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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission file
September 30, 2002 000-20616
PEOPLES BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-09581843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1818 East Main Street, Easley, South Carolina 29640
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (864) 859-2265
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required
to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12 b-2
of the Exchange Act).
Yes [ ] No [X]
The number of outstanding shares of the
issuer's $1.67 par value common stock
as of September 30, 2002 was 3,341,370.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)
September 30, 2002 December 31, 2001
Unaudited Audited
ASSETS
CASH AND DUE FROM BANKS .................................................................. $ 17,234 $ 5,199
INTEREST-BEARING DEPOSITS IN OTHER BANKS ................................................. 25 24
FEDERAL FUNDS SOLD ....................................................................... 16,852 7,203
-------- --------
Total cash and cash equivalents ..................................................... 34,111 12,426
SECURITIES
Available for sale .................................................................. 76,948 30,339
Held for investment (market value of $3,534, and $3,417) ............................ 3,371 3,339
Other investments, at cost .......................................................... 1,884 1,815
LOANS-less allowance for loan losses of $2,804 and $2,288 ................................ 234,537 210,248
MORTGAGE LOANS HELD FOR SALE ............................................................. 32,913 40,925
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization ....................................................... 9,498 7,961
ACCRUED INTEREST RECEIVABLE .............................................................. 2,011 1,683
OTHER ASSETS ............................................................................. 2,775 3,430
-------- --------
TOTAL ASSETS .................................................................... $398,048 $312,166
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
DEPOSITS
Noninterest-bearing ................................................................. $ 45,531 $ 34,579
Interest-bearing .................................................................... 285,500 202,223
-------- --------
Total deposits .................................................................. 331,031 236,802
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS .......................................................................... 23,225 20,646
FEDERAL FUNDS PURCHASED .................................................................. 4,363 0
NOTES PAYABLE TO FEDERAL HOME LOAN BANK .................................................. 5,000 23,985
ACCRUED INTEREST PAYABLE ................................................................. 1,372 1,218
OTHER LIABILITIES ........................................................................ 1,297 964
-------- --------
Total Liabilities ............................................................... 366,288 283,615
-------- --------
SHAREHOLDERS' EQUITY
Common Stock - 10,000,000 shares authorized, $1.67
Par value per share, 3,341,370 shares and 3,328,607
shares outstanding, respectively .................................................. 5,580 5,559
Additional paid-in capital ............................................................... 22,855 22,786
Retained Earnings ........................................................................ 2,630 32
Accumulated other comprehensive income ................................................... 695 174
-------- --------
Total Shareholders' Equity ...................................................... 31,760 28,551
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................................... $398,048 $312,166
======== ========
2
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands except share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans ..................................... $ 4,400 $ 4,453 $ 13,007 $ 13,383
Interest on securities
Taxable ................................................... 773 475 1,862 1,452
Tax-exempt ................................................ 36 41 108 127
Interest on federal funds ...................................... 135 159 333 402
---------- ---------- ---------- ----------
Total interest income .......................................... 5,344 5,128 15,310 15,364
INTEREST EXPENSE
Interest on deposits ........................................... 1,975 2,373 5,381 7,429
Interest on federal funds purchased and securities
sold under repurchase agreements .......................... 112 185 356 534
Interest on notes payable Federal Home
Loan Bank ................................................. 62 62 195 292
---------- ---------- ---------- ----------
Total interest expense ......................................... 2,149 2,620 5,932 8,255
Net interest income ............................................ 3,195 2,508 9,378 7,109
PROVISION FOR LOAN LOSSES ...................................... 143 149 654 401
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................................... 3,052 2,359 8,724 6,708
NON-INTEREST INCOME
Service fees and other income .................................. 627 561 1,777 1,446
Mortgage banking income ........................................ 885 720 2,523 2,341
---------- ---------- ---------- ----------
1,512 1,281 4,300 3,787
NON-INTEREST EXPENSE
Salaries and benefits .......................................... 1,721 1,399 4,722 4,068
Occupancy ...................................................... 154 135 399 383
Equipment ...................................................... 217 159 549 468
Other operating expenses ....................................... 791 689 2,411 2,098
---------- ---------- ---------- ----------
2,883 2,382 8,081 7,017
Income before income taxes ..................................... 1,681 1,258 4,943 3,478
PROVISION FOR INCOME TAXES ..................................... 607 452 1,778 1,248
---------- ---------- ---------- ----------
Net income ..................................................... $ 1,074 $ 806 $ 3,165 $ 2,230
========== ========== ========== ==========
INCOME PER COMMON SHARE:
BASIC ..................................................... $ 0.32 $ 0.24 $ 0.95 $ 0.67
========== ========== ========== ==========
DILUTED ................................................... $ 0.32 $ 0.24 $ 0.93 $ 0.65
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC ...................................................... 3,341,370 3,327,384 3,335,698 3,326,760
========== ========== ========== ==========
DILUTED .................................................... 3,402,755 3,427,638 3,420,524 3,413,198
========== ========== ========== ==========
DIVIDENDS PAID PER COMMON SHARE ............................... $ 0.06 $ 0.04 $ 0.17 $ 0.12
========== ========== ========== ==========
3
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the nine months ended September 30, 2001 and 2002
(Amounts in thousands except share data)
(Unaudited)
Accumulated
Common stock Additional other Total
------------ paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income equity
------ ------ ------- -------- ------ ------
Balance, December 31, 2000* ............... 3,168,046 $ 5,290 $ 20,587 $ 0 $ (62) $ 25,815
Net Income ................................ 2,230 2,230
Other comprehensive income, net of tax:
Unrealized holding gains on
securities available for sale ....... 431 431
Less reclassification
adjustments for gains
included in net income .............. 0 0
-----------
Comprehensive income .................... 2,661
Cash Dividends .......................... (412) (412)
Proceeds from stock options ............. 2,672 5 6 11
----------- ---------- ---------- ---------- ------------- ------------
Balance, September 30, 2001 ............. 3,170,718 $ 5,295 $ 20,593 $ 1,818 $ 369 $ 28,075
=========== ========== ========== ========== ============= ============
Balance, December 31, 2001* ............. 3,328,609 $ 5,559 $ 22,786 $ 32 $ 174 $ 28,551
Net Income .............................. 3,165 3,165
Other comprehensive income,
net of tax:
Unrealized holding losses on
securities available for sale ...... 521 521
Less reclassification
adjustments for gains
included in net income ............. 0 0
-----------
Comprehensive income .................... 3,686
Cash Dividends .......................... (567) (567)
Proceeds from stock options ............. 12,761 21 69 90
----------- ---------- ---------- ---------- ------------- ------------
Balance, September 30, 2002 ............. 3,341,370 $ 5,580 $ 22,855 $ 2,630 $ 695 $ 31,760
=========== = ======== ========== ========== ============= ============
* 5% stock dividends issued in January 2001 and 2002 are reflected in December
31, 2000 and 2001 data.
4
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Nine months Ended
September 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income .......................................................................... $ 3,165 $ 2,230
Adjustments to reconcile net income to net cash provided
by (used in) operating activities
Provision for loan losses ........................................................... 654 401
Depreciation and amortization ....................................................... 356 421
Amortization and accretion (net) of premiums and
discounts on securities ........................................................... 82 (19)
Origination of mortgage loans held for sale ........................................ (263,913) (232,297)
Sale of mortgage loans held for sale ............................................... 271,925 228,056
(Increase) decrease in accrued interest receivable .................................. (328) 86
Increase in other assets ............................................................ (147) (765)
Increase (decrease) in accrued interest payable ..................................... 154 (77)
Increase (decrease) in other liabilities ............................................ 212 (81)
--------- ---------
Net cash provided by (used in) operating activities ............................... 12,160 (2,045)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale .......................................... (73,701) (28,343)
Proceeds from the maturity of securities available for sale ......................... 5,299 3,769
Proceeds from the sale of securities available for sale ............................. 5,750 0
Proceeds from the call of securities available for sale ............................. 16,650 23,600
Net increase in loans ............................................................... (24,289) (23,887)
Purchase of premises and equipment .................................................. (1,893) (251)
--------- ---------
Net cash used in investing activities ............................................. (72,184) (25,112)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ............................................................ 94,229 33,471
Net increase in securities sold under repurchase
agreements ........................................................................ 2,579 5,219
Net increase (decrease) in Federal funds purchased .................................. 4,363 (3,531)
Net decrease in notes payable Federal Home Loan Bank ................................ (18,985) (1,500)
Proceeds from stock options exercised ............................................... 90 11
Cash dividend ....................................................................... (567) (412)
--------- ---------
Net cash provided by financing activities ......................................... 81,709 33,258
--------- ---------
Net increase in cash and cash equivalents ......................................... 21,685 6,101
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................................... 12,426 10,685
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................... $ 34,111 $ 16,786
========= =========
CASH PAID FOR
Interest .......................................................................... $ 5,778 $ 8,334
========= =========
Income Taxes ...................................................................... $ 1,597 $ 1,204
========= =========
5
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 2001 Annual Report on
Form 10-K and incorporated herein by reference.
STATEMENT OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection,
amounts due from banks and federal funds sold. All have maturities of three
months or less.
COMMON STOCK
The Board of Directors declared cash dividends of $0.05 per common
share to shareholders of record March 22, 2002 payable April 5, 2002, and $0.06
per common share to shareholders of record June 21, 2002 and September 20, 2002,
payable July 5, 2002 and October 4, 2002, respectively.
SFAS No. 128, "Earnings per Share" requires that the Company present
basic and diluted net income per common share. The assumed conversion of stock
options creates the difference between basic and diluted net income per share.
Income per share is calculated by dividing net income by the weighted average
number of common shares outstanding for each period presented. The weighted
average number of common shares outstanding for basic net income per common
share for the nine months ended September 30, 2002 and 2001 was 3,335,698 and
3,326,760, respectively. The weighted average number of common shares
outstanding for diluted net income per common share was 3,420,524 and 3,413,198
for the nine months ended September 30, 2002 and 2001.
The Company issued a five-percent common stock dividend in January
2002. Per share data in 2001 has been restated to reflect this transaction.
6
MANAGEMENT'S OPINION
The accompanying unaudited financial statements of Peoples
Bancorporation, Inc. have been prepared in accordance with accounting principles
in the United States of America for interim financial information and with the
instructions to Form 10-Q according to guidelines set forth by the Securities
and Exchange Commission. Accordingly, they do not include all information and
footnotes required by accounting principles in the United States of America for
complete financial statements. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for the fair presentation have been included. The results of operations for any
interim period are not necessarily indicative of the results to be expected for
an entire year.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes and with the
statistical information and financial data appearing in this report as well as
the 2001 Annual Report of Peoples Bancorporation, Inc. on Form 10-K. Results of
operations for the nine-month period ending September 30, 2002 are not
necessarily indicative of the results to be attained for any other period.
Estimates
The preparation of 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 as of
the dates of the consolidated balance sheets and the consolidated statements of
income for the periods covered. Actual results could differ from those
estimates.
Forward-Looking Statements
From time to time, Peoples Bancorporation, Inc. (the "Company") may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products and similar matters. All statements that are not historical facts are
"forward-looking statements." Words such as "estimate," "project," "intend,"
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performances, development and results of the Company's business
include, but are not limited to, the following: risks from changes in economic
and industry conditions; changes in interest rates; risks inherent in making
loans including repayment risks and value of collateral; dependence on senior
management; and recently-enacted or proposed legislation. Statements contained
in this filing regarding the demand for Peoples Bancorporation's products and
services, changing economic conditions, interest rates, consumer spending and
numerous other factors may be forward-looking statements and are subject to
uncertainties and risks.
Overview
Peoples Bancorporation, Inc. 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 effectiveness of
the acquisition of The Peoples National Bank. On May 19, 2000, the Company filed
an election with the Federal Reserve Bank of Richmond to become a financial
8
holding company, pursuant to the Gramm-Leach-Bliley Act of 1999, and the
election became effective June 23, 2000. As a financial holding company, Peoples
Bancorporation, Inc. may engage in activities that are financial in nature or
incidental to a financial activity as described in the law and regulations
adopted pursuant to the law. To date, the Company has not engaged in any
activities other than those permitted to a bank holding company and has not yet
taken advantage of its status as a financial holding company to engage in
additional activities.
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").
Currently, the Company engages in no significant operations other than
the ownership of its three subsidiaries and the support thereof. The Company
conducts its business from six banking offices located in the Upstate Area of
South Carolina.
9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EARNINGS PERFORMANCE
Overview
The consolidated Company's net income for the third quarter of 2002 was
$1,074,000 or $0.32 per diluted share compared to $806,000 or $0.24 per diluted
share for the second quarter of 2001, an increase of 33.3%. Net income for the
nine months ended September 30, 2002 was $3,165,000 or $0.93 per diluted share
compared to $2,230,000 or $0.65 per diluted share for the nine months ended
September 30, 2001, an increase of 41.9%. Return on average equity for the nine
months and three months ended September 30, 2002 was 14.20% and 14.02% compared
to 11.13% and 11.76% for the nine months and three months ended September 30,
2001. Return on average assets for the nine months and three months ended
September 30, 2002 was 1.21% and 1.12% compared to 1.06% and 1.10% for the nine
months and three months ended September 30, 2001. The increases in the Company's
net income, earnings per fully diluted share, return on average equity, and
return on average assets in 2002 are attributable to increased earnings at the
Company's bank subsidiaries. The Peoples National Bank recorded net earnings of
$2,386,000 for the nine months ended September 30, 2002 compared to net earnings
of $1,981,000 for the nine months ended September 30, 2001, an increase of
20.4%. Bank of Anderson, N. A. recorded net earnings of $578,000 for the nine
months ended September 30, 2002 compared to net earnings of $255,000 for the
nine months ended September 30, 2001, an increase of 126.7%. Seneca National
Bank recorded net earnings of $229,000 for the nine months ended September 30,
2002 compared to net earnings of $37,000 for the nine months ended September 30,
2001, an increase of 518.9%.
Interest Income, Interest Expense and Net Interest Income
The largest component of the Company's net income is interest income.
Net interest income, which is the difference between the interest earned on
assets and the interest paid for the liabilities used to fund those assets,
measures the gross profit from lending and investing activities and is the
primary contributor to the Company's earnings. Net interest income before
provision for loan losses increased $687,000 or 27.4% to $3,195,000 for the
quarter ended September 30, 2002 compared to $2,508,000 for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002 net interest
income before provision for loan losses increased $2,269,000 or 31.9% to
$9,378,000 compared to $7,109,000 for the nine months ended September 30, 2001.
The increases in the net interest income resulted primarily from an increase in
interest earning assets, as well as, a decrease in interest expense associated
with interest bearing liabilities. The Company's net interest margin for the
nine months and three months ended September 30, 2002 was 3.84% and 3.57%
respectively, compared to 3.62% and 3.66% respectively for the nine months and
three months ended September 30, 2001.
The Company's total interest income for the third quarter of 2002 was
$5,344,000 compared to $5,128,000 for the third quarter of 2001, an increase of
10
$216,000 or 4.2%. Total interest income for the nine months ended September 30,
2002 was $15,310,000 compared to $15,364,000 for the nine months ended September
30, 2001, a decrease of $54,000 or 0.4%. Interest and fees on loans, the largest
component of total interest income, decreased $53,000 in the third quarter of
2002 to $4,400,000 compared to $4,453,000 for the third quarter of 2001, a
decrease of 1.2%. Interest and fees on loans decreased $376,000 for the nine
months ended September 30, 2002 to $13,007,000 compared to $13,383,000 for the
nine months ended September 30, 2001, a decrease of 2.8%. The decrease in
interest and fees on loans resulted primarily from the lower market interest
rates that were experienced at the Company's bank subsidiaries during the first
half of 2002 compared to the first half of 2001, and was partially offset by the
higher average balances in the various types of earning assets.
The Company's total interest expense for the third quarter of 2002 was
$2,149,000 compared to $2,620,000 for the third quarter of 2001, a decrease of
$471,000 or 18.0%. Total interest expense for the nine months ended September
30, 2002 was $5,932,000 compared to $8,255,000 for the nine months ended
September 30, 2001, a decrease of $2,323,000 or 28.1%. Interest expense on
deposits, the largest component of total interest expense, decreased $398,000 in
the third quarter of 2002 to $1,975,000 compared to $2,373,000 for the third
quarter of 2001, a decrease of 16.8%. Interest expense on deposits decreased
$2,048,000 for the nine months ended September 30, 2002 to $5,381,000 compared
to $7,429,000 for the nine months ended September 30, 2001, a decrease of 27.6%.
Interest on federal funds purchased and securities sold under repurchase
agreements, the second largest component of total interest expense, decreased
$73,000 or 39.5% to $112,000 in the third quarter of 2002 compared to $185,000
for the third quarter of 2001. Interest on federal funds purchased and
securities sold under repurchase agreements decreased $178,000 or 33.3% to
$356,000 for the nine months ended September 30, 2002 compared to $534,000 for
the same period in 2001. Interest on notes payable to the Federal Home Loan
Bank, the third largest component of total interest expense, remained unchanged
at $62,000 in the third quarter of 2002 compared to the third quarter of 2001.
Interest on notes payable to the Federal Home Loan Bank decreased $97,000 or
33.2% to $195,000 for the nine months ended September 30, 2002 compared to
$292,000 for the nine months ended September 30, 2001. The significant decrease
in interest expense among each of deposits, federal funds purchased, and
securities sold under repurchase agreements for the three-month and nine-month
periods ending September 30, 2002 compared to the same periods in 2001 is
largely attributable to lower market interest rates experienced at the Company's
banks, and was partially offset by the higher average balances in certain of the
accounts.
Provision for Loan Losses
The amount charged to the provision for loan losses by the Company is
based on management's judgment as to the amount required to maintain an
allowance adequate to provide for losses inherent in the Company's loan
portfolio.
11
The provision for loan losses charged to operations during the three
months and nine months ended September 30, 2002 was $143,000 and $654,000
respectively, compared to $149,000 and $401,000 respectively, for the three
months and nine months ended September 30, 2001. The increase in the Company's
provision for loan losses for the nine months ended September 30, 2002 is
largely attributable to an increase in the volume of outstanding loans during
2002 when compared to 2001 and to management's view of current and future
economic conditions.
During the quarter ended September 30, 2002, one of the Company's
subsidiary banks was informed of a potential problem with one of its credits. As
a result, management took a partial charge of $57,000 against the allowance for
loan losses during the quarter. While it is difficult to determine at this time
the exact amount of any additional loss associated with this credit, management
feels that the allowance for loan loss remains adequate to absorb the maximum
loss potential on this one credit of $205,000 should it occur in any future
reporting period.
Non-interest Income
Non-interest income increased $231,000 or 18.0% to $1,512,000 for the
third quarter of 2002 compared to $1,281,000 for the third quarter of 2001.
Non-interest income increased $513,000 or 13.5% to $4,300,000 for the nine
months ended September 30, 2002 compared to $3,787,000 for the nine months ended
September 30, 2001. The increase in non-interest income for the two comparative
periods resulted largely from an increase in fees associated with a relatively
new overdraft privilege product, which was implemented during the third quarter
of 2000 at Peoples National Bank and during the first quarter of 2001 at Bank of
Anderson, N. A., and at Seneca National Bank. Also contributing substantially to
the increase in non-interest income was an increase in fees associated with the
origination of residential mortgages. A gain of $40,000 was realized on the sale
of available-for-sale securities during the third quarter of 2002. No gain or
loss was realized on the sale of securities during the three months and nine
months ended September 30, 2001.
Non-interest Expense
Total non-interest expense increased $501,000 or 21.0% to $2,883,000
for the third quarter of 2002 from $2,382,000 for the third quarter of 2001.
Total non-interest expense increased $1,064,000 or 15.2% to $8,081,000 for the
nine months ended September 30, 2002 from $7,017,000 for nine months ended
September 30, 2001. Salaries and benefits, the largest component of non-interest
expense, increased $322,000 or 23.0% to $1,721,000 for the third quarter of 2002
from $1,399,000 for the third quarter of 2001. Salaries and benefits increased
$654,000 or 16.1% to $4,722,000 for the nine months ended September 30, 2002
from $4,068,000 for the nine months ended September 30, 2001. The increase in
salaries and benefits is primarily attributable to additional staffing
associated with the Company's continued growth and normal salary increases
throughout the Company. The increase in other non-interest expense items
resulted from continued growth experienced by the Company during the comparable
periods.
12
BALANCE SHEET REVIEW
Loans
Outstanding loans (which excludes mortgage loans held for sale)
represent the largest component of earning assets at 64.3% of total earning
assets. As of September 30, 2002, the Company held total gross loans outstanding
of $237,341,000. Gross loans increased $24,805,000 or 11.7% from $212,536,000 in
total gross outstanding loans at December 31, 2001 and increased $28,310,000 or
13.5% from $209,031,000 in total gross loans outstanding at September 30, 2001.
The increase resulted from new loans generated by the Company's three banking
subsidiaries.
The interest rates charged on loans vary with the degree of risk,
maturity and amount of the loan. Competitive pressures, money market rates,
availability of funds, and government regulation also influence interest rates.
The average yield on the Company's loans for the nine months and three months
ended September 30, 2002 was 7.03% and 6.86% respectively, compared to 8.27% and
7.99% respectively, for the nine months and three months ended September 30,
2001. Approximately 41.3% of the Company's loans are tied to the prime interest
rate.
The Company's loan portfolio consists principally of residential
mortgage loans, commercial loans and consumer loans. Substantially all of these
loans are to borrowers located in South Carolina and are concentrated in the
Company's market areas.
The Company's real estate loans are primarily construction loans and
other loans secured by real estate, both commercial and residential, located
within the Company's trade areas. The Company does not predominantly pursue
long-term, fixed-rate mortgage loans for retention in its loan portfolio.
The Banks employ mortgage loan personnel who originate and package
loans that are pre-sold at origination to third parties and are classified as
mortgage loans held for sale for reporting purposes. At September 30, 2002 the
Company held $32,913,000 of mortgage loans held for sale compared to $40,925,000
at December 31, 2001 and $21,232,000 at September 30, 2001. The substantial
swings in the level of mortgage loans held for sale are due to wide fluctuations
in the demand for residential mortgages from time to time. During the three
months ended September 30, 2002 the Company originated $104,842,000 and sold
$85,209,000 in residential mortgage loans. During the nine months ended
September 30, 2002, the Company originated $263,913,000 and sold $271,925,000 in
residential mortgage loans.
The Company's commercial lending activity 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 and corporate borrowers,
which are obtained for a variety of business purposes. Particular emphasis is
placed on loans to small and medium-sized businesses. The Company's commercial
loans are spread throughout a variety of industries, with no industry or group
of related industries accounting for a significant portion of the commercial
13
loan portfolio. Commercial loans are made on either a secured or unsecured
basis. When taken, security usually consists of liens on inventories,
receivables, equipment, furniture and fixtures. Unsecured commercial loans are
generally short-term with emphasis on repayment strengths and low debt-to-worth
ratios. At September 30, 2002 approximately $13,225,000 or 8.7% of commercial
loans were unsecured.
The Company's direct consumer loans consist primarily of secured
installment loans to individuals for personal, family and household purposes,
including automobile loans to individuals and pre-approved lines of credit.
Management believes that the loan portfolio is adequately diversified.
The Company has no foreign loans or loans for highly leveraged transactions. The
Company has very few agricultural loans.
Allowance for Loan Losses
The allowance for loan losses at September 30, 2002 was $2,804,000 or
1.18% of loans outstanding (which excludes mortgage loans held for sale)
compared to $2,288,000 or 1.08% of loans outstanding at December 31, 2001 and to
$2,282,000 or 1.09% of loans outstanding at September 30, 2001. The allowance
for loan losses is based upon management's continuing evaluation of the
collectability of past due loans based on the historical loan loss experience of
the Company, current economic conditions affecting the ability of borrowers to
repay, the volume of loans, the quality of collateral securing non-performing
and problem loans, and other factors deserving recognition.
At September 30, 2002 the Company had $691,000 in non-accruing loans,
no restructured loans, $190,000 in loans more than ninety days past due and
still accruing interest, and $193,000 in Other Real Estate Owned. This compares
to $993,000 in non-accruing loans, $8,000 in restructured loans, no loans more
than ninety days past due on which interest was still being accrued, and
$950,000 in other real estate owned at December 31, 2001. At September 30, 2001,
the Company had $1,207,000 in non-accruing loans, no restructured loans, no
loans more than ninety days past due and still accruing interest, and $957,000
in Other Real Estate Owned. Non-performing loans at September 30, 2002 consisted
of $231,000 in commercial loans, $452,000 in mortgage loans, and $8,000 in
consumer loans. Non-performing assets as a percentage of loans and other real
estate owned was 0.40%, 0.77%, and 0.94% at September 30, 2002, December 31,
2001, and September 30, 2001, respectively.
Net charge-offs during the nine months ended September 30, 2002 were
$138,000 compared to net charge-offs of $142,000 for the nine months ended
September 30, 2001. The allowance for loan losses as a percentage of
non-performing loans was 318%, 228%, and 189% as of September 30, 2002, December
31, 2001, and September 30, 2001, respectively.
14
The Company accounts for impaired loans in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") 114,
Accounting by Creditors for Impairment of a Loan. SFAS No. 114, as amended by
SFAS No. 118, requires that impaired loans be measured based on the present
value of expected future cash flows or the underlying collateral values as
defined in the pronouncement. The Company includes the provisions of SFAS NO.
114, if any, in 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 then applied to principal. At each of September 30, 2002, September
30, 2001, and December 31, 2001 the Company had no impaired loans.
Securities
The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities, and in certain obligations of states and municipalities. The
Company does not invest in corporate bonds nor does it hold any trading
securities. The Company uses its investment portfolio to provide liquidity for
unexpected deposit liquidation or loan generation, to meet the Company's
interest rate sensitivity goals, to secure public deposits, and to generate
income. At September 30, 2002 securities totaled $82,203,000, which represents
22.3% of total earning assets. Securities increased $46,710,000 or 131.6% from
$35,493,000 invested as of December 31, 2001 and $44,044,000 or 115.4% from
$38,159,000 invested as of September 30, 2001. The increase in securities is
primarily the result of the investment of excess liquidity resulting from an
increase in deposits at the Company's bank subsidiaries.
At September 30, 2002 the Company's total investments classified as
available for sale had an amortized cost of $75,895,000 and a market value of
$76,948,000 for an unrealized gain of $1,053,000. This compares to an amortized
cost of $32,458,000 and a market value of $33,017,000 for an unrealized gain of
$559,000 on the Company's investments classified as available for sale at
September 30, 2001. At December 31, 2001 the Company's total investments
classified as available for sale had an amortized cost of $30,076,000 and a
market value of $30,339,000 for an unrealized gain of $263,000.
Cash and Cash Equivalents
The Company's cash and cash equivalents increased $21,685,000 or 174.5%
to $34,111,000 at September 30, 2002 from $12,426,000 at December 31, 2001 and
$17,325,000 or 103.2% from $16,786,000 at September 30, 2001. This increase is
the result of increased deposits coupled with slightly lower loan demand. The
Company's intent is to deploy these funds into higher yielding assets as
opportunities arise.
Deposits
The Bank's primary source of funds for loans and investments is its
deposits. Total deposits grew $94,229,000 or 39.8% to $331,030,000 at September
30, 2002 from $236,802,000 at December 31, 2001 and $91,926,000 or 38.4% from
$239,105,000 at September 30, 2001. The increase resulted from deposits
15
generated by each of the Banks. Competition for deposit accounts is primarily
based on the interest rates paid, location convenience and services offered.
During the nine months ended September 30, 2002, interest-bearing
deposits averaged $247,208,000 compared to $196,222,000 for the same period of
2001. From time to time Peoples National Bank solicits certificates of deposit
from various sources through brokers and through a program designed to gather
deposits via the Internet. This is done to reduce the need for funding from
other short-term sources such as federal funds purchased and short-term
borrowings from the Federal Home Loan Bank of Atlanta. These non-traditional
deposits are primarily being used to fund Peoples National Bank's short-term
mortgage lending activities. On September 30, 2002 the outstanding certificates
garnered through the Internet totaled $1,486,000, and brokered deposits totaled
$100,000. At December 31, 2001 the Internet certificates of deposit totaled
$7,681,000, and brokered deposits totaled $5,100,000. At September 30, 2001
Peoples National Bank had $4,358,000 in Internet certificates of deposit and no
brokered deposits.
The average interest rate paid on interest-bearing deposits was 2.86%
during the nine months ended September 30, 2002 compared to 5.04% for the same
period of 2001. In pricing deposits, the Company considers its liquidity needs,
the direction and levels of interest rates, and local market conditions. At
September 30, 2002 interest-bearing deposits comprised 86.3% of total deposits
compared to 83.9% at September 30, 2001.
The Company's core deposit base consists largely of consumer time
deposits, savings accounts, NOW accounts, money market accounts, and checking
accounts. Although such core deposits are becoming increasingly
interest-sensitive for both the Company and the industry as a whole, these core
deposits continue to provide the Company with a large source of relatively
stable funds. Core deposits as a percentage of total deposits averaged
approximately 77.8% and 76.0% for the nine months ended September 30, 2002 and
2001 respectively. The Company closely monitors its reliance on certificates
greater than $100,000, which are generally considered to be less stable and less
reliable than core deposits.
Borrowings
The Company's borrowings are comprised of federal funds purchased,
securities sold under repurchase agreements, and both short-term and long-term
advances from the Federal Home Loan Bank of Atlanta. At September 30, 2002
short-term borrowings totaled $27,588,000 and were comprised of $4,363,000 in
Federal Funds Purchased and $23,225,000 in securities sold under repurchase
agreements. At December 31, 2001 short-term borrowings totaled $39,631,000 and
were comprised of $20,646,000 in securities sold under repurchase agreements and
$18,985,000 in short-term advances from the Federal Home Loan Bank of Atlanta.
At September 30, 2001 short-term borrowings totaled $21,004,000 and were
comprised of $129,000 in Federal Funds Purchased, $19,376,000 in securities sold
under repurchase agreements, and $1,500,000 in sort-term advances from the
Federal Home Loan Bank of Atlanta. Short-term borrowings are used primarily for
the immediate cash needs of the Company. During 2002 the Company repaid
16
short-term borrowings from the Federal Home Loan Bank of Atlanta from funds
generated from the sale of mortgage loans held for sale and from an increase in
core deposits. The Company also had $5,000,000 of long-term advances from the
Federal Home Loan Bank of Atlanta at each of September 30, 2002, December 31,
2001, and September 30, 2001.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company's liquidity position is primarily dependent upon its need
to respond to short-term demand for funds caused by increased loan demand and
withdrawals from deposit accounts. The Company's primary liquidity sources
include cash and due from banks, federal funds sold, and securities available
for sale. In addition, the Company (through the Banks) has the ability to borrow
funds on a short-term basis from the Federal Reserve System and to purchase
federal funds from other financial institutions. The Banks are also members of
the Federal Home Loan Bank System and have the ability to borrow both short-term
and long-term funds on a secured basis. At September 30, 2002, The Peoples
National Bank had total borrowing capacity from the Federal Home Loan Bank of
Atlanta equal to twenty percent (20%) of its total assets or approximately
$47,260,000. The unused portion of this line of credit was $42,260,000 at
September 30, 2002. The Company's other two bank subsidiaries, Bank of Anderson
and Seneca National Bank, each had established secured lines of credit with the
Federal Home Loan Bank totaling ten percent (10%) of each bank's total assets,
or approximately $11,749,000 and $4,756,000 respectively, all of which was
unused. At September 30, 2002, the Banks had unused federal funds lines of
credit with various correspondent banks totaling $13,387,000.
Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs, and requires liquidity to pay limited operating expenses and
dividends only.
The Company is considering capital expenditures that may be made in
part during the remainder of 2002. The Company may begin incurring costs for
these projects during the fourth quarter of 2002. These include the possible
construction of a branch banking facility for Bank of Anderson for approximately
$800,000 when completed and the possible renovation and expansion of the main
office of Bank of Anderson for approximately $800,000 when completed. The
Company may additionally make other lesser capital expenditures through the
normal course of business.
Company management believes its liquidity sources are adequate to meet
its operating needs and does not know of any trends that may result in the
Company's liquidity materially increasing or decreasing.
OFF-BALANCE SHEET RISK
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
17
September 30, 2002, the Banks had issued commitments to extend credit and
letters of credit of $64,472,000 through various types of arrangements. The
commitments generally expire in one year. Past experience indicates that many of
these commitments to extend credit will expire not fully used. However, as
described under Liquidity, the Company believes that it has adequate sources of
liquidity to fund commitments that are drawn upon by the borrowers.
In addition to commitments to extend credit, the Banks also issue
standby letters of credit, which are assurances to a third party that they will
not suffer a loss if the Banks' customer fails to meet its contractual
obligation to the third party. Standby letters of credit totaled $5,602,000 at
September 30, 2002. 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. Most of the standby letters of credit are
secured by various types of collateral. 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
Neither the Company nor the subsidiaries are involved in other
off-balance sheet contractual relationships or transactions that could result in
liquidity needs or other commitments or significantly impact earnings.
18
CAPITAL ADEQUACY and RESOURCES
The capital needs of the Company have been met through the retention of
earnings and from the proceeds of prior public stock offerings.
The following table sets forth the capital ratios for the Company and
the Banks as of September 30, 2002:
CAPITAL RATIOS
(Amounts in Thousands)
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
Total Risk-based Capital $ 33,870 12.56% $ 26,945 10.00% $ 21,556 8.00%
Tier 1 Risk-based Capital 31,065 11.52 16,166 6.00 10,777 4.00
Leverage Ratio 31,065 8.19 18,965 5.00 15,172 4.00
Peoples National Bank:
Total Risk-based Capital $ 19,725 11.59% $ 17,019 10.00% $ 13,615 8.00%
Tier 1 Risk-based Capital 17,968 10.55 10,209 6.00 6,806 4.00
Leverage Ratio 17,968 8.11 11,078 5.00 8,862 4.00
Bank of Anderson, N. A:
Total Risk-based Capital $ 7,749 11.50% $ 6,738 10.00% $ 5,391 8.00%
Tier 1 Risk-based Capital 7,034 10.44 4,043 6.00 2,695 4.00
Leverage Ratio 7,034 6.40 5,495 5.00 4,396 4.00
Seneca National Bank:
Total Risk-based Capital $ 3,941 12.31% $ 3,201 10.00% $ 2,561 8.00%
Tier 1 Risk-based Capital 3,608 11.27 1,921 6.00 1,281 4.00
Leverage Ratio 3,608 7.55 2,389 5.00 1,912 4.00
19
IMPACT of NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No. 102 -
Selected Loan Loss Allowance Methodology Issues. This staff accounting bulletin
clearly defines the required development, documentation, and application of a
systematic methodology for determining allowances for loan and lease losses in
accordance with generally accepted accounting principles. The Company believes
that it is in compliance with SAB 102.
Additional accounting standards that have been issued or proposed by
the FASB that do not require adoption until a future date are not expected to
have a material impact on the consolidated financial statements upon adoption.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and interest rates. The Company's market risk arises principally from interest
rate risk inherent in its lending, deposit, and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages certain other risks, such as credit quality and liquidity risk,
in the normal course of business, management considers interest rate risk to be
its most significant market risk and the risk that could potentially have the
largest material effect on the Company's financial condition and results of
operations. Other types of market risks, such as foreign currency risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
The primary objective of Asset and Liability Management at the Company
is to manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate-sensitive earning assets and rate-sensitive
interest-bearing liabilities. The relationship of rate-sensitive earning assets
to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate-sensitive assets and liabilities are those that can be
repriced to current market rates within a relatively short time period.
Management monitors the rate sensitivity of earning assets and interest-bearing
liabilities over the entire life of these instruments, but places particular
emphasis on the first year. At September 30, 2002, on a cumulative basis through
12 months, rate-sensitive liabilities exceeded rate-sensitive assets by
$119,944,000. This liability-sensitive position is largely attributable to the
Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $115,560,000, $77,289,000 and $32,197,000, respectively,
at September 30, 2002, and may reprice or mature within one year.
20
Item 4. CONTROLS AND PROCEDURES
(a) Based on their evaluation of the issuer's disclosure controls and
procedures (as defined in 17 C.F.R Sections 240.13a-14(c) and 240.15d-14(c)) as
of a date within 90 days prior to the filing of this quarterly report, the
issuer's chief executive officer and chief financial officer concluded that the
effectiveness of such controls and procedures was adequate.
(b) There were no significant changes in the issuer's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
21
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
During the period ended September 30, 2002 the Registrant issued shares of
common stock to the following classes of persons upon the exercise of options
issued pursuant to the Registrant's 1997 Non-Employee Directors Stock Option
Plan. The securities were issued pursuant to the exemption from the 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
----------- ---------- ------ -----
05/07/02 Director 12,761 $90,000
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
No Exhibits
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORPORATION, INC.
Dated: November 6, 2002 By: /s/ Robert E. Dye, Sr.
------------------------
Robert E. Dye, Sr.
President and Chairman of the Board
Dated: November 6, 2002 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)
23
CERTIFICATIONS
I, Robert E Dye, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples
Bancorporation, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made know to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 6, 2002 By: /s/ Robert E. Dye, Sr.
------------------------
Robert E. Dye, Sr.
President and Chairman of the Board
24
CERTIFICATIONS
I, William B. West., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peoples
Bancorporation, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made know to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 6, 2002 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)
25