Banks at December 31, 2004 and 2003 were
approximately $2,934,000 and $3,533,000, respectively.
NOTE 3 - SECURITIES
Securities are summarized as follows as of December 31 (tabular
amounts in thousands):
2004
----
Unrealized holding
Amortized ------------------ Fair
cost Gains Losses value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE:
OBLIGATIONS OF U. S. GOVERNMENT
AGENCIES AND CORPORATIONS
Maturing within one year .................................. $ 500 $ - $ 7 $ 493
Maturing after one but within five years .................. 47,953 - 593 47,360
------- ------- ------- -------
48,453 - 600 47,853
MORTGAGE-BACKED SECURITIES
Maturing after one but within five years .................. 1,546 3 6 1,543
Maturing after five but within ten years
Maturing after ten years
9,532 13 121 9,424
3,218 17 3 3,232
------- ------- ------- -------
14,296 33 130 14,199
------- ------- ------- -------
Total securities available for sale .................... $62,749 $ 33 $ 730 $62,052
======= ======= ======= =======
(Continued)
68
NOTE 3 - SECURITIES, Continued
2004, continued
---------------
Unrealized holding
Amortized ------------------ Fair
cost Gains Losses value
---- ----- ------ -----
SECURITIES HELD FOR INVESTMENT:
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS
Maturing within one year .................................. $1,056 $ 9 $ - $1,065
Maturing after one but within five years .................. 3,145 69 - 3,214
Maturing after five but within ten years .................. 2,980 27 39 2,968
Maturing after ten years .................................. 205 - 1 204
------ ------ ------ ------
$7,386 $ 105 $ 40 $7,451
====== ====== ====== ======
2003
----
Unrealized holding
Amortized ------------------ Fair
cost Gains Losses value
---- ----- ------ -----
SECURITIES AVAILABLE FOR SALE:
OBLIGATIONS OF U. S. GOVERNMENT
AGENCIES AND CORPORATIONS
Maturing after one but within five years .................. $53,024 $ 57 $ 256 $52,825
------- ------- ------- -------
MORTGAGE-BACKED SECURITIES
Maturing after one but within five years .................. 5,075 46 5 5,116
Maturing after five but within ten years
Maturing after ten years
13,540 103 59 13,584
6,981 208 - 7,189
------- ------- ------- -------
25,596 357 64 25,889
------- ------- ------- -------
Total securities available for sale .................... $78,620 $ 414 $ 320 $78,714
======= ======= ======= =======
SECURITIES HELD FOR INVESTMENT:
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing within one year .................................. $ 510 $ 10 $ - $ 520
Maturing after one but within five years .................. 2,600 91 1 2,690
Maturing after five but within ten years .................. 2,422 21 4 2,439
Maturing after ten years .................................. 100 3 - 103
------- ------- ------- -------
$ 5,632 $ 125 $ 5 $ 5,752
======= ======= ======= =======
(Continued)
69
NOTE 3 - SECURITIES, Continued
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual securities
have been in a continuous unrealized loss position, at December 31, 2004.
Securities Available for Sale (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
US Government agencies
and corporations .................... $42,428 $ 525 $ 4,175 $ 75 $46,603 $ 600
Mortgage-backed securities ............... 7,017 86 2,069 44 9,086 130
------- ------- ------- ------- ------- -------
Total .................................... $49,445 $ 611 $ 6,244 $ 119 $55,689 $ 730
======= ======= ======= ======= ======= =======
Ten individual securities were in a continuous loss position for
twelve months or more.
Securities Held for Investment (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
States and political
subdivisions .......................... $1,719 $ 40 $ - $ - $1,719 $ 40
====== ==== ==== ==== ====== ====
The Company has the ability and intent to hold these securities until
such time as the value recovers or the securities mature. The Company believes,
based on industry analyst reports and credit ratings, that the deterioration in
value is attributable to changes in market interest rates and not in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
OTHER INVESTMENTS, AT COST
The Banks, as member institutions, are required to own certain stock
investments in the Federal Home Loan Bank of Atlanta ("FHLB"), the Federal
Reserve Bank, and the Bankers Bank. The stock is generally pledged against any
borrowings from these institutions (see Note 8). No ready market exists for the
stock and it has no quoted market value. The Company's investments in stock are
carried at par value and are summarized below (tabular amounts in thousands):
December 31,
------------
2004 2003
---- ----
Federal Reserve Bank ....................... $ 396 $ 396
FHLB ....................................... 1,269 1,607
Bankers Bank ............................... 144 144
------ ------
$1,809 $2,147
====== ======
Securities with carrying amounts of $57,887,000 and $48,851,000 at
December 31, 2004 and 2003, respectively, were pledged to secure public deposits
and for other purposes required or permitted by law.
70
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows (tabular amounts in thousands):
December 31,
------------
2004 2003
---- ----
Commercial and industrial - not secured by real estate ... $ 39,723 $ 44,306
Commercial and industrial - secured by real estate ....... 95,965 84,805
Residential real estate - mortgage ....................... 105,580 90,299
Residential real estate - construction ................... 63,380 55,139
Loans to individuals for household, family
and other personal expenditures ......................... 21,255 21,703
-------- --------
325,903 296,252
Less allowance for loan losses ........................... 3,691 3,438
-------- --------
$322,212 $292,814
======== ========
The composition of gross loans by rate type is as follows:
December 31,
------------
2004 2003
---- ----
Variable rate loans ...................... $167,430 $153,541
Fixed rate loans ......................... 158,473 142,711
-------- --------
$325,903 $296,252
======== ========
Changes in the allowance for loan losses were as follows:
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
BALANCE, BEGINNING OF YEAR ................. $3,438 $2,850 $2,288
Provision for loan losses ............. 589 1,106 944
Loans charged off ..................... 448 565 410
Loans recovered ....................... 112 47 28
------ ------ ------
BALANCE, END OF YEAR ....................... $3,691 $3,438 $2,850
====== ====== ======
At December 31, 2004 and 2003 nonaccrual loans amounted to $670,000
and $829,000, respectively. Foregone interest income was approximately $46,000,
$101,000, and $76,000 on nonaccrual loans for 2004, 2003 and 2002, respectively.
There were no impaired loans at December 31, 2004 and 2003.
NOTE 5 - PREMISES AND EQUIPMENT
The principal categories and estimated useful lives of premises and
equipment are summarized below (tabular amounts in thousands):
December 31,
Estimated ------------
useful lives 2004 2003
------------ ---- ----
Land .................................................................... $ 2,145 $ 2,122
Building and improvements ............................................... 15 - 40 years 7,369 6,262
Furniture, fixtures and equipment ....................................... 3 - 10 years 7,082 6,365
------- -------
........................................................................ 16,596 14,749
Less accumulated depreciation ........................................... 5,521 4,518
------- -------
$11,075 $10,231
======= =======
Depreciation expense of approximately $1,075,000, $967,000, and
$614,000 for 2004, 2003 and 2002, respectively, is included in occupancy and
equipment expenses in the accompanying consolidated statements of income.
71
NOTE 6 - DEPOSITS
The composition of deposits is as follows (tabular amounts in
thousands):
December 31,
------------
2004 2003
Demand deposits, noninterest bearing ............. $ 51,507 $ 42,288
NOW and money market accounts .................... 95,604 94,812
Savings deposits ................................. 11,964 10,377
Time certificates, $100,000 or more .............. 81,015 114,075
Other time certificates .......................... 106,055 91,777
-------- --------
Total ................................... $346,145 $353,329
======== ========
The amounts and scheduled maturities of deposits are as follows
(tabular amounts in thousands):
December 31,
------------
2004 2003
---- ----
Time certificates maturing
Within one year ............................. $110,298 $135,318
After one but within two years .............. 41,786 37,734
After two but within three years ............ 32,385 25,119
After three but within four years ........... 1,780 5,737
After four years ............................ 821 1,944
-------- --------
187,070 205,852
Transaction and savings accounts ................. 159,075 147,477
-------- --------
$346,145 $353,329
======== ========
Certificates of deposit in excess of $100,000 totaled approximately
$81,015,000 and $114,075,000 at December 31, 2004 and 2003, respectively.
Interest expense on certificates of deposit in excess of $100,000 was
approximately, $2,422,000 in 2004, $2,247,000 in 2003, and $2,197,000 in 2002.
The Banks had no time certificates from customers outside their market
area, at December 31, 2004 and 2003, respectively.
NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as follows
(tabular amounts in thousands):
December 31,
------------
2004 2003
---- ----
U. S. Government securities with an amortized cost of $48,768,000 ($48,322,000
fair value) and $40,528,000 ($40,676,000 fair value) at
December 31, 2004 and 2003, respectively, collateralize the agreements ...................... $33,953 $24,390
======= =======
The Banks enter into sales of securities under agreements to
repurchase. These obligations to repurchase securities sold are reflected as
liabilities in the consolidated balance sheets. The dollar amount of securities
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are book entry securities maintained by a safekeeping
agent. The weighted average interest rate of these agreements was 1.07 and 1.34
percent for 2004 and 2003, respectively. The agreements mature daily. Securities
sold under agreements to repurchase averaged $31,856,000, $28,783,000, during
2004 and 2003, respectively. The maximum amounts outstanding at any month-end
were $36,243,000 and $33,035,000 during 2004 and 2003, respectively.
72
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK
The Banks had advances aggregating $8,500,000 and $5,000,000 at
December 31, 2004 and 2003, respectively. At December 31, 2004, the Banks had
$3,500,000 of advances at interest rates of 1.63 percent and which matured
daily. At December 31, 2004 and 2003, $5,000,000 of the advances bear interest
at 4.82 percent and mature in December 2010. At December 31, 2004 and 2003, the
advances were collateralized by qualifying mortgage loans aggregating
approximately $61,445,000 and $59,983,000, respectively, and by FHLB stock owned
by all three Banks. Additional borrowings under similar terms are available
which may require pledging additional collateral and purchasing additional stock
in the FHLB.
NOTE 9 - UNUSED LINES OF CREDIT
The Banks have unused short-term lines of credit to purchase federal
funds from unrelated banks totaling $30,178,000 at December 31, 2004. These
lines of credit are available on a one to seven day basis for general corporate
purposes.
The Peoples National Bank has the ability to borrow an additional
$33,090,000 or 13.7 percent of total assets from the FHLB as of December 31,
2004. The Bank of Anderson, N.A. has the ability to borrow an additional
$17,449,000 or 12.3 percent of total assets, and the Seneca National Bank has
the ability to borrow an additional $2,406,000 or 5.1 percent of total assets.
The borrowings are available by pledging collateral and purchasing additional
stock in the FHLB.
NOTE 10 - INCOME TAXES
Provision for income taxes consists of the following (tabular amounts
in thousands):
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
Current tax provision
Federal .......................... $ 1,703 $ 2,736 $ 2,299
State ............................ 160 229 201
------- ------- -------
Total current taxes ....... 1,863 2,965 2,500
Deferred tax benefit ............. (209) (97) (34)
------- ------- -------
$ 1,654 $ 2,868 $ 2,466
======= ======= =======
Income taxes differ from the tax expense computed by applying the
statutory federal income tax rate of 34 percent to income before income taxes.
The reasons for these differences are as follows:
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
Tax expense at statutory rate ................. $1,762 $2,690 $2,328
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit 104 149 129
Tax-exempt interest income ................ (79) (61) (51)
Investment in life insurance .............. (159) (32) (22)
Other ..................................... 26 122 82
------ ------ ------
Provision for income taxes .............. $1,654 $2,868 $2,466
====== ====== ======
(Continued)
73
NOTE 10 - INCOME TAXES, Continued
Deferred tax assets (liabilities) result from temporary differences
in the recognition of revenue and expenses for tax and financial statement
purposes. Management believes realization of the deferred tax assets is more
likely than not and accordingly has not recorded a valuation allowance. The
sources and the cumulative tax effect of temporary differences are as follows:
December 31,
------------
2004 2003
---- ----
Deferred tax assets
Allowance for loan losses .................... $1,255 $1,238
Deferred compensation ........................ 194 131
Unrealized holding losses on
securities available for sale ............ 237 -
Other ........................................ 48 28
------- -------
1,734 1,397
------- -------
Deferred tax liabilities
Depreciation ................................. (502) (611)
Unrealized holding gains on
securities available for sale ............. - (32)
------- -------
(502) (643)
------- -------
Net deferred tax assets included in
other assets and other liabilities ............. $ 1,232 $ 754
======= =======
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit and
standby letters of credit. They involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the balance
sheets.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any material condition established in the
contract. Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. At December 31, 2004, unfunded
commitments to extend credit were $91,847,000. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based
on management's credit evaluation of the borrower. Collateral varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
At December 31, 2004, there were $6,077,000 committed under letters
of credit. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. Collateral
varies but may include accounts receivable, inventory, equipment, marketable
securities and property. Since most of the letters of credit are expected to
expire without being drawn upon, they do not necessarily represent future cash
requirements.
74
NOTE 12 - LEGAL CONTINGENCIES
The Company has, from time to time, various lawsuits and claims
arising from the conduct of its business. Such items are not expected to have
any material adverse effect on the financial position or results of operations
of the Company.
NOTE 13 - RELATED PARTY TRANSACTIONS
At December 31, 2004 and 2003, certain officers, directors, employees,
related parties and companies in which they have 10 percent or more beneficial
ownership, were indebted to the Banks in the aggregate amount of $7,533,000 and
$7,375,000, respectively. During 2004, $3,506,000 of new loans were made to this
group and repayments of $3,348,000 were received. This same group had deposits
in the banks of $7,892,000.
NOTE 14 - COMMON STOCK AND EARNINGS PER SHARE
SFAS No. 128, Earnings per Share requires that the Company present
basic and diluted net income per common share. The assumed conversion of stock
options creates the difference between basic and diluted net income per common
share. Income per share is calculated by dividing net income by the weighted
average number of common shares outstanding for each period presented. The
weighted average number of common shares outstanding for basic net income per
common share was 5,822,608 in 2004, 5,523,842 in 2003 and 5,261,577 in 2002. The
weighted average number of common shares outstanding for diluted net income per
common share was 6,034,430 in 2004, 6,015,832 in 2003, and 5,969,752 in 2002.
The Company declared or issued five percent common stock dividends in
2004, 2003, and 2002. Additionally, the Company effected a 3-for-2 stock split
in October 2004. 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. Net income per common share in prior years has been
restated to reflect these transactions.
NOTE 15 - RESTRICTION OF DIVIDENDS
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Banks. Federal banking
regulations restrict the amount of dividends that can be paid and such dividends
are payable only from the retained earnings of the Banks. At December 31, 2004
the Company did not have any retained earnings.
NOTE 16 - STOCK OPTION COMPENSATION PLANS
A summary of the status of the plans as of December 31, 2004, 2003 and
2002, and changes during the years ending on those dates is presented below (all
shares have been adjusted for stock dividends and the stock split):
2004 2003 2002
---- ---- ----
Weighted Weighted Weighted
average average average
Shares exercise price Shares exercise price Shares exercise price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year .... 375,800 $5.53 364,224 $ 5.09 357,730 $ 4.83
Granted ............................. 38,584 15.05 11,576 12.10 28,651 10.50
Exercised ........................... (23,165) 6.21 - - (22,157) 4.04
Forfeited or expired ................ - - - - - -
-------- -------- --------
Outstanding at end of year .......... 391,219 6.50 375,800 5.53 364,224 5.09
======== ======== ========
Options exercisable at year-end ..... 391,219 360,275 335,433
Weighted average fair value of
options granted during the year ... $ 5.51 $ 8.87 $ 6.79
Shares available for grant .......... 387,630 426,965 438,541
75
NOTE 16 - STOCK OPTION COMPENSATION PLANS, Continued
The following table summarizes information at December 31, 2004:
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------ ----------- ---- ----- ----------- -----
$ 2.35 68,622 .5 years $ 2.35 68,622 $ 2.35
4.06 144,004 2.3 4.06 144,004 4.06
6.19 3,150 3.3 6.19 3,150 6.19
6.17 31,636 3.6 6.17 31,636 6.17
6.17 14,745 3.8 6.17 14,745 6.17
7.49 9,018 4.3 7.49 9,018 7.49
9.43 14,310 4.3 9.43 14,310 9.43
9.88 8,199 5.1 9.88 5,738 9.88
8.92 2,733 5.3 8.92 1,913 8.92
8.79 13,650 5.4 8.79 13,650 8.79
8.78 1,822 5.2 8.78 1,275 8.78
8.78 3,644 5.7 8.78 2,550 8.78
10.24 13,872 6.4 10.24 13,872 10.24
10.80 12,409 6.6 10.80 6,138 10.80
12.11 11,564 7.4 12.11 11,564 12.11
14.93 34,691 8.4 14.93 16,487 14.93
15.87 1,575 8.7 15.87 394 15.87
17.05 1,575 8.8 17.05 394 17.05
-------- --------
391,219 359,460
======== ========
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for grants in 2004, 2003 and 2002: dividend yields from $.23 to $.28
per share, expected volatility from 5 to 27 percent, risk-free interest rates
from 4.50 to 6.50 percent and expected life of 10 years.
The plans are administered by the Board of Directors or by a committee
designated by the Board. The plans provide that if the shares of common stock
shall be subdivided or combined into a greater or smaller number of shares or if
the Company shall issue any shares of common stock as a stock dividend on its
outstanding common stock, the number of shares of common stock deliverable upon
the exercise of options shall be increased or decreased proportionately, and
appropriate adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend.
(Continued)
76
NOTE 17 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement plan for all eligible
employees. Upon ongoing approval of the Board of Directors, the Company matches
employee contributions equal to fifty percent of the first six percent of such
contributions, subject to certain adjustments and limitations. Contributions to
the plan of $136,526, $135,619, and $111,207 were charged to operations during
2004, 2003 and 2002, respectively.
Supplemental benefits have been approved by the Board of Directors
for certain executive officers of The Peoples National Bank. These benefits are
not qualified under the Internal Revenue Code and they are not funded. However,
certain funding is provided informally and indirectly by life insurance
policies. The Company recorded expense related to these benefits of $495,210,
$173,997, and $54,573 in 2004, 2003, and 2002, respectively.
NOTE 18 - REGULATORY MATTERS
The Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Banks' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of the
Banks' assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Banks to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to average assets. Management believes, as of December 31, 2004,
that the Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification from the
Office of the Comptroller of the Currency categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Banks' categories. The Banks' actual capital amounts and ratios
and minimum regulatory amounts and ratios are presented as follows:
77
NOTE 18 - REGULATORY MATTERS, Continued
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(amounts in thousands)
Peoples Bancorporation, Inc.:
As of December 31, 2004
Total Capital (to risk-weighted assets) ........ $ 42,382 12.35% $ 27,454 8.00% $34,317 10.00%
Tier I Capital (to risk-weighted assets) ....... 38,700 11.27 13,736 4.00 20,603 6.00
Tier I Capital (to average assets) ............. 38,700 8.92 17,354 4.00 21,693 5.00
As of December 31, 2003
Total Capital (to risk-weighted assets) ........ $ 39,537 12.37% $ 25,570 8.00% $31,962 10.00%
Tier I Capital (to risk-weighted assets) ....... 36,099 11.30 12,778 4.00 19,168 6.00
Tier I Capital (to average assets) ............. 36,099 8.46 17,068 4.00 21,335 5.00
The Peoples National Bank:
As of December 31, 2004
Total Capital (to risk-weighted assets) ........ $ 24,570 12.61% $ 15,588 8.00% $ 19,485 10.00%
Tier I Capital (to risk-weighted assets) ....... 22,541 11.57 7,793 4.00 11,689 6.00
Tier I Capital (to average assets) ............. 22,541 9.10 9,908 4.00 12,385 5.00
As of December 31, 2003
Total Capital (to risk-weighted assets) ........ $ 23,564 12.58% $ 14,985 8.00% $ 18,731 10.00%
Tier I Capital (to risk-weighted assets) ....... 21,483 11.47 7,492 4.00 11,238 6.00
Tier I Capital (to average assets) ............. 21,483 8.47 10,145 4.00 12,682 5.00
Bank of Anderson, N.A.:
As of December 31, 2004
Total Capital (to risk-weighted assets) ........ $ 11,325 10.26% $ 8,830 8.00% $11,038 10.00%
Tier I Capital (to risk-weighted assets) ....... 10,149 9.19 4,417 4.00 6,626 6.00
Tier I Capital (to average assets) ............. 10,149 7.21 5,631 4.00 7,038 5.00
As of December 31, 2003
Total Capital (to risk-weighted assets) ........ $ 9,972 10.61% $ 7,519 8.00% $ 9,399 10.00%
Tier I Capital (to risk-weighted assets) ....... 9,045 9.63 3,757 4.00 5,635 6.00
Tier I Capital (to average assets) ............. 9,045 7.17 5,046 4.00 6,308 5.00
Seneca National Bank:
As of December 31, 2004
Total Capital (to risk-weighted assets) ........ $ 4,794 12.59% $ 3,046 8.00% $3,808 10.00%
Tier I Capital (to risk-weighted assets) ....... 4,318 11.34 1,523 4.00 2,285 6.00
Tier I Capital (to average assets) ............. 4,318 9.11 1,895 4.00 2,369 5.00
As of December 31, 2003
Total Capital (to risk-weighted assets) ........ $ 4,411 11.79% $ 2,993 8.00% $ 3,741 10.00%
Tier I Capital (to risk-weighted assets) ....... 3,981 10.64 1,497 4.00 2,245 6.00
Tier I Capital (to average assets) ............. 3,981 7.92 2,011 4.00 2,513 5.00
78
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments
requires disclosure of fair value information, whether or not recognized in the
balance sheets, when it is practical to estimate the fair value. SFAS No. 107
defines a financial instrument as cash, evidence of an ownership interest in an
entity or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's common stock, premises and
equipment and other assets and liabilities.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing deposits in other banks and federal funds sold and
purchased.
Securities are valued using quoted fair market prices. Other
investments are valued at par value.
Fair value for variable rate loans that reprice frequently, loans held
for sale, and for loans that mature in less than three months is based on the
carrying value. Fair value for fixed rate mortgage loans, personal loans, and
all other loans (primarily commercial) maturing after three months is based on
the discounted present value of the estimated future cash flows. Discount rates
used in these computations approximate the rates currently offered for similar
loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts
with no fixed maturity date is equal to the carrying value. Certificate of
deposit accounts and securities sold under repurchase agreements maturing within
one year are valued at their carrying value. The fair value of certificate of
deposit accounts and securities sold under repurchase agreements maturing after
one year are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments.
Fair value for long-term FHLB advances is based on discounted cash
flows using the Company's current incremental borrowing rate. Discount rates
used in these computations approximate rates currently offered for similar
borrowings of comparable terms and credit quality.
Fair value of off-balance sheet instruments are based on fees currently
charged to enter into similar arrangements; taking into account the remaining
terms of the agreement and the counterparties' credit standing.
The Company has used management's best estimate of fair value based on
the above assumptions. Thus, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses which would be incurred in an
actual sale or settlement are not taken into consideration in the fair value
presented.
The estimated fair values of the Company's financial instruments are as
follows (amounts in thousands):
December 31,
------------
2004 2003
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Financial assets:
Cash and due from banks ................................... $ 8,630 $ 8,630 $ 9,164 $ 9,164
Interest-bearing deposits in other banks .................. 1,028 1,028 214 214
Federal funds sold ........................................ 2,631 2,631 11,865 11,865
Securities available for sale ............................. 62,052 62,052 78,714 78,714
Securities held for investment ............................ 7,386 7,451 5,632 5,752
Other investments ......................................... 1,809 1,809 2,147 2,147
Mortgage loans held for sale .............................. - - 5,101 5,101
Loans (gross) ............................................. 325,903 322,090 296,252 295,423
(Continued)
79
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
December 31,
------------
2004 2003
Carrying Fair Carrying Fair
amount Value amount value
------ ----- ------ -----
Financial liabilities:
Deposits .................................................. $346,145 $349,592 $353,329 $357,161
Securities sold under repurchase agreements ............... 33,953 33,953 24,390 24,390
Federal Funds Purchased ................................... 572 572 - -
Advances from Federal Home Loan Bank ...................... 8,500 8,500 5,000 5,000
Notional or Notional or
contract Fair contract Fair
amount value amount value
------ ----- ------ -----
Financial instruments with off-balance sheet risk:
Commitments to extend credit ........................... $91,847 - $84,557 -
Standby letters of credit .............................. 6,077 - 4,453 -
NOTE 20 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of Peoples Bancorporation,
Inc. (parent company only) (amounts in thousands):
CONDENSED BALANCE SHEETS
December 31,
------------
2004 2003
---- ----
ASSETS
Cash ......................................... $1,701 $556
Due from subsidiaries ........................ - 259
Investment in bank subsidiaries .............. 36,680 34,895
Other assets ................................. 199 667
------- -------
$38,580 $36,377
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities ............................ $340 $216
Shareholders' equity ......................... 38,240 36,161
------- -------
$38,580 $36,377
======= =======
80
NOTE 20 - CONDENSED FINANCIAL INFORMATION, Continued
CONDENSED STATEMENTS OF INCOME
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
INCOME
Fees and dividends from subsidiaries ...... $4,271 $3,861 $3,199
Other income .............................. - - 94
------- ------- -------
4,271 3,861 3,293
------- ------- -------
EXPENSES
Salaries and benefits ..................... 2,205 1,996 1,692
Occupancy ................................. 22 22 88
Equipment ................................. 298 233 168
Other operating ........................... 706 675 683
------- ------- -------
3,231 2,926 2,631
EQUITY IN UNDISTRIBUTED NET INCOME OF BANK
SUBSIDIARIES .............................. 2,478 4,091 3,683
------- ------- -------
Income before income taxes ........... 3,518 5,026 4,345
INCOME TAX BENEFIT ............................ (10) (18) (38)
------- ------- -------
Net income ........................... $3,528 $5,044 $4,383
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
OPERATING ACTIVITIES
Net income .................................................................. $ 3,528 $ 5,044 $ 4,383
Adjustments to reconcile net income to net cash provided
by operating activities
Equity in undistributed net income of bank subsidiaries ................ (2,478) (4,091) (3,683)
Depreciation ........................................................... - - 28
Amortization ........................................................... - - 2
(Increase) decrease in other assets .................................... 706 (120) (198)
Increase (decrease) in other liabilities ............................... 124 (21) 54
------- ------- -------
Net cash provided by operating activities ............................ 1,880 812 586
------- ------- -------
INVESTING ACTIVITIES
Investment in bank subsidiaries ............................................. - - (1,500)
Proceeds from the sale of premises and equipment ............................ - - 1,823
------- ------- -------
Net cash provided by investing activities ............................ - - 323
------- ------- -------
FINANCING ACTIVITIES
Proceeds from the exercise of stock options ................................. 144 - 90
Cash dividends .............................................................. (1,051) (994) (778)
Cash in lieu of fractional share on stock dividends and splits .............. (20) (13) (10)
Proceeds (repayment) of advances from subsidiaries .......................... 192 131 (257)
------- ------- -------
Net cash used for financing activities ............................... (735) (876) (955)
------- ------- -------
Net increase (decrease) in cash ...................................... 1,145 (64) (46)
CASH, BEGINNING OF YEAR ......................................................... 556 620 666
------- ------- -------
CASH, END OF YEAR ............................................................... $ 1,701 $ 556 $ 620
======= ======= =======
81
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited condensed financial data by quarter for 2004 and 2003 is as
follows (amounts, except share data, in thousands):
Quarter ended
-------------
2004 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Interest income ............................................ $ 5,083 $ 5,113 $ 5,324 $ 5,543
Interest expense ........................................... 1,650 1,583 1,584 1,624
---------- ---------- ---------- ----------
Net interest income ................................... 3,433 3,530 3,740 3,919
Provision for loan losses .................................. 130 153 153 153
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .......................... 3,303 3,377 3,587 3,766
Noninterest income ......................................... 1,303 1,530 1,193 970
Noninterest expenses ....................................... 3,792 3,456 3,298 3,301
---------- ---------- ---------- ----------
Income before income taxes ............................ 814 1,451 1,482 1,435
Provision for income taxes ................................. 273 454 460 467
---------- ---------- ---------- ----------
Net income ............................................ $ 541 $ 997 $1,022 $ 968
========== ========== ========== ==========
Basic net income per common share (1)(2) ................... $ 0.09 $ 0.17 $0.18 $ 0.17
========== ========== ========== ==========
Diluted net income per common share (1)(2) ................. $ $0.09 $ 0.17 $0.17 $ 0.16
========== ========== ========== ==========
Basic weighted average shares
outstanding (1)(2) .................................... 5,800,338 5,800,338 5,810,581 5,814,744
========== ========== ========== ==========
Diluted weighted average shares
outstanding (1)(2) .................................... 6,038,104 6,030,254 6,057,123 6,079,581
========== ========== ========== ==========
Quarter ended
-------------
2003 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
Interest income ............................................ $ 5,325 $ 5,196 $ 5,236 $ 5,150
Interest expense ........................................... 1,936 1,915 1,872 1,803
---------- ---------- ---------- ----------
Net interest income ................................... 3,389 3,281 3,364 3,347
Provision for loan losses .................................. 129 329 549 99
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .......................... 3,260 2,952 2,815 3,248
Noninterest income ......................................... 2,734 3,432 3,112 1,024
Noninterest expenses ....................................... 3,394 3,530 3,873 3,868
---------- ---------- ---------- ----------
Income before income taxes ............................ 2,600 2,854 2,054 404
Provision for income taxes ................................. 943 1,043 749 133
---------- ---------- ---------- ----------
Net income ............................................ $ 1,657 $ 1,811 $ 1,305 $ 271
========== ========== ========== ==========
Basic net income per common share (1)(2) ................... $ 0.29 $ 0.31 $ 0.23 $ 0.05
========== ========== ========== ==========
Diluted net income per common share (1)(2) ................. $ 0.28 $ 0.30 $ 0.22 $ 0.05
========== ========== ========== ==========
Basic weighted average shares
outstanding (1)(2) .................................... 5,801,209 5,801,209 5,801,209 5,800,338
========== ========== ========== ==========
Diluted weighted average shares
outstanding (1)(2) .................................... 6,005,456 6,000,244 6,030,724 6,031,919
========== ========== ========== ==========
(1) Share and per share data has been restated to reflect 3 for 2 stock split.
(2) Share and per share data has been restated to reflect 5 percent stock
dividends.
82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this item.
ITEM 9A. 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 year covered by this annual report, were
effective.
No disclosure is required under 17 C.F.R. Section 229.308 (a) or (b).
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.
ITEM 9 B. OTHER INFORMATION
The Company was not required to disclose any information in a Form 8-K
during the fourth quarter of 2004 that was not so disclosed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the caption "EXECUTIVE OFFICERS" under
Part I, Item 1 of this report on Form 10-K, and the information set forth under
the captions "ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE" in the Proxy Statement to be used in conjunction with the
2004 Annual Meeting of Shareholders (the "Proxy Statement"), which will be filed
within 120 days of the Company's fiscal year end, is incorporated herein by
reference.
Garnet A. Barnes, age 81, has served as director of the Company and The
Peoples National Bank since 1992. Mr. Barnes has reached mandatory retirement
age for directors under the proposed changes to the Company's Bylaws that will
be voted on by the shareholders at the 2005 annual shareholder meeting.
Accordingly, Mr. Barnes has not been nominated for re-election at the 2005
annual shareholder meeting. Mr. Barnes has been President of Barnes Real Estate,
Inc. since 1964. In addition, Mr. Barnes is President of Smithfield Development
Corporation and Vice President and Secretary of Pinnacle Associates.
83
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does
not have an "audit committee financial expert," as that term is defined by Item
401(h) of Regulation S-K promulgated by the Securities and Exchange Commission,
serving on its audit committee. The Company's audit committee is a committee of
directors who are elected by the shareholders and who are independent of the
Company and its management. After reviewing the experience and training of all
of the Company's independent directors, the board of directors has concluded
that no independent director meets the SEC's very demanding definition.
Therefore, it would be necessary to find a qualified individual willing to serve
as both a director and member of the audit committee and have that person
elected by the shareholders in order to have an "audit committee financial
expert" serving on the Company's audit committee. The Company's audit committee
is, however, authorized to use consultants to provide financial accounting
expertise in any instance where members of the committee believe such assistance
would be useful. Accordingly, the Company does not believe that it needs to have
an "audit committee financial expert" on its audit committee.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer, controller, or persons serving in equivalent positions regardless of
whether they are designated executive officers. The Company will provide a copy
of the Code of Ethics to any person, without charge, upon written request to the
Corporate Secretary, Peoples Bancorporation, Inc, 1818 East Main Street, Easley,
South Carolina 29640.
ITEM 11. EXECUTIVE COMPENSATION
With the exception of information set forth under the captions "Board
Compensation Committee Report on Executive Compensation" and "Performance
Graph," which sub-sections are not incorporated herein by reference, the
information set forth under the caption "EXECUTIVE COMPENSATION" in the Proxy
Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND
RELATED STOCKHOLDER MATTERS
The information set forth under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Proxy Statement is incorporated
herein by reference.
84
The following table sets forth aggregated information as of December
31, 2004 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding options, future issuance
outstanding options, warrants and rights under equity compensation
warrants and rights plans (excluding
securities reflected in
column (a))
(a) (b) (c)
- ------------------ -------------------- ------------------ -------------------------
Equity compensation
Plans approved by
Security holders 391,219 $ 6.50 387,630
Equity compensation
Plans not approved
By security holders 0 $ 0.00 0
---------- ------ ----------
Total 391,219 $ 6.50 387,630
For further information about the Company's plans as set forth in the
above table, see Note 16 of the consolidated financial statements set forth in
Item 8 of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "CERTAIN TRANSACTIONS" in
the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "INDEPENDENT PUBLIC
ACCOUNTANTS" in the Proxy Statement is incorporated herein by reference.
85
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
(a) (1) and (2) Financial Statements and Financial Schedules
The following consolidated financial statements and report of
independent auditors of Peoples Bancorporation, Inc. and subsidiaries are
included in Item 8 of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Income - Years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Cash Flows - Years ended December 31, 2004,
2003 and 2002
Consolidated Statements of Shareholders' Equity and Comprehensive
Income - Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements - December 31, 2004
(a) (3) Listing of Exhibits:
Exhibit No. Description of Exhibit
3 (i) Articles of Incorporation as amended (incorporated by
reference to Registrant's Form 10-Q for the quarter ended
September 30, 2004).
3(ii) Bylaws, (incorporated by reference to Registrant's
Registration Statement on Form 8-A)
4.1 Specimen Common Stock Certificate (incorporated by reference
to exhibits to Registrant's Registration Statement on Form S-4
(Number 33-46649)).
10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to exhibits to Registrant's
Registration Statement on Form S-8 (Number 333-121158)).
10.3 Peoples Bancorporation, Inc. 1997 Non-Employee Directors Stock
Option Plan (incorporated by reference to exhibits to
Registrant's Registration Statement on Form S-8 (Number
333-121157)).
86
10. 4 Peoples Bancorporation, Inc. 2004 Stock Option Plan
(incorporated by reference to exhibits to Registrant's
Registration Statement on Form S-8 (Number 333-121156)).
10.5 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and David C. King.
10.6 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and R. Riggie Ridgeway.
10.7 on-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and William B. West.
10.8 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and C. Kyle Thomas.
10. 9 Salary Continuation Agreement between The Peoples National
Bank and Robert E. Dye, Sr., dated July 7, 1998, as amended
(incorporated by reference to exhibits to Registrant's Form
10-K for the year ended December 31, 2002).
10.10 Salary Continuation Agreement between The Peoples National
Bank and Ralph R. Ridgeway, dated July 7, 1998, as amended
(incorporated by reference to exhibits to Registrant's Form
10-K for the year ended December 31, 2002).
10.11 Split Dollar Agreement between the Company and Robert E. Dye,
Sr. (incorporated by reference to exhibits to Registrant's
Form 10-K for the year ended December 31, 2002).
10.12 Spit Dollar Agreement between the Company and Ralph R.
Ridgeway (incorporated by reference to exhibits to
Registrant's Form 10-K for the year ended December 31, 2002).
21. Subsidiaries of the Registrant
23. Consent of Elliott Davis, LLC
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
31.2 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Peoples Bancorporation, Inc.
Dated: March 25, 2005 By: s/R. Riggie Ridgeway
-------------------------------
R. Riggie Ridgeway
President and Chief
Executive Officer
Dated: March 25, 2005 By: s/Robert E. Dye, Jr.
-------------------------------
Robert E. Dye. Jr.
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
s/ Garnet A. Barnes Chairman and March 25, 2005
- --------------------------------------------
Garnet A. Barnes Director
s/ James A. Black, Jr. Director March 25, 2005
- --------------------------------------------
James A. Black, Jr.
s/ William A. Carr Director March 25, 2005
- --------------------------------------------
William A. Carr
s/ Charles E. Dalton Director March 25, 2005
- --------------------------------------------
Charles E. Dalton
88
s/ Robert E. Dye, Jr. Senior Vice March 25, 2005
- -------------------------------------------- President, Secretary
Robert E. Dye, Jr. and Director
s/ W. Rutledge Galloway Director March 25, 2005
- --------------------------------------------
W. Rutledge Galloway
s/ David C. King Director March 25, 2005
- --------------------------------------------
David C. King
s/ Andrew M. McFall, III Director March 25, 2005
- --------------------------------------------
Andrew M. McFall, III
Director March __, 2005
- --------------------------------------------
E. Smyth McKissick, III
s/ Eugene W. Merritt, Jr. Director March 25, 2005
- --------------------------------------------
Eugene W. Merritt, Jr.
s/ George B. Nalley, Jr. Director March 25, 2005
- --------------------------------------------
George B. Nalley, Jr.
s/ Larry D. Reeves Director March 25, 2005
- --------------------------------------------
Larry D. Reeves
s/ R. Riggie Ridgeway President, Chief March 25, 2005
- -------------------------------------------- Executive Officer,
R. Riggie Ridgeway and Director
s/ Nell W. Smith Director March 25, 2005
- --------------------------------------------
Nell W. Smith
s/ A. J. Thompson, Jr., M.D. Director March 25, 2005
- --------------------------------------------
A. J. Thompson, Jr., M. D.
s/ William B. West Executive Vice March 25, 2005
- -------------------------------------------- President, Treasurer
William B. West and Director
89
EXHIBIT INDEX
Exhibit No. Description of Exhibit
3 (i) Articles of Incorporation as amended (incorporated by
reference to Registrant's Form 10-Q for the quarter ended
September 30, 2004).
3(ii) Bylaws, (incorporated by reference to Registrant's
Registration Statement on Form 8-A)
4.1 Specimen Common Stock Certificate (incorporated by reference
to exhibits to Registrant's Registration Statement on Form S-4
(Number 33-46649)).
10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan
(incorporated by reference to exhibits to Registrant's
Registration Statement on Form S-8 (Number 333-121158)).
10.3 Peoples Bancorporation, Inc. 1997 Non-Employee Directors Stock
Option Plan (incorporated by reference to exhibits to
Registrant's Registration Statement on Form S-8 (Number
333-121157)).
10. 4 Peoples Bancorporation, Inc. 2004 Stock Option Plan
(incorporated by reference to exhibits to Registrant's
Registration Statement on Form S-8 (Number 333-121156)).
10.5 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and David C. King.
10.6 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and R. Riggie Ridgeway.
10.7 on-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and William B. West.
10.8 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and C. Kyle Thomas.
10. 9 Salary Continuation Agreement between The Peoples National
Bank and Robert E. Dye, Sr., dated July 7, 1998, as amended
(incorporated by reference to exhibits to Registrant's Form
10-K for the year ended December 31, 2002).
10.10 Salary Continuation Agreement between The Peoples National
Bank and Ralph R. Ridgeway, dated July 7, 1998, as amended
(incorporated by reference to exhibits to Registrant's Form
10-K for the year ended December 31, 2002).
10.11 Split Dollar Agreement between the Company and Robert E. Dye,
Sr. (incorporated by reference to exhibits to Registrant's
Form 10-K for the year ended December 31, 2002).
10.12 Spit Dollar Agreement between the Company and Ralph R.
Ridgeway (incorporated by reference to exhibits to
Registrant's Form 10-K for the year ended December 31, 2002).
21. Subsidiaries of the Registrant
23. Consent of Elliott Davis, LLC
31.1 Rule 13a-14(a) / 15d-14(a) Certifications
31.2 Rule 13a-14(a) / 15d-14(a) Certifications
32 Section 1350 Certifications
90