Attached files
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, 2009
[ ] 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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. [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ] (Not yet applicable to
Registrant)
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant (5,001,283 shares) on June 30, 2009, the last
day of the Registrant's most recently completed second fiscal quarter, was
approximately $13,754,000. The aggregate market value of the voting and
non-voting common equity held by nonaffiliates of the Registrant (4,495,741
shares) on March 22, 2010 was approximately $14,329,000. For the purpose of this
determination, 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
24, 2010: 7,003,003 shares of $1.11 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2010 Annual Meeting of
Shareholders - Part III
CAUTIONARY NOTICE WITH RESPECT TO
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning
of the securities laws. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the 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
forwarding-looking statements.
All statements that are not historical facts are statements that could
be "forward-looking statements." You can identify these forward-looking
statements through the use of words such as "may," "will," "should," "could,"
"would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek,"
"plan," "predict," "target," "potential," "believe," "intend," "estimate,"
"project," "continue," or other similar words. Forward-looking statements
include, but are not limited to, statements regarding the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations,
estimates and projections about the banking 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 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 risks and uncertainties include, but are not
limited to:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values of
loan collateral, securities, and interest sensitive assets and
liabilities;
o the effects of competition from a wide variety of local,
regional, national and other providers of financial, investment,
and insurance services, as well as competitors that offer banking
products and services by mail, telephone, computer and/or the
Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o ability to weather the current economic downturn;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
o the risks of opening new offices, including, without limitation,
the related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure
to achieve expected gains, revenue growth and/or expense savings
from such endeavors;
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o cost and difficulty of implementing changes in technology or
products;
o loss of consumer or investor confidence;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
1
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
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
effectiveness of the acquisition of The Peoples National Bank. 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 nine 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 Highway 123 Bypass, 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; safe deposit boxes; 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. The Company does, however, have a geographic
concentration of customers and borrowers because most of its customers and
borrowers are located in the Upstate area of South Carolina, and most of the
real estate securing mortgage loans is located in this area. There are no
material seasonal factors that would have an adverse effect on the Company.
As a bank 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.
2
Territory Served and Competition
The Peoples National Bank serves its customers from six locations; two
offices in the city of Easley and one office in the city of Pickens, South
Carolina, which are located in Pickens County; one office in the unincorporated
community of Powdersville, South Carolina, which is located in the northeast
section of Anderson County; and two offices in the city of Greenville, South
Carolina, which is located in Greenville County. 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 is primarily derived from Greenville and Pickens Counties,
South Carolina and the northeast section of Anderson County, South Carolina.
Bank of Anderson's primary service area is Anderson County, South Carolina, and
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 large national 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 competitor
bank offices, two savings institution offices, and two credit union offices. In
Anderson County there are sixty competitor bank offices, two savings institution
offices, and four credit union offices. In Oconee County, there are twenty
competitor bank offices, six savings institution offices, and one credit union
office. In Greenville County there are one hundred sixty competitor bank
offices, eight savings institution offices, and eight credit union offices. The
Peoples National Bank had approximately 11.7% of the deposits of Federal Deposit
Insurance Corporation ("FDIC")-insured institutions in Pickens County and 0.3%
in Greenville County. The Peoples National Bank and Bank of Anderson, combined,
had approximately 6.8% of the deposits of FDIC-insured institutions in Anderson
County. Seneca National Bank had approximately 7.1% of the deposits of
FDIC-insured institutions in Oconee County. The foregoing information is as of
June 30, 2009, the most recent date for which such information is available from
the FDIC.
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
some of these services through correspondent banks. In addition to commercial
banks, savings institutions and credit unions, the Banks compete with other
financial intermediaries and investment alternatives, including, but not limited
to, mortgage companies, consumer finance companies, money market mutual funds,
brokerage firms, insurance companies, leasing companies and other financial
institutions. 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.
3
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.
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, 2009, 2008 and 2007. 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,
--------------------------------
2009 2008 2007
---- ---- ----
Assets
Cash and Due from Banks ....................................... $ 12,344 $ 9,852 $ 10,846
Taxable Securities ............................................ 73,088 57,918 57,467
Tax-Exempt Securities ......................................... 38,242 38,968 38,106
Federal Funds Sold ............................................ 5,937 3,791 2,381
Gross Loans ................................................... 388,359 416,161 384,691
Less: Allowance for Loan Losses .............................. (7,969) (5,937) (4,073)
--------- --------- ---------
Net Loans ..................................................... 380,390 410,224 380,618
--------- --------- ---------
Other Assets .................................................. 40,138 32,953 29,476
--------- --------- ---------
Total Assets .................................................. $ 550,139 $ 553,706 $ 518,894
========= ========= =========
Liabilities and
Shareholders' Equity
Noninterest-bearing Deposits .................................. $ 46,320 $ 46,778 $ 51,760
Interest-bearing Deposits:
Interest Checking ......................................... 62,622 64,239 58,207
Savings Deposits .......................................... 10,327 9,119 8,849
Money Market .............................................. 52,707 29,421 25,608
Certificates of Deposit ................................... 249,556 252,641 233,310
Individual Retirement Accounts ............................ 31,991 30,004 29,620
--------- --------- ---------
Total Interest-bearing Deposits ............................... 407,203 385,424 355,594
--------- --------- ---------
Short-term Borrowings ......................................... 37,547 69,127 55,034
Notes Payable - Other ......................................... 3,385 1,846 2,342
Other Liabilities ............................................. 4,605 3,561 6,038
--------- --------- ---------
Total Liabilities ......................................... 499,060 506,736 470,768
--------- --------- ---------
Preferred Stock ............................................... 8,754 - -
Common Stock .................................................. 7,808 7,839 7,476
Additional Paid-in Capital .................................... 41,691 41,680 38,988
Retained Earnings (Deficit) ................................... (7,174) (2,549) 1,662
--------- --------- ---------
Total Shareholders' Equity ................................ 51,079 46,970 48,126
--------- --------- ---------
Total Liabilities and Shareholders'
Equity ........................................................ $ 550,139 $ 553,706 $ 518,894
========= ========= =========
4
The following is a presentation of an analysis of the net interest
income of the Company for the years ended December 31, 2009, 2008 and 2007 with
respect to each major category of interest-earning assets and each major
category of interest-bearing liabilities:
Year Ended December 31, 2009
----------------------------
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ------ ----------- ----------
Securities - Taxable ........................................ $ 73,088 $ 3,445 4.71%
Tax-Exempt ..................................... 38,242 1,498 5.94%(1)
Interest-bearing Deposits at Other Banks .................... 569 23 4.04%
Federal Funds Sold .......................................... 5,937 9 0.15%
Gross Loans (2) ............................................. 388,359 23,190 5.97%
----------- -----------
Total Earning Assets .................................... $ 506,195 $ 28,165 5.72%(1)
=========== ===========
Liabilities
Interest Checking ........................................... $ 62,622 $ 468 0.75%
Savings Deposits ............................................ 10,327 47 0.46%
Money Market ................................................ 52,707 1,126 2.14%
Certificates of Deposit ..................................... 249,556 7,205 2.89%
Individual Retirement Accounts .............................. 31,991 1,061 3.32%
----------- -----------
407,203 9,907
Short-term Borrowings ....................................... 37,547 180 0.48%
Long-term Borrowings ........................................ 3,385 181 5.38%
----------- -----------
Total Interest-bearing Liabilities ...................... $ 448,135 $ 10,270 2.29%
=========== ===========
Excess of Interest-earning Assets
over Interest-bearing Liabilities ......................... $ 58,060
===========
Net Interest Income ......................................... $ 17,895
===========
Interest Rate Spread ........................................ 3.43%(1)
Net Yield on Earning Assets (3) ............................. 3.69%(1)
(1) Yield adjusted to a fully taxable equivalent basis using a federal tax rate
of 34%.
(2) 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.
(3) Net yield on interest-earning assets is calculated by dividing net interest
income by total interest-earning assets.
5
Year Ended December 31, 2008
----------------------------
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ------ ----------- ----------
Securities - Taxable .......................................... $ 57,918 $ 3,017 5.21%
Tax-Exempt ....................................... 38,968 1,502 5.84%(1)
Interest-bearing Deposits at Other Banks ...................... 668 33 4.49%
Federal Funds Sold ............................................ 3,791 61 1.61%
Gross Loans (2) ............................................... 416,161 27,188 6.53%
-------- --------
Total Earning Assets ...................................... $517,506 $ 31,801 6.29%(1)
======== ========
Liabilities
Interest Checking ............................................. $ 64,239 $ 761 1.18%
Savings Deposits .............................................. 9,119 40 0.44%
Money Market .................................................. 29,421 731 2.48%
Certificates of Deposit ....................................... 252,641 10,298 4.08%
Individual Retirement Accounts ................................ 30,004 1,283 4.28%
-------- --------
385,424 13,113
Short-term Borrowings ......................................... 69,127 1,949 2.82%
Long-term Borrowings .......................................... 1,846 105 5.69%
-------- --------
Total Interest-bearing Liabilities ........................ $456,397 $ 15,167 3.32%
======== ========
Excess of Interest-earning Assets
over Interest-bearing Liabilities ........................... $ 61,109
========
Net Interest Income ........................................... $ 16,634
========
Interest Rate Spread .......................................... 2.97%(1)
Net Yield on Earning Assets (3) ............................... 3.36%(1)
(1) Yield adjusted to a fully taxable equivalent basis using a federal tax rate
of 34%.
(2) 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.
(3) Net yield on interest-earning assets is calculated by dividing net interest
income by total interest-earning assets.
6
Year Ended December 31, 2007
----------------------------
(dollars in thousands)
Average Interest Average
Assets Amount Earned/Paid Yield/Rate
------ ------ ----------- ----------
Securities - Taxable .......................................... $ 57,467 $ 2,994 5.21%
Tax-Exempt ....................................... 38,106 1,422 5.65%(1)
Interest-bearing Deposits at Other Banks ...................... 781 43 5.51%
Federal Funds Sold ............................................ 2,381 128 5.38%
Gross Loans (2) ............................................... 384,691 30,959 8.05%
-------- --------
Total Earning Assets ...................................... $483,426 $ 35,546 7.50%(1)
======== ========
Liabilities
Interest Checking ............................................. $ 58,207 $ 739 1.27%
Savings Deposits .............................................. 8,849 39 0.44%
Money Market .................................................. 25,608 608 2.37%
Certificates of Deposit ....................................... 233,310 11,537 4.94%
Individual Retirement Accounts ................................ 29,620 1,385 4.68%
-------- --------
355,594 14,308
Short-term Borrowings ......................................... 55,034 2,201 4.00%
Long-term Borrowings .......................................... 2,342 113 4.82%
-------- --------
Total Interest-bearing Liabilities ........................ $412,970 $ 16,622 4.02%
======== ========
Excess of Interest-earning Assets
over Interest-bearing Liabilities ........................... $ 70,456
========
Net Interest Income ........................................... $ 18,924
========
Interest Rate Spread .......................................... 3.49%(1)
Net Yield on Earning Assets (3) ............................... 4.07%(1)
(1) Yield adjusted to a fully taxable equivalent basis using a federal tax rate
of 34%.
(2) 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.
(3) Net yield on interest-earning assets is calculated by dividing net interest
income by total interest-earning assets.
7
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 in the tables below. The effect of a change in volume has
been determined by applying the average rate in the two periods to the change in
average balances between the two periods. The effect of a change in rate has
been determined by applying the average balance of the two periods to the change
in the average rate between the two periods.
Year Ended December 31,
2009 compared to 2008
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable .................................................. $ 749 $ (331) $ 418
Tax-Exempt (1) ........................................... (28) 24 (4)
Federal Funds Sold ............................................ 19 (71) (52)
Gross Loans (2) ............................................... (1,738) (2,260) (3,998)
------- ------- -------
Total Interest Income ......................................... (998) (2,638) (3,636)
------- ------- -------
Interest paid on:
Interest Checking ............................................. (16) (277) (293)
Savings Deposits .............................................. 5 2 7
Money Market .................................................. 538 (143) 395
Certificates of Deposit ....................................... (107) (2,986) (3,093)
Individual Retirement Accounts ................................ 75 (297) (222)
------- ------- -------
495 (3,701) (3,206)
Short-term Borrowings ......................................... (521) (1,248) (1,769)
Notes Payable - Other ......................................... 85 (8) 77
------- ------- -------
Total Interest Expense ........................................ 59 (4,957) (4,898)
------- ------- -------
Change in Net Interest Income ................................. $(1,057) $ 2,319 $ 1,262
======= ======= =======
(1) Tax-exempt income is shown on an actual, rather than, taxable equivalent
basis.
(2) 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.
As reflected in the table above, less interest was earned during 2009
compared to 2008 due to lower rates and decreased volume of loans and other
earning assets. Interest expense was also lower in 2009 compared to 2008 due to
lower rates and was partially offset by increased volume of deposits and other
interest-bearing liabilities. The net effect of these differences was an overall
increase in the Company's net interest income.
8
Year Ended December 31,
2008 compared to 2007
(dollars in thousands)
Change in Change in Total
Volume Rate Change
------ ---- ------
Interest earned on:
Securities
Taxable .................................................. $ 28 $ (15) $ 13
Tax-Exempt (1) ........................................... 33 47 80
Federal Funds Sold ............................................ 49 (116) (67)
Gross Loans (2) ............................................... 2,294 (6,065) (3,771)
------- ------- -------
Total Interest Income ......................................... 2,404 (6,149) (3,745)
------- ------- -------
Interest paid on:
Interest Checking ............................................. 74 (52) 22
Savings Deposits .............................................. 1 - 1
Money Market .................................................. 93 30 123
Certificates of Deposit ....................................... 872 (2,111) (1,239)
Individual Retirement Accounts ................................ 17 (119) (102)
------- ------- -------
1,057 (2,252) (1,195)
Short-term Borrowings ......................................... 480 (732) (252)
Notes Payable - Other ......................................... (26) 18 (8)
------- ------- -------
Total Interest Expense ........................................ 1,511 (2,966) (1,455)
------- ------- -------
Change in Net Interest Income ................................. $ 893 $(3,183) $(2,290)
======= ======= =======
(1) Tax-exempt income is shown on an actual, rather than, taxable equivalent
basis.
(2) 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.
As reflected in the table above, less interest was earned during 2008
compared to 2007 due to lower rates and was partially offset by increased volume
of loans and other earning assets. Interest expense was also lower in 2008
compared to 2007 due to lower rates and was partially offset by increased volume
of deposits and other interest-bearing liabilities. The net effect of these
differences was an overall decrease in the Company's net interest income.
LOAN PORTFOLIO
The Company engages, through the Banks, in a full complement of lending
activities, including commercial, consumer, installment, and real estate loans.
Types of 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
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, however, geographically concentrated primarily
9
to borrowers in the Upstate area of South Carolina. 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, 2009 approximately
$7,359,000, or 4.6% of commercial loans, were unsecured compared to
approximately $8,841,000 or 5.7% at December 31, 2008.
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 market areas. The Company does not actively pursue long-term,
fixed-rate residential mortgage loans for retention. However, the Banks do
employ mortgage loan originators who originate loans that are pre-sold at
origination to third parties.
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.
Distribution and Maturities of Loan Portfolio
Management believes the loan portfolio is adequately diversified. The
largest component of the loan portfolio continues to be loans secured by real
estate located primarily in the Upstate area of South Carolina, including
certain commercial and industrial loans secured by real estate, mortgage loans,
and construction loans. These loans represent $319,314,000 or 85.5% of total
loans at December 31, 2009, compared to $340,679,000 or 85.4% at December 31,
2008. There are no foreign loans and few if any 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 year-end for 2009, 2008,
2007, 2006 and 2005.
Loan Portfolio Composition
(dollars in thousands) December 31,
------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
Commercial and industrial - not secured by
real estate ........................................... $ 39,981 $ 43,451 $ 47,885 $ 38,505 $ 39,669
Commercial and industrial - secured by real estate ... 120,102 111,844 107,531 90,298 90,186
Real estate - mortgage .................................. 126,544 124,445 108,161 97,835 107,398
Real estate - construction .............................. 72,668 104,390 138,926 117,465 121,048
Consumer loans .......................................... 14,279 14,581 16,495 13,978 19,194
-------- -------- -------- -------- --------
Loans held for investment ............................... 373,574 398,711 418,998 358,081 377,495
Less: Allowance for loan losses ....................... 7,431 9,217 4,310 4,070 3,854
-------- -------- -------- -------- --------
Net Loans ............................................... $366,143 $389,494 $414,688 $354,011 $373,641
======== ======== ======== ======== ========
Percentage of Loans Held for Investment
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
Commercial and industrial - not secured by real estate ........ 10.70% 10.90% 11.43% 10.75% 10.51%
Commercial and industrial - secured by real estate ............. 32.15% 28.05% 25.66% 25.22% 23.89%
Real estate - mortgage ............................................ 33.88% 31.21% 25.81% 27.33% 28.45%
Real estate - construction ........................................ 19.45% 26.18% 33.16% 32.80% 32.07%
Consumer loans .................................................... 3.82% 3.66% 3.94% 3.90% 5.08%
------ ------ ------ ------ ------
Total ........................................................ 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
10
The following is a presentation of maturities of loans as of December
31, 2009:
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 .......................... $ 21,455 $ 16,250 $ 2,276 $ 39,981
Real Estate ........................................ 109,257 163,630 46,427 319,314
Consumer Loans ..................................... 5,816 8,008 455 14,279
-------- -------- -------- --------
Total .......................................... $136,528 $187,888 $ 49,158 $373,574
======== ======== ======== ========
All loans are recorded according to contractual 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, 2009, the amount of loans due after one year with
predetermined interest rates totaled approximately $142,930,000, while the
amount of loans due after one year with variable or floating interest rates
totaled approximately $94,116,000.
Non-Performing Loans and Real Estate Acquired in Settlement of Loans
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 2009 2008 2007 2006 2005
--------------------- ---- ---- ---- ---- ----
Non-performing loans:
Non-accrual loans ........................... $14,881 $16,950 $ 7,505 $ 993 $ 1,206
Past due 90 days or more .................... - - - - 10
------- ------- ------- ------- -------
Total non-performing loans .................... 14,881 16,950 7,505 993 1,216
Real estate acquired in
settlement of loans ......................... 11,490 5,428 1,023 271 2,007
------- ------- ------- ------- -------
Total non-performing assets ................... $26,371 $22,378 $ 8,528 $ 1,264 $ 3,223
======= ======= ======= ======= =======
Non-performing assets as a
percentage of loans and
real estate acquired in
settlement of loans ......................... 6.85% 5.54% 2.03% 0.35% 1.09%
Allowance for loan losses as
a percentage of non-
performing loans ............................ 50% 54% 57% 410% 317%
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 indications of problems 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, the
gross interest income that would have been recorded if the loans had been
11
current in accordance with their original terms and outstanding throughout the
period or since origination amounts to $1,101,000 for the year ended December
31, 2009. The interest on those loans that was included in net income for 2009
amounts to $3,000.
At December 31, 2009 there were $14,881,000 of non-accruing loans. The
overall increase in non-accruing loans since 2005 is primarily due to
deterioration in the residential real estate market in the Company's service
areas. For some of these non-accruing loans, management does not currently
expect any loss of principal. Where principal losses are expected, these loans
have already been written down by the expected amount of the loss. Furthermore,
management believes that the Company's allowance for loan losses is adequate to
absorb any unidentified probable losses. 96.4% of the Company's non-accruing
loans are secured by real estate.
Potential Problem Loans
As of December 31, 2009, there were no potential problem loans
classified for regulatory purposes as doubtful, substandard or special mention
that are not included in non-accruing loans, which (i) represent or result from
trends or uncertainties that 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 that causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms. As of December 31, 2009,
management had identified $26,270,000 of performing loans where information
about the borrowers or other characteristics of the loans indicated an increased
risk of non-performance justifying increased management attention.
Impaired Loans
The Company uses the practical methods to measure loan impairment
permitted by the FASB Accounting Standards Codification. A loan is impaired
when, based on current information and events, it is probable a creditor will be
unable to collect all amounts due (interest as well as principal) according to
the contractual terms of the loan agreement. A loan is also impaired when its
original terms are modified in a troubled debt restructuring. The FASB
Accounting Standards Codification 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 FASB Accounting Standards Codification when determining the
adequacy of the allowance for loan losses. When the ultimate collectibility 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 recorded as
recoveries on any amounts previously charged-off. Further cash receipts are
applied to interest income, to the extent that any interest has been foregone.
Impaired loans totaled approximately $14,746,000 at December 31, 2009 and
$16,671,000 at December 31, 2008. See also Item 8 - Financial Statements and
Supplementary Data - Note 1 - "Summary of Significant Accounting Policies and
Activities - Allowance for Loan Losses."
Impaired Loan Analysis (amounts in thousands except loan information):
2009 2008
---- ----
Outstanding Amount Outstanding Amount
# Amount Charged-off # Amount Charged-off
------------------ ----------- ------------------ -----------
Type of Loans
Commercial and Industrial ................ 2 $ 70 $ 0 0 $ 0 $ 0
Real Estate .............................. 36 14,667 4,082 20 16,659 7,092
Consumer Loans ........................... 2 9 10 1 12 10
-- ------- ------- -- ------- -------
Total ............................... 40 $14,746 $ 4,092 21 $16,671 $ 7,102
== ======= ======= == ======= =======
12
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 loan 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
borrowers' 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
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 reviews consider 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
Office of 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 regulator's credit evaluations
differing from those of management. The Company's management believes it has in
place the controls and personnel to adequately monitor its loan portfolios and
the adequacy of the allowance for loan losses.
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, 2009, the allowance for loan losses was $7,431,000, or
1.99% of gross outstanding loans, compared to $9,217,000, or 2.31% of gross
outstanding loans at December 31, 2008. During 2009, the Company experienced net
charge-offs of $6,744,000, or 1.73% of average loans, compared to net
charge-offs of $8,913,000, or 2.14% of average loans during 2008. Consumer loan
net charge-offs were $96,000 in 2009 compared to net charge-offs of $63,000 in
2008. Commercial loan net charge-offs were $405,000 in 2009 compared to net
charge-offs of $1,318,000 in 2008. Mortgage loan net charge-offs were $6,243,000
in 2009 compared to net charge-offs of $7,532,000 in 2008. It should be noted
that 2009 mortgage loan charge-offs included a specifically allocated charge
down of one loan relationship in the amount of $1.6 million. This was allocated
in the 2008 provision and charged down during the first quarter of 2009.
The Company's provision for loan losses was $4,958,000 in 2009 compared
to $13,820,000 in 2008.
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. When
increases in the overall level of non-performing and potential problem loans
13
accelerates from the current trend, management tends to adjust the methodology
for determining the allowance for loan losses, which results in increases the
provision and the allowance for loan losses. This typically decreases 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,
-----------------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
Balance at beginning of year ............................ $ 9,217 $ 4,310 $ 4,070 $ 3,854 $ 3,691
Charge-offs:
Commercial and industrial - not secured by
real estate .......................................... 459 1,360 298 118 32
Commercial and industrial - secured by real
estate ............................................... 848 901 - 138 26
Real estate - mortgage .................................. 1,161 45 210 528 327
Real estate - construction .............................. 4,419 6,659 110 150 141
Consumer loans .......................................... 102 72 88 61 178
------- ------- ------- ------- -------
6,989 9,037 706 995 704
------- ------- ------- ------- -------
Recoveries:
Commercial and industrial - not secured by
real estate .......................................... 54 42 8 - 1
Commercial and industrial - secured by real
estate ............................................... 18 5 7 37 -
Real estate - mortgage .................................. 35 - 10 165 8
Real estate - construction .............................. 132 68 8 - -
Consumer loans .......................................... 6 9 13 66 10
------- ------- ------- ------- -------
245 124 46 268 19
------- ------- ------- ------- -------
Net Charge-offs ......................................... 6,744 8,913 660 727 685
Provision for loan losses ............................... 4,958 13,820 900 943 848
------- ------- ------- ------- -------
Balance at end of year .................................. $ 7,431 $ 9,217 $ 4,310 $ 4,070 $ 3,854
======= ======= ======= ======= =======
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,
-----------------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
Net charge-offs to average loans
outstanding during the year .................... 1.74% 2.14% 0.17% 0.20% 0.19%
Net charge-offs to total loans
outstanding at end of year ..................... 1.81% 2.24% 0.16% 0.20% 0.18%
Allowance for loan losses to
average loans ................................. 1.91% 2.21% 1.12% 1.10% 1.09%
Allowance for loan losses to
total loans at end of year .................... 1.99% 2.31% 1.03% 1.14% 1.02%
Net charge-offs to allowance for
loan losses at end of year .................... 90.75% 96.70% 15.31% 17.86% 17.77%
Net charge-offs to provision
loan losses for ............................... 136.02% 64.49% 73.33% 77.09% 80.78%
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
uncollectible. Recoveries of previously charged-off loans are credited back to
the allowance.
Management considers the allowance for loan losses adequate to cover
inherent losses on the loans outstanding at December 31, 2009. In the opinion of
management, there are no material risks or significant loan concentrations,
other than loans secured by real estate, in the present portfolio. The allowance
for loan losses uses the Company's procedures and methods which include the
following risk factors, though not intended to be an all inclusive list:
14
- The impact of changes in the international, national, regional
and local economic and business conditions and developments that
affect the collectibility of the loan portfolio, including those
within our geographic market.
- The cumulative impact of the extended duration of this economic
deterioration on our borrowers, in particular those with real
estate related loans.
- Changes in the nature and volume in our loan portfolio.
- The impact of changes in the experience, ability, and depth of
the lending management and other relevant staff.
- Changes in the value of underlying collateral for
collateral-dependent loans.
- The impact of changes in the volume and severity of past due
loans, the volume of non-accrual loans, and the volume and
severity of adversely classified or graded loans.
- Changes in the quality of the Company's loan review system.
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.
The local economy continues to struggle. The housing market, including
construction and development projects, has demonstrated stress given reduced
cash flows of individual borrowers, limited bank financing and credit
availability, and slow property sales. The Company continues to diligently
assess its risk, particularly in the real estate market. The Company's special
assets department has been proactive in foreclosures actions and sales in 2009.
These actions should start to decrease the Company's non-performing assets
levels.
INVESTMENTS
The Company invests primarily in obligations of the United States of
America or obligations guaranteed as to principal and interest by the United
States of America, 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
purchasing bank.
The following table summarizes the amortized cost and market values of
investment securities held by the Company at December 31, 2009 and 2008.
Securities Portfolio Composition
(dollars in thousands)
2009 2008 2007
---- ---- ----
Amortized Market Amortized Amortized Amortized Amortized
Cost Value Cost Cost Cost Cost
---- ----- ---- ---- ---- ----
TRADING ASSETS
Other Securities ............................... $ 128 $ 128 $ 47 $ 47 $ - $ -
-------- -------- -------- -------- -------- --------
AVAILABLE FOR SALE
Government Sponsored Enterprises ............... 6,792 7,132 10,960 11,373 8,750 $ 8,974
Other Securities ............................... 64,417 66,697 55,608 57,441 49,019 49,908
State and Political Subdivisions ............... 28,950 29,398 27,199 27,189 25,839 25,914
-------- -------- -------- -------- -------- --------
Total Available for Sale ....................... 100,159 103,227 93,767 96,003 83,608 84,796
-------- -------- -------- -------- -------- --------
HELD TO MATURITY
State and Political Subdivisions ............... 8,402 8,621 12,651 12,666 13,102 13,113
-------- -------- -------- -------- -------- --------
OTHER INVESTMENTS .............................. 4,456 4,456 3,546 3,546 4,795 4,795
-------- -------- -------- -------- -------- --------
Total ................................. $113,145 $116,432 $110,011 $112,262 $101,505 $102,704
======== ======== ======== ======== ======== ========
15
The Company accounts for investments in accordance with Accounting
Standards Codification Topic 320. 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 amortized 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. Trading securities
are carried at market value. Unrealized holding gains or losses are recognized
in income.
At December 31, 2009 the Company's total investment portfolio
classified as available for sale had a book value of $100,159,000 and a market
value of $103,227,000 for an unrealized net gain of $3,068,000. The changes in
the market valuation of the investment portfolio were directly related to the
changes in market interest rates during the year. Management believes that
maintaining most of its securities in the available for sale category provides
greater flexibility in the management of the overall investment portfolio. In
cases where the market value is less than book value, the Company has the
ability and intent to hold these securities until the value recovers or the
securities mature.
The following table indicates the respective maturities and
weighted-average yields of securities as of December 31, 2009:
Securities Maturity Schedule
(dollars in thousands)
Amortized Weighted
Cost Average Yield**
---- ---------------
TRADING ASSETS
Other Securities
Greater than 10 Years ....................................................... $ 128 0.00%
========
AVAILABLE FOR SALE
Government sponsored enterprises and other securities:
0-1 Years ................................................................... $ 1,410 6.19%
1-5 Years ................................................................... 55,163 5.23%
5-10 Years .................................................................. 9,939 5.34%
Greater than 10 Years ....................................................... 4,697 5.34%
--------
71,209 5.20%
--------
State and political subdivisions:
1-5 Years ................................................................... 457 6.08%
5-10 Years .................................................................. 4,327 5.94%*
Greater than 10 Years ....................................................... 24,166 6.17%*
--------
28,950 6.02%*
--------
Other investments
No contractual maturity ............................................... 4,456 n/a
--------
Total .............................................................. $104,615 5.66%*
========
HELD TO MATURITY State and political subdivisions:
0-1 Year .................................................................... $ 596 4.86%*
1-5 Years ................................................................... 3,117 4.89%*
5-10 Years .................................................................. 3,260 5.87%*
Greater than 10 Years ....................................................... 1,429 6.54%*
--------
Total .............................................................. $ 8,402 5.66%*
========
* Yield adjusted to 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.
16
DEPOSITS
The Company offers a full range of interest-bearing and
noninterest-bearing deposit 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 primary 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
Internet and brokered deposits are generally more volatile than deposits
acquired in the local market areas. There were no Internet deposits at December
31, 2009 or December 31, 2008. There were $59,565,000 and $77,411,000 of
brokered deposits at December 31, 2009 and December 31, 2008, respectively.
Traditional brokered time deposits decreased $19,410,000 or 43.6% from
$44,458,000 at December 31, 2008 to $25,048,000 at December 31, 2009. Brokered
time deposits, within the Certificate of Deposit Account Registry Service
("CDARS"), grew $1,564,000 or 4.7% from $32,953,000 at December 31, 2008 to
$34,517,000 at December 31, 2009. All of the Company's deposits under the CDARS
program are retail in nature and originate from the Banks' customer base. The
Company considers these funds to be an attractive alternative funding source
available for use while it continues efforts to maintain and grow its local
deposit base.
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.
The Company's average deposits in 2009 were $453,523,000 compared to
$432,202,000 the prior year, an increase of $21,321,000 or 4.9%. In 2009 the
average noninterest-bearing deposits decreased approximately $458,000 or 1.0%,
average interest-bearing checking accounts decreased $1,617,000 or 2.5%, average
savings accounts increased $1,208,000 or 13.3%, average money market accounts
increased $23,286,000 or 79.2%, average certificates of deposit decreased
$3,085,000 or 1.2%, and individual retirement accounts increased $1,987,000 or
6.6%. 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, 2009,
2008 and 2007, 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)
2009 2008 2007 2009 2008 2007
---- ---- ---- ---- ---- ----
Noninterest-bearing Deposits ...................... $ 46,320 $ 46,778 $ 51,760 - - -
Interest-bearing Deposits
Interest Checking ............................. 62,622 64,239 58,207 0.75% 1.18% 1.27%
Savings Deposits .............................. 10,327 9,119 8,849 0.46% 0.44% 0.44%
Money Market .................................. 52,707 29,421 25,608 2.14% 2.48% 2.37%
Certificates of Deposit ....................... 249,556 252,641 233,310 2.89% 4.08% 4.94%
Individual Retirement Accounts ................ 31,991 30,044 29,620 3.32% 4.28% 4.68%
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 still continue to provide the Company with a large and stable source of
funds. Core deposits as a percentage of average total deposits averaged
approximately 78% in 2009 and 2008. The Company closely monitors its reliance on
17
certificates of deposits greater than $100,000, which are generally considered
less stable and less reliable than core deposits.
The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities as of December 31,
2009:
Time Certificates of Deposit
----------------------------
(dollars in thousands)
3 months or less .............. $ 33,629
4-6 months .................... 33,759
7-12 months ................... 28,585
Over 12 months ................ 15,739
------------
Total ................ $ 111,712
============
RETURN ON EQUITY AND ASSETS
Returns on average consolidated assets and average consolidated equity
for the years ended December 31, 2009 and 2008 are as follows:
2009 2008 2007
----- ----- -----
Return on average assets ..................... 0.06% -1.51% 0.84%
Return on average total equity ............... 0.63% -17.83% 9.03%
Return on average common equity .............. -0.53% -17.83% 9.03%
Average equity to average assets ratio ....... 9.28% 8.48% 9.27%
Dividend payout ratio:
Preferred stock ............................ 120.31% (1) (1)
Common stock ............................... (2) -12.66% 31.04%
----------------------
(1) Preferred stock was issued in 2009. (2) No cash dividends were paid on
common stock in 2009.
SHORT-TERM BORROWINGS
The following table summarizes the Company's short-term borrowings for
the years ended December 31, 2009 and 2008. 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)
2009:
-----
Federal funds purchased .................................. $ 399 $ 226 0.83% $ 399 0.19%
Securities sold under repurchase agreements .............. $19,671 $16,122 0.53% $12,785 0.52%
Advances from Federal Home Loan Bank ..................... $49,500 $21,315 0.44% $ - 0.36%
2008:
----
Federal funds purchased .................................. $ 4,197 $ 649 2.44% $ 1,028 1.26%
Securities sold under repurchase agreements .............. $25,557 $20,832 1.56% $22,181 0.70%
Advances from Federal Home Loan Bank ..................... $71,700 $47,646 3.37% $34,600 0.46%
2007:
----
Federal funds purchased .................................. $ 2,960 $ 1,137 5.21% $ 429 4.76%
Securities sold under repurchase agreements .............. $23,229 $20,648 1.92% $19,824 1.82%
Advances from Federal Home Loan Bank ..................... $65,100 $33,249 5.59% $65,100 4.40%
18
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
rates and equity prices. The Company's primary type of market 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.
The Company seeks to achieve this objective 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.
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. According to the model, as of December 31, 2009
the Company was positioned so that net interest income would increase by
approximately $479,000 in the next twelve months if market interest rates were
to gradually rise by 100 basis points over the same period. Conversely, net
interest income would decline by approximately $21,000 in the next twelve months
if interest rates were to gradually decline by 100 basis points. Computation of
prospective effects of hypothetical interest-rate changes are based on numerous
assumptions, including relative levels of market interest rates and loan
prepayment, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate all of the actions the Company and
its customers could undertake in response to changes in interest rates.
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.
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.
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,
2009 the Banks in aggregate had unused federal funds lines of credit totaling
$21,101,000 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, 2009 the Banks in the
aggregate had no long-term borrowings, no short-term borrowings, and $65,310,000
in unused borrowing capacity from the Federal Home Loan Bank of Atlanta. The
19
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 them. The unused borrowing capacity currently available
assumes that the Banks' $3,629,000 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.
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
at each subsidiary bank. In 2008, the Company obtained a $15,000,000 line of
credit from a correspondent bank to enable it to inject additional capital into
the Banks. The Company subsequently drew on this line of credit and injected a
total of $11,500,000 into its three banks. At December 31, 2008 the line of
credit had an outstanding balance of $11,000,000, which the Company repaid in
full in April 2009, using a portion of the proceeds of the sale of preferred
stock to the U. S. Treasury, pursuant to its Capital Purchase Program. In
December 2009, the Company cancelled the line of credit.
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, 2009, unfunded commitments to extend credit were $70,731,000, of
which $65,435,000 were at variable rates and $5,296,000 were at fixed rates.
These commitments included $4,651,000 of unfunded amounts of construction loans,
$47,179,000 of undisbursed amounts of home equity lines of credit, $12,436,000
of unfunded amounts under commercial lines of credit, and $6,465,000 of other
commitments to extend credit. The Company evaluates each customer's
creditworthiness 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, and
commercial and residential real estate.
At December 31, 2009 the Banks had issued commitments to extend credit
through various types of arrangements, described further in the table below.
December 31, 2009
-----------------
(dollars in thousands)
Unused Commitments
Lines of credit secured by residential properties .... $ 47,303
Lines of credit secured by commercial properties ..... 5,509
Other unused commitments ............................. 17,919
--------------
Total ............................................. $ 70,731
==============
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.
20
In addition to commitments to extend credit, the Banks also issue
letters of credit. A letter of credit is an assurance to a third party that it
will not suffer a loss if the Bank's customer fails to meet its contractual
obligation to the third party. At December 31, 2009, $2,953,000 was committed
under letters of credit. Past experience indicates that many of these 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 letters of credit. The Company believes that the risk of loss associated
with letters of credit is comparable to the risk of loss associated with its
loan portfolio. Moreover, the fair value associated with any letters of credit
issued by the Company is immaterial to the Company.
Neither the Company nor its subsidiaries are involved in any other
off-balance sheet arrangements or transactions that could result in liquidity
needs or other commitments or significantly impact earnings. The Company did not
have any obligations under non-cancelable operating lease agreements at December
31, 2009. Refer to Note 12 and Note 13 of the Company's consolidated financial
statements for a discussion of financial instruments with off-balance sheet risk
and commitments and contingencies.
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, as well as the
sale of Fixed Rate Cumulative Perpetual Preferred Stock to the U. S. Treasury,
pursuant to its Capital Purchase Program.
For publicly held bank holding companies, such as the Company, capital
adequacy is evaluated on a consolidated basis. The Company's banking
subsidiaries must separately meet additional regulatory capital requirements
imposed by the Office of the Comptroller of the Currency (the "Comptroller").
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 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's regulations establish the minimum leverage capital
ratio (Tier 1 capital to adjusted total assets) 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 growth or expansion. For all other
national banks, the minimum leverage capital ratio requirement is 4%.
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.
On October 15, 2008, one the Company's bank subsidiaries, entered into
a formal agreement with the Comptroller for the bank to take various actions
with respect to the operation of the bank. For further discussion of this
agreement see footnote 1 to the table below and Item 8 - Financial Statements
and Supplementary Data- "NOTE 19 - REGULATORY MATTERS".
21
The Company's and Banks' capital ratios are presented as follows:
December 31,
2009 2008
----- -----
Peoples Bancorporation, Inc.
Risk-based capital ratio 13.67% 10.77%
Tier 1 capital (to risk weighted assets) 12.41% 9.49%
Tier 1 capital (to adjusted total assets) 9.03% 7.33%
Peoples National Bank
Risk-based capital ratio 12.87% 12.44%
Tier 1 capital (to risk weighted assets) 11.61% 11.15%
Tier 1 capital (to adjusted total assets) 8.73% 9.06%
Bank of Anderson (1)
Risk-based capital ratio 15.16% 15.27%
Tier 1 capital (to risk weighted assets) 13.90% 14.02%
Tier 1 capital (to adjusted total assets) 9.01% 9.58%
Seneca National Bank
Risk-based capital ratio 12.31% 14.44%
Tier 1 capital (to risk weighted assets) 11.05% 13.19%
Tier 1 capital (to adjusted total assets) 8.08% 9.76%
(1) On October 23, 2008 Bank of Anderson, N.A. was notified by the Comptroller
that it must maintain the following minimum capital ratios: Tier-1 capital of at
least 8% of adjusted total assets, Tier-1 capital of at least 10% of
risk-weighted assets, and total risk-based capital of at least 12% of
risk-weighted assets.
See Item 8 - Financial Statements and Supplementary Data, Note 19, for
more information about regulatory capital ratios.
PAYMENT OF DIVIDENDS
Payment of dividends by the Company is within the discretion of its
Board of Directors subject to certain regulatory requirements. The Company's
primary sources of funds with which to pay dividends to shareholders are the
dividends it receives from the Banks.
The directors of a national bank may declare a dividend of so much of
the undivided profits of the bank as the directors judge to be expedient,
subject to certain limitations. A national bank may not declare and pay
dividends in any year in excess of an amount equal to the sum of the total of
the net income of the bank for that year and the retained net income of the bank
for the preceding two years, minus the sum of any transfers required by the
Comptroller and any transfers required to be made to a fund for the retirement
of any preferred stock, unless the Comptroller approves the declaration and
payment of dividends in excess of such amount.
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.
22
The Company has outstanding shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series T and Series W (the "Preferred Stock"), which is owned
by the U. S. Treasury pursuant to its Capital Purchase Program. The Company
declared and paid $385,000 in preferred stock dividends to the U.S. Treasury in
2009. The terms of the Preferred Stock limit the Company's ability to pay common
stock dividends or make repurchases of common stock under certain circumstances.
The Company did not pay any cash dividends to its common shareholders in 2009.
For further information see Item 8 - Financial Statements and
Supplementary Data - "NOTE 16 - PREFERRED STOCK AND RESTRICTIONS ON DIVIDENDS ."
In 2009, the Company sold 12,660 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series T (the "Series T Stock") and 633 shares of
Fixed Rate Cumulative Perpetual Preferred Stock, Series W (the "Series W Stock")
to the U. S. Treasury, pursuant to its Capital Purchase Program. The annual
dividend on the Series T Stock is 5% for the first five years and 9% thereafter.
The annual dividend on the Series W stock is 9%. The cumulative dividend for the
preferred stock is accrued and payable on February 15, May 15, August 15 and
November 15 of each year. The Company declared and paid $385,000 in preferred
stock dividends to the U.S. Treasury in 2009. Other terms of the Series T Stock
and the Series W Stock limit the Company's ability to pay common stock dividends
or make repurchases of common stock under certain circumstances. The Company did
not pay cash dividends to its common shareholders in 2009.
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 principles 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 effect 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.
23
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 South
Carolina Bank and Trust, N.A., Columbia, South Carolina; CenterState Bank, N.A.,
Winter Haven, Florida; Community Bankers Bank, Midlothian, Virginia; and Wells
Fargo, N.A., Charlotte, North Carolina. As compensation for services provided by
correspondents, the Banks may maintain certain balances with such correspondents
in non-interest bearing accounts.
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.
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. Relevant information about the regulatory framework
that applies to the Company and the Banks is provided below. This regulatory
framework is intended primarily for the benefit and protection of the Banks'
depositors and the Depository Insurance Fund, and not for the protection of the
Company's shareholders or creditors.
Financial institutions are being subjected to increased scrutiny and
enforcement activity by state and federal banking agencies, the United States
Department of Justice, the Securities and Exchange Commission, and other state
and federal regulatory agencies. This increased scrutiny and enforcement
activity entails significant potential increases in compliance requirements and
associated costs.
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 Federal Reserve Board,
the Comptroller and 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 examinations 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 or engaged in permissible activities 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, directly or through subsidiaries, 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
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 of America, the states and their political subdivisions. The BHCA also
24
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 bank 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 used any of the additional
powers, and in 2008 the Company changed its status back to that of a bank
holding company. 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, or merging with a
South Carolina bank holding company. 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 the
Deposit Insurance Fund 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 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 Deposit Insurance Fund.
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.
25
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Comptroller is authorized to require
payment of the deficiency by assessment upon the bank's shareholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
shareholder after three months notice, to sell the stock of such shareholder to
make good the deficiency.
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 Item
1 - Business - "CAPITAL ADEQUACY AND RESOURCES"). Failure to meet capital
guidelines could subject the Banks to a variety of enforcement remedies,
ranging, for example, from a prohibition on the taking of brokered deposits to
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
must 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
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, 2009. On October 23, 2008, Bank of Anderson, N.A.
was notified by the Comptroller that it must maintain the following minimum
capital ratios: Tier-1 capital of at least 8% of adjusted total assets, Tier-1
capital of at least 10% of risk-weighted assets, and total risk-based capital of
at least 12% of risk-weighted assets.
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 "Item 1 - Business -- PAYMENT OF
DIVIDENDS" above.
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
26
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;
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 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. The Banks are also subject to
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 USA Patriot Act,
dealing with, among other things, requiring the establishment of anti-money
laundering programs including standards for verifying customer information at
account opening.
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 the
national banking laws may require.
FDIC Insurance Assessments
The FDIC merged the Bank Insurance Fund and the Savings Association
Insurance Fund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in
accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC
maintains the DIF by assessing depository institutions an insurance premium. The
amount each institution is assessed is based upon statutory factors that include
the balance of insured deposits as well as the degree of risk the institution
poses to the insurance fund. The FDIC uses a risk-based premium system that
27
assesses higher rates on those institutions that pose greater risks to the DIF.
Under rules adopted by the FDIC in November 2006, beginning January 1, 2007, the
FDIC placed each institution in one of four risk categories using a two-step
process based first on capital ratios (the capital group assignment) and then on
other relevant information (the supervisory group assignment). As a result of
the actual and predicted impact on the DIF of bank failures in 2008 and 2009,
the FDIC has altered its methodology for computing assessments, beginning with
assessments due in September 2009 based on assessable deposits at June 30, 2009.
Under the new methodology, assessments will range between 7 and 77.5 cents per
$100 in assessable deposits.
During the first quarter of 2009, the FDIC announced a special one-time
emergency assessment. The Company's bank subsidiaries paid $245,000 on September
30, 2009 for the one-time emergency assessment. On November 12, 2009, the FDIC
Board of Directors adopted a final rule requiring insured depository
institutions to prepay their quarterly risk-based deposit insurance assessment
for all of 2010, 2011 and 2012. On December 31, 2009, the Banks paid $3,981,000
for these quarterly assessments, of which $3,517,000 was booked as a prepaid
expense. The FDIC also voted to adopt a uniform three-basis point increase in
assessment rates effective January 1, 2011.
Legislation enacted in 1996 also required that 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.
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 the prompt
corrective action provisions of the FDIA: restricting payment of capital
distributions and management fees; requiring the FDIC to monitor the condition
of the bank; prohibiting the acceptance of employee benefit plan deposits;
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 additionally
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. Pursuant to a formal
agreement with the Comptroller, Bank of Anderson, N.A. may not accept brokered
deposits without the prior written advice of no supervisory objection from the
Assistant Deputy Comptroller.
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
28
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
permits 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
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"), makes it easier for
affiliations between banks, securities firms and insurance companies to take
place, 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 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 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
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.
29
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
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 had not yet used that status to engage in any activities that
are not also permissible for bank holding companies, and changed its status back
to that of a bank holding company in 2008. 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 related regulations pursuant to the requirements of the
Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's related 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 the Sarbanes-Oxley Act and the related SEC
regulations in ways that are materially different or more onerous than those of
other public companies of similar size and in similar businesses.
Governmental Response to 2008 Financial Crisis
During the fourth quarter of 2008 and continuing into 2009 the FDIC,
the Federal Reserve, the Department of the Treasury and Congress took a number
of actions designed to alleviate or correct mounting problems in the financial
services industry. A number of these initiatives were directly applicable to
community banks.
Congress enacted the Emergency Economic Stabilization Act of 2008
which, among other things, temporarily increased the maximum amount of FDIC
deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief
Program ("TARP") administered by Treasury. In October 2008, Treasury announced a
Capital Purchase Program ("CPP") under TARP to increase the capital of healthy
banks. Under the CPP, Treasury purchased preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighted assets as of September 30, 2008. The Company filed an application
which received approval, and in 2009 the Company sold preferred stock and
warrants to the Treasury for $12,660,000.
The FDIC also implemented in October 2008 a Temporary Liquidity
Guarantee Program consisting of a deposit insurance component pursuant to which
it undertook to provide deposit insurance in an unlimited amount for
non-interest bearing transaction accounts, and a debt guarantee component
pursuant to which it undertook to fully guarantee senior, unsecured debt issued
by banks or bank holding companies. Coverage of both components was automatic
until December 5, 2008, at which time covered institutions could opt out of one
or both of the components. Institutions not opting out would be charged fees for
their participation in the components. The Bank did not opt out of either
component.
An unfortunate consequence of the difficulties that have beset the
banking industry in the last two years has been a large increase in bank
failures, which has led to substantial claims being made against the FDIC's
Deposit Insurance Fund. In order to increase the amount in the DIF to reflect
the increased risk of additional bank failures and insurance claims, the FDIC
has raised its assessments on banks for 2009, issued a special one-time
30
assessment of 5 cents per $100 of assessable deposits paid in September, 2009
based on deposits at June 30, 2009, and adopted a final rule requiring insured
depository institutions to prepay their quarterly risk-based deposit insurance
assessments through 2012 on December 31, 2009. The Banks paid FDIC insurance in
the amount of $4,814,000 in 2009 and expensed $1,297,000 in 2009. See also
"--FDIC Insurance Assessments."
Additional governmental efforts to ameliorate the problems afflicting
the banking industry have been adopted or proposed, or are being considered by
Congress and various governmental entities. The Company is presently unable to
predict the impact of any such changes, although it appears that they are likely
to increase operating expenses in the near term without creating completely
offsetting benefits.
Legislative Proposals
Proposed legislation that could significantly affect the business of
banking is introduced in Congress and the General Assembly of South Carolina
from time to time. For example, numerous bills are pending in Congress and the
South Carolina Legislature to provide various forms of relief to homeowners from
foreclosure of mortgages as a result of publicity surrounding economic problems
resulting from subprime mortgage lending and the economic adjustments in
national real estate markets. Broader problems in the financial sector of the
economy, which became apparent in 2008, have led to numerous calls for, and
legislative and regulatory proposals for, restructuring of the regulation of
financial institutions. 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 115 full-time and 17 part-time
persons as of December 31, 2009. Management believes that its employee relations
are good.
EXECUTIVE OFFICERS
The executive officers of the Company are R. Riggie Ridgeway, Chief
Executive Officer; L. Andrew Westbrook, III, President and Chief Operating
Officer; William B. West, Executive Vice President and Treasurer; Robert E. Dye,
Jr., Senior Vice President, Chief Financial Officer and Secretary. Information
about all of the executive officers is set forth in Item 10, Part III of this
report on Form 10-K.
AVAILABLE INFORMATION
The Company electronically files with the Securities and Exchange
Commission ("SEC") its annual reports on Form 10-K, its quarterly reports on
Form 10-Q, its current reports on Form 8-K, amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the
"1934 Act"), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC
maintains a site on the Internet at www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC. The Company also makes its filings available, free
of charge, upon written request to Ms. Patricia A. Jensen, Senior Vice
President, Peoples Bancorporation, Inc., P.O. Box 1989, Easley, South Carolina
29641.
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ITEM 1 A. RISK FACTORS
Risks Related to Our Business
There can be no assurance that recent government actions will help stabilize the
U.S. financial system.
In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, various branches and agencies of the U.S. government
have put in place laws, regulations and programs to address capital and
liquidity issues in the banking system. There can be no assurance, however, as
to the actual impact that such laws, regulations and programs will have on the
financial markets, including the extreme levels of volatility, liquidity and
confidence issues, and limited credit availability currently being experienced.
The failure of such laws, regulations and programs to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock.
Recent levels of market volatility are unprecedented.
The volatility and disruption of financial and credit markets has
reached unprecedented levels for recent times. In some cases, the markets have
produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers' underlying financial strength. If
recent levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including
brokers, dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral we hold cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
Our primary source of funding for our operations is deposits from
customers in our local market. Should other banks in or near our market areas
fail, it could cause our deposit customers to lose confidence in banks and cause
them to withdraw or substantially restrict their deposits with us. If such
activity reached a high enough level, it could substantially disrupt our
business. There is no assurance that such disruptions, were they to occur, would
not materially and adversely affect our results of operations or earnings.
Current market developments may adversely affect our industry, business and
results of operations.
Dramatic declines in the housing market during the prior two years,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but spreading
to credit default swaps, other derivative securities, and mortgage loans have
caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in
32
some cases, ceased to provide funding to borrowers, including other financial
institutions. The resulting lack of available credit, lack of confidence in the
financial sector, increased volatility in the financial markets and reduced
business activity could materially and adversely, directly or indirectly, affect
our business, financial condition and results of operations.
We depend on the services of a number of key personnel, and a loss of any of
those personnel could disrupt our operations and result in reduced revenues.
The success of our business depends to a great extent on our customer
relationships. Our growth and development to date have depended in large part on
the efforts of our senior management team. A number of these senior officers
have primary contact with our customers and are extremely important in
maintaining personalized relationships with our customer base, a key aspect of
our business strategy, and in increasing our market presence. The unexpected
loss of services of one or more of these key employees could have a material
adverse effect on our operations and possibly result in reduced revenues if we
were unable to find suitable replacements promptly.
We may be unable to successfully manage our future growth.
Our future profitability will depend in part on our ability to manage
growth successfully. Our ability to manage growth successfully will depend on
our ability to maintain cost controls and asset quality while attracting
additional loans and deposits, as well as on factors beyond our control, such as
economic conditions and interest rate trends. If we grow too quickly and are not
able to control costs and maintain asset quality, growth could materially
adversely affect our financial performance.
Our continued ability to grow or regulatory requirements may require us to raise
additional capital in the future, but that capital may not be available when it
is needed or be available on favorable terms.
We anticipate that our current capital resources will satisfy our
capital requirements for the immediate future. Nevertheless, we may need to
raise additional capital to support additional growth or to meet regulatory
requirements. Our ability to raise additional capital, if needed, will depend,
among other things, on conditions in the capital markets at that time, which are
outside our control, and on our financial condition and performance. If we
cannot raise additional capital on acceptable terms when needed, our ability to
further expand our operations through internal growth and acquisitions could be
limited.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue producing business is making loans. When loans
are not repaid, we suffer losses. Even though we maintain an allowance for loan
losses, the amount of the allowance may not be adequate to cover the losses we
experience. We attempt to mitigate this risk by a thorough review of the
creditworthiness of loan customers. Nevertheless, there is risk that our credit
evaluations will prove to be inaccurate due to changed circumstances or
otherwise.
Our business is concentrated in the Upstate area of South Carolina, and, as has
been the case over the prior two years, a downturn in the economy of the area, a
decline in area real estate values or other events in our market area may
adversely affect our business.
Substantially all of our business is located in the Upstate area of
South Carolina. As a result, our financial condition and results of operations
are likely to be affected by changes in the Upstate economy. As has been the
case over the prior two years, a prolonged period of economic recession, a
continuing decline in real estate values in our market area or other adverse
economic conditions in the Upstate and South Carolina may result in decreases in
demand for our services, increases in nonpayment of loans and decreases in the
value of collateral securing loans, which could have a material adverse effect
33
on our business, future prospects, financial condition or results of operations.
The longer such adverse economic conditions persist, the greater the adverse
impact on us will be.
We face strong competition from larger, more established competitors, which may
adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating
in the Upstate area of South Carolina. In the conduct of our business, we also
compete with credit unions, insurance companies, money market mutual funds and
other financial institutions, some of which are not subject to the same degree
of regulation as we are. Many of these competitors have substantially greater
resources and lending abilities than we have and offer services, such as
investment banking, trust and international banking services that we do not
provide. We believe that we have competed, and will continue to be able to
compete, effectively with these institutions because of our experienced bankers
and personalized service, as well as through loan participations and other
strategies and techniques. However, we cannot promise that we are correct in our
belief. If we are wrong, our ability to operate profitably may be negatively
affected.
Technological changes affect our business, and we may have fewer resources than
many of our competitors to invest in technological improvements.
The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.
Our profitability and liquidity may be affected by changes in interest rates and
economic conditions.
Our profitability depends upon our net interest income, which is the
difference between interest earned on our earning assets, such as loans and
investment securities, and interest expense on interest-bearing liabilities,
such as deposits and borrowings. Our net interest income will be adversely
affected if market interest rates change such that the interest we pay on
deposits and borrowings increases faster than the interest earned on loans and
investments, or, conversely, if the interest earned on loans and investments
decreases faster than the interest we pay on deposits and borrowings. Interest
rates, and consequently our results of operations, are affected by general
economic conditions (domestic and foreign) and fiscal and monetary policies.
Monetary and fiscal policies may materially affect the level and direction of
interest rates. Beginning in June 2004 through June 2006, the Federal Reserve
raised short-term interest rates seventeen times for a total increase of 4.25%.
Increases in interest rates generally decrease the market values of interest
earning investments and loans held and therefore may adversely affect our
liquidity and earnings. Increased interest rates also generally affect the
volume of mortgage loan originations, the resale value of mortgage loans
originated for resale, and the ability of borrowers to perform under existing
loans of all types. Since September 18, 2007, the Federal Reserve has decreased
interest rates significantly to near zero percent in 2009. Decreases in interest
rates generally have the opposite effect on market values of interest-bearing
assets, the volume of mortgage loan originations, the resale value of mortgage
loans originated for resale, and the ability of borrowers to perform under
existing loans of all types from the effect of increases in interest rates.
Failure of one of our subsidiary banks to comply with the terms of a Formal
Agreement with the Comptroller could result in penalties and more stringent
enforcement action against that bank.
34
One of our Banks, Bank of Anderson, N. A., has entered into a Formal
Agreement with the Comptroller to take various actions required by the
Comptroller. Failure of the Bank to fully comply with all of the terms of the
Formal Agreement could result in the Comptroller's taking more stringent
enforcement actions against the Bank, including the imposition of civil money
penalties, the imposition of a cease and desist order or, in an extreme case,
the appointment of a receiver or revocation of the Bank's charter. Such action
by the Comptroller could have a material adverse effect on our financial
condition or results of operation.
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may make the prompt
execution of sale transactions difficult.
Our common stock is not traded on any exchange. Although our common
stock is traded over-the-counter and quotations of bid and ask information are
provided by the National Association of Securities Dealers, Inc.'s OTC Bulletin
Board, no active trading market has developed and none is expected to develop in
the foreseeable future. Accordingly, if you wish to sell shares you may
experience a delay or have to sell them at a lower price in order to sell them
promptly, if at all.
We may issue additional securities, which could affect the market price of our
common stock and dilute your ownership.
We may issue additional securities to raise additional capital to
support growth, offset losses, redeem our preferred stock, or to make
acquisitions. Sales of a substantial number of shares of our preferred stock or
our common stock, or the perception by the market that those sales could occur,
could cause the market price of our common stock to decline or could make it
more difficult for us to raise capital through the sale of common stock or to
use our common stock in future acquisitions.
The Series T and W Preferred Stock impact net income available to our common
shareholders and earnings per common share.
The dividends declared on the Series T and Series W Preferred Stock
will reduce the net income available to common shareholders and our earnings per
common share. The Series T and W Preferred Stock will also receive preferential
treatment in the event of liquidation, dissolution or winding up of the company.
Moreover, the securities purchase agreement between us and the Treasury pursuant
to the CPP provides that prior to the earlier of (i) three years from the date
of sale and (ii) the date on which all of the shares of the preferred stock have
been redeemed by us or transferred by the Treasury to third parties, we may not,
without the consent of the Treasury, (a) increase the cash dividend on our
common stock.
We may need to raise additional capital in the future to redeem the Series T and
W Preferred Stock or to support further growth, but that capital may not be
available when it is needed.
We are required by regulatory authorities to maintain adequate levels
of capital to support our operations. To support our continued growth, we may
need to raise additional capital. In addition, when we intend to redeem the
Series T and W Preferred Stock that we issued to the Treasury Department we may
need to raise additional capital to do so. Our ability to raise additional
capital, if needed, will depend in part on conditions in the capital markets at
that time, which are outside our control. Accordingly, we cannot assure you of
our ability to raise additional capital, if needed, on terms acceptable to us.
If we cannot raise additional capital when needed, our ability to further expand
our operations through internal growth and acquisitions could be materially
impaired. In addition, if we decide to raise additional equity capital, your
interest could be diluted.
There is no guarantee we will to pay cash dividends in the future at any level.
Declaration and payment of dividends are within the discretion of our
board of directors. Our Banks are currently our only source of funds with which
35
to pay cash dividends. Our Banks' declaration and payment of future dividends to
us are within the discretion of the Banks' boards of directors, and are
dependent upon their earnings, financial condition, their need to retain
earnings for use in the business and any other pertinent factors. The Banks'
payment of dividends is also subject to various regulatory requirements and the
ability of the Banks' regulators to forbid or limit their payment of dividends.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. The
provisions include staggered terms for our board of directors and requirements
of supermajority votes to approve certain business transactions. In addition,
South Carolina law contains several provisions that may make it more difficult
for a third party to acquire control of us without the approval of our board of
directors, and may make it more difficult or expensive for a third party to
acquire a majority of our outstanding common stock. To the extent that these
provisions are effective in discouraging or preventing takeover attempts, they
may tend to reduce the market price for our stock.
Our common stock is not insured, so you could lose your total investment.
Our common stock is not a deposit, savings account or obligation of our
banks and is not insured by the Federal Deposit Insurance Corporation or any
other government agency. Should our business fail you could lose your total
investment.
Risks Related to Our Industry
We are subject to governmental regulation, which could change and increase our
cost of doing business or have an adverse effect on our business.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Most of this regulation is designed to protect our depositors
and other customers, not our shareholders. Our compliance with the requirements
of these agencies is costly and may limit our growth and restrict certain of our
activities, including, payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, and locations of offices. We are
also subject to capitalization guidelines established by federal authorities and
our failure to meet those guidelines could result in limitations being imposed
on our activities or, in an extreme case, in one or more of our banks being
placed in receivership. We are also subject to the extensive and expensive
requirements imposed on public companies by the Sarbanes-Oxley Act of 2002 and
related regulations.
Various laws, including the Federal Deposit Insurance Act and the
Emergency Economic Stability Act of 2008 ("EESA"), and related regulations are
structured to spread the governmental costs of problems in the financial
industry broadly over the financial industry in order to prevent the taxpayers
from having to pay such costs. As a result, assessments by the FDIC to pay for
deposit insurance have increased, and will likely continue to increase,
substantially, and the total our banks will be required to pay could increase
enough to materially affect our income and our ability to operate profitably.
Additionally, EESA contains a provision for the financial industry to be
required to absorb, in an as yet undetermined fashion, any losses suffered by
the government on account of its acquiring troubled assets under the Troubled
Assets Relief Program of EESA.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
36
We are susceptible to changes in monetary policy and other economic factors,
which may adversely affect our ability to operate profitably.
Changes in governmental, economic and monetary policies may affect the
ability of our banks to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and affect our
ability to operate profitably.
ITEM 1 B. UNRESOLVED STAFF COMMENTS
The Company is not an accelerated filer or a large accelerated filer
and has not received any comments from the Securities and Exchange Commission
regarding its current or periodic reports in the 180 days prior to December 31,
2009.
37
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, 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
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, adjacent to the Company's corporate
office. 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 five branch facilities: one
in Powdersville, South Carolina located at 4 Hood Road 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 at 424 Hampton Avenue 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; a third branch office in Easley
located at 1053 Pendleton Street 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; a fourth branch office in Greenville,
South Carolina located at 300 Mills Avenue approximately ten miles east of the
Bank's main office containing approximately 1,600 square feet in a one-story
brick building situated on 0.574 acres of land; and a fifth branch office in
Greenville, South Carolina located at 45 East Antrim Drive approximately
thirteen miles east of the Bank's main office containing approximately 7,000
square feet in a two-story brick building situated on 1.321 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.
Bank of Anderson owns and operates one branch facility in Anderson
County, South Carolina located at 1434 Pearman Dairy Road approximately five
38
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.
Bank of Anderson owns a 0.99 acre lot, without improvements, on Highway
81 North in Anderson County, South Carolina for the purpose of building an
additional branch facility in the future.
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.
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. (REMOVED AND RESERVED).
39
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 OTC Bulletin Board
under the symbol "PBCE.OB." The reported high and low bid prices for each
quarter of 2009 and 2008 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. There is not an active
trading market for our common stock.
Quarter Ended Low High
------------- --- ----
March 31, 2009 .................... $ 1.35 $ 3.50
June 30, 2009 ..................... $ 2.55 $ 3.75
September 30, 2009 ................ $ 2.70 $ 3.10
December 31, 2009 ................. $ 2.05 $ 3.25
March 31, 2008 .................... $ 7.40 $ 9.25
June 30, 2008 ..................... $ 6.00 $ 8.00
September 30, 2008 ................ $ 4.75 $ 7.50
December 31, 2008 ................. $ 1.50 $ 6.00
As of March 22, 2010, the number of holders of record of the Company's
common stock was 962 and the number of issued and outstanding shares was
7,003,003.
During 2009 the Company paid dividends of $385,000 on its preferred
stock to the U.S. Treasury pursuant to the Capital Purchase Program. The Company
paid no cash dividends to its common shareholders in 2009. In prior years cash
dividends were paid to common shareholders at the discretion of the Board of
Directors.
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,
January 4, 2005, December 30, 2005, January 5, 2007 and January 4, 2008 the
Company paid 5% stock dividends to common shareholders.
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 -- Business, "PAYMENT OF
DIVIDENDS") and a contractual agreement not to pay cash dividends, except under
certain circumstances, without the prior consent of the U. S. Department of the
Treasury while it owns the Company's preferred stock.
Unregistered Sales of Equity Securities and Use of Proceeds.
Other than as reported in a previously filed Form 10-Q or Form 8-K, the
Company did not sell any equity securities during the years ended December 31,
2009 and 2008 that were not registered under the Securities Act of 1933.
On, July 2, 2009, the Company issued 500 shares of its Company Stock to
a director for an aggregate price of $1,375 upon exercise of options pursuant to
40
the Company's 2007 Non-Employee Director Stock Option. Plan. Issuance of the
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 because no public offering was involved.
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 are registered pursuant to Section 12 of the
Exchange Act during the fourth quarter of 2009. Accordingly, no disclosure is
required pursuant to 17 C.F.R. ss.229.703.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by 17 C.F.R. 229.201(d) is set forth under
Item 12.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(All amounts, except per share data, in thousands)
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Net interest income ..................... $ 17,895 $ 16,634 $ 18,924 $ 19,337 $ 17,357
Provision for loan losses ............... 4,958 13,820 900 943 848
Other operating income .................. 3,980 732 3,842 3,648 3,609
Other operating expenses ................ 17,286 17,106 15,966 15,621 14,338
Net income (loss) ....................... 320 (8,376) 4,343 4,486 4,128
Net income (loss) available to
common shareholders ................. (224) (8,376) 4,343 4,486 4,128
PER COMMON SHARE DAT (1)
Net income (loss) per common
share -
Basic .............................. $ (0.03) $ (1.19) $ 0.59 $ 0.65 $ 0.60
Diluted ............................ (0.03) (1.19) 0.59 0.64 0.59
Cash dividends declared ................. 0.00 0.15 0.20 0.20 0.20
BALANCE SHEET DATA
Total assets ............................ $ 556,601 $ 559,875 $ 558,443 $ 503,814 $ 487,977
Total deposits .......................... 484,996 445,369 417,621 385,045 390,349
Total loans (net) ....................... 366,143 389,494 414,688 354,011 373,641
Investment securities ................... 116,213 112,247 102,693 99,469 78,061
Total earning assets .................... 504,799 520,908 523,597 470,172 456,456
Shareholders' equity .................... 54,443 41,512 50,241 46,064 41,171
OTHER DATA
Return on average assets ................ 0.06% -1.51% 0.84% 0.91% 0.88%
Return on average common equity ......... -0.53% -17.83% 9.03% 10.29% 10.20%
(1) Per share data has been restated to reflect 5% stock dividends in 2005,
2006 and 2007.
41
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 set
forth in Item 8--Financial Statements and Supplementary Data, and the
description of the Company's business set forth in Item 1--Business, of this
Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The Company has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of the Company's consolidated financial statements.
The significant accounting policies of the Company are described in Note 1 to
the consolidated financial statements included in Item 8 of this Annual Report
on Form 10-K.
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 the Allowance. The Company has
developed policies and procedures for assessing the adequacy of the Allowance,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Company's assessments may be impacted in
future periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers, which
is not known to management at the time of the issuance of the consolidated
financial statements. Refer to the discussion under Item 1--Business--
"PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE" for a detailed
description of the Company's estimation process and methodology related to the
allowance for loan losses.
With the declines in value of many debt and equity securities during
2009 due to economic conditions, the Company has focused more attention on the
process of determining if such declines in its equity securities are
"other-than-temporarily impaired." The process of evaluating
other-than-temporary impairment is inherently judgmental, involving the weighing
of positive and negative factors and evidence that may be objective or
subjective.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION
Total assets decreased $3,274,000 or 0.6% to $556,601,000 at December
31, 2009 from $559,875,000 at December 31,
2008.
The Company experienced a decline in lending activity during 2009 as
total outstanding loans, the largest single category of Company assets,
decreased $25,137,000 or 6.3% from $398,711,000 at December 31, 2008 to
$373,574,000 at December 31, 2009. This decrease comes primarily as the result
of lower loan demand from creditworthy borrowers at the Company's three bank
subsidiaries, with some decrease resulting from a number of loans that were
charged off or converted into real estate owned through foreclosures or deeds in
lieu of foreclosure.
42
The Company's securities portfolio collectively, at amortized cost,
increased $3,134,000 or 2.8% from $110,011,000 at December 31, 2008 to
$113,145,000 at December 31, 2009. The increase is part of a strategy that was
designed to replace a portion of maturing loans with securities, thus
maintaining the Company's overall investment in earning assets while increasing
its liquidity. The sale of government-sponsored-enterprise securities and
mortgage-backed securities in the available-for-sale portfolio in 2008 amounted
to approximately $4,845,000, resulting in a realized loss of $48,000 in 2008.
There were $320,000 of sales in 2009, resulting in a realized gain of $10,000.
Maturities, calls, and principal pay-downs on all securities amounted to
$26,367,000 in 2009 compared to $11,040,000 in 2008. During 2009, the Company
made purchases of $29,036,000 in available-for-sale securities and no purchases
in securities held to maturity compared to $28,289,000 in available-for-sale
securities and $444,000 in securities held to maturity in 2008. None of the
Company's mortgage-backed securities are backed by subprime mortgages, and
accordingly their value has not been diminished by the "subprime crisis." The
Company does not engage in, and does not expect to engage in, hedging
activities.
Cash and due from banks balances increased $3,988,000 or 50.6% from
$7,874,000 at December 31, 2008 to $11,862,000 at December 31, 2009. The Company
had $14,592,000 in federal funds sold as of December 31, 2009, compared to
$9,185,000 in federal funds sold at December 31, 2008. 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 $489,000 or 4.1% from
$11,815,000 at December 31, 2008 to $12,304,000 at December 31, 2009, due to the
normal appreciation in the cash surrender value associated with the ownership of
these assets. Earnings from the ownership of these policies are informally used
to partially offset the cost of certain employee-related benefits.
Other real estate owned increased $6,062,000 or 111.7% from $5,428,000
at December 31, 2008 to $11,490,000 at December 31, 2009. Other real estate
owned primarily consists of residential real estate consisting of 1-to-4 family
homes and development lots. In 2009, the Banks acquired real estate in the
amount of $15,536,000 sold $9,344,000 and wrote down $130,000. Real estate
activity in the Company's market area is exhibiting the weaknesses that have
plagued other markets, resulting in the higher amounts of these distressed
assets.
Other assets comprised largely of prepaid expenses, tax benefit and
deferred income taxes, increased $1,754,000 or 24.4% to $8,936,000 at December
31, 2009 from $7,182,000 at December 31, 2008. This increase is largely
attributable to an increase in prepaid expenses of $3,571,000 or 666.2% to
$4,107,000 at December 31, 2009 from $536,000 at December 31, 2008. The bulk of
this increase is related to prepaid FDIC quarterly assessments in the amount of
$3,517,000 at December 31, 2009.
Total liabilities decreased $16,205,000 or 3.1% from $518,363,000 at
December 31, 2008 to $502,158,000 at December 31, 2009. Total deposits increased
$39,627,000 or 8.9% to $484,996,000 at December 31, 2009 from $445,369,000 at
December 31, 2008, with a $35,351,000 increase in interest-bearing deposits in
2009 and partially offset by a decrease in brokered time deposits of $17,846,000
in 2009. The total deposit increase was made possible by effective rate pricing,
and they were used to repay higher costing Federal Home Loan Bank borrowings at
the Banks, which averaged $21,315,000. Securities sold under repurchase
agreements decreased $9,396,000 or 42.4% from $22,181,000 at December 31, 2008
to $12,785,000 at December 31, 2009.
There were $399,000 in federal funds purchased at December 31, 2009,
compared to $1,028,000 in federal funds purchased as of December 31, 2008, a
decrease of $629,000 or 61.2%. Advances from the Federal Home Loan Bank were
fully repaid in 2009. Federal Home Loan Bank advances are used to support the
liquidity needs of the Company.
In 2008, the Company obtained a $15,000,000 line of credit from a
correspondent bank to enable it to provide additional capital for the Banks. The
Company drew on this line of credit in 2008 and injected a total of $11,500,000
43
into its three banks. At December 31, 2008 the line of credit had an outstanding
balance of $11,000,000, which the Company paid in full in April 2009 using a
portion of the proceeds of the sale of preferred stock to the U. S. Treasury,
pursuant to its Capital Purchase Program. In December 2009, the Company
cancelled the line of credit.
Shareholders' equity increased $12,931,000 or 31.2% from $41,512,000 at
December 31, 2008 to $54,443,000 at December 31, 2009. This increase is
primarily the result of the Company's selling 12,660 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series T, and 633 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series W, to the U. S. Treasury, pursuant
to its Capital Purchase Program, for an aggregate price of $12,660,000 on April
24, 2009.
EARNINGS PERFORMANCE
2009 Compared to 2008
Overview
The Company's consolidated operations for the twelve months ended
December 31, 2009 resulted in net income of $320,000 compared to a net loss of
$8,376,000 for the twelve months ended December 31, 2008. After deducting for
dividends on preferred stock and net amortization of preferred stock, the year
ended December 31, 2009 resulted in a net loss available to common shareholders
of $224,000 or $0.03 per basic and diluted share, compared to a net loss of
$8,376,000 or $1.19 per basic and diluted share for the year ended December 31,
2008.
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased $1,261,000 or 7.6% to
$17,895,000 for the year ended December 31, 2009 compared to $16,634,000 for the
year ended December 31, 2008.
The Company's total interest income decreased $3,636,000 or 11.4% to
$28,165,000 in 2009 compared to $31,801,000 for 2008. This decrease is largely
attributable to a decrease in interest income and fees on loans of $3,998,000
resulting from lower market interest rates, an increase in foregone interest
income on non-accrual loans, and lower average loan balances. There was a
$418,000 increase in interest on taxable securities due to higher average
balances, partially offset by lower market rates. There was also a decrease of
$4,000 in interest on tax-exempt securities, primarily due to lower average
balances. There was a $52,000 decrease in interest on federal funds sold,
largely due to lower market rates.
Total interest expense decreased $4,897,000 or 32.3% to $10,270,000 in
2009 compared to $15,167,000 for 2008. The amount of interest paid on deposits
decreased $3,206,000 resulting from lower market interest rates, partially
offset by higher average balances. The interest paid on notes payable to the
Federal Home Loan Bank decreased $1,512,000 and interest expense on federal
funds purchased and securities sold under repurchase agreements decreased
$256,000 during 2009. The decrease in interest expense among the various types
of interest-bearing liabilities is largely attributable to lower market interest
rates paid, coupled with lower average balances during 2009 as compared to 2008.
The Company paid $182,000 in interest expense in 2009 compared to $105,000 in
2008 on a note from a correspondent bank that was paid in full in April 2009 and
canceled in December 2009.
Provision and Allowance for Loan Losses
The Company's provision for loan losses was $4,958,000 in 2009 compared
to $13,820,000 for 2008, an $8,862,000 or 64.1% decrease. During 2009 the
Company experienced net charge-offs of $6,744,000, or 1.74% of average
outstanding loans, compared to net charge-offs of $8,913,000, or 2.14% of
44
average outstanding loans in 2008. At December 31, 2009 the allowance for loan
losses was 1.99% as a percentage of outstanding loans compared to 2.31% at
December 31, 2008.
At December 31, 2009 the Company had $14,881,000 in non-accrual loans,
no loans past due 90 days or more but still accruing interest, and $11,490,000
in real estate acquired in settlement of loans, compared to $16,950,000 in
non-accrual loans, no loans past due 90 days or more but still accruing
interest, and $5,428,000 in real estate acquired in settlement of loans at
December 31, 2008. Non-performing assets as a percentage of all loans and other
real estate owned were 6.85% and 5.54% at December 31, 2009 and 2008,
respectively. The substantial balance in non-accruing loans is related to
deterioration of the credit-worthiness of certain borrowers and is affected by
the current economic recession. At December 31, 2009, 96.4% of the Company's
non-accruing loans were secured by real estate, compared to 99.5% at December
31, 2008. The Company does not actively pursue sub-prime loans for retention in
its loan portfolio, nor does it purchase sub-prime assets for its investment
portfolio.
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. 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, 2009 will not
require significant write-downs in future accounting periods, and therefore will
not have a significant effect on the Company's future operations.
Noninterest Income
Total consolidated noninterest income, including securities
transactions, increased $3,248,000 or 443.7% from $732,000 in 2008 to $3,980,000
in 2009. The substantial increase in non-interest income in 2009 is primarily
due to the impairment write-down on securities in 2008. The Company experienced
a $160,000 write-down during the second quarter of 2009, due to the impairment
of stock in Silverton Bank which became worthless. During the third quarter of
2008, the Company experienced a $2,890,000 write-down due to the
other-than-temporary impairment on the Company's FHLMC Preferred Stock. This
impairment was the direct result of FHLMC's, also known as "Freddie Mac," being
placed in conservatorship in September 2008.
Service charges on deposit accounts, decreased $235,000 or 12.4% to
$1,665,000 for 2009 compared to $1,900,000 for 2008. Net non-sufficient funds
fees decreased $242,000 or 15.1% from $1,603,000 in 2008 to $1,361,000 in 2009.
The changes more than likely resulted from customers paying more attention to
economic details as a result of the current recession.
Bank owned life insurance income increased $16,000 or 3.0% in 2009 to
$548,000 compared to $532,000 in 2008. Mortgage banking income increased
$160,000 or 44.6% from $359,000 in 2008 to $519,000 in 2009. The change in
mortgage banking income is largely due to the substantial swings in the local
demand for residential mortgage loan originations that occur from time to time.
Gains (losses) on the sale of assets acquired in settlement of loans increased
$289,000 or 704.9% from a loss of $41,000 in 2008 to a gain of $248,000 in 2009.
The Company sold $9,344,000 of other real estate in 2009 compared to $2,886,000
in 2008.
Other noninterest income increased $256,000 or 43.3% to $847,000 in
2009 when compared to $591,000 in 2008. The 2009 increase was substantially
constrained by a write-down of $160,000 due to impairment during the second
quarter of 2009 of stock in Silverton Bank, which became worthless. Interchange
income on the Banks' debit cards increased $84,000 or 16.0% to $608,000 in 2009
compared to $524,000 in 2008.
45
The Company recorded a $10,000 gain on the sale of available-for-sale
securities in 2009, compared to a $48,000 loss on the sale of available-for-sale
securities in 2008.
Noninterest Expenses
Total consolidated noninterest expenses increased $180,000 or 1.1% to
$17,286,000 in 2009 compared to $17,106,000 in 2008. Salaries and benefits, the
largest component of non-interest expense, decreased $974,000 or 10.3% to
$8,441,000 in 2009 compared to $9,415,000 in 2008. The decrease is primarily due
to a reduction in work force and a freeze on most salary increases that was
imposed by the Company during the fourth quarter of 2008 in response to
deteriorating economic conditions.
Occupancy and furniture and equipment expenses decreased $130,000 or
5.6% to $2,177,000 in 2009 compared to $2,307,000 in 2008. Marketing and
advertising expense decreased $226,000 or 56.1% from $403,000 in 2008 to
$177,000 in 2009. Communication expenses decreased $19,000 or 7.1% from 268,000
in 2008 to $249,000 in 2009. Printing and supplies decreased $34,000 or 18.3% to
$152,000 in 2009 compared to $186,000 in 2008. Director fees decreased $70,000
or 16.1% from $435,000 in 2008 to $365,000 in 2009. These decreases were
primarily the result of deliberate efforts by management to limit and reduce
expenses in response to deteriorating economic conditions.
Bank paid loan costs increased $776,000 or 95.4% from $813,000 in 2008
to $1,589,000 in 2009. Of the 2009 expense, $1,204,000 is attributable to the
repossession and maintenance of collateral on defaulted real estate loans,
compared to $193,000 in 2008.
Legal and professional fees increased $160,000 or 24.6% to $810,000 in
2009 from $650,000 in 2008. The increase in legal and professional fees is
primarily due to collection efforts on certain loans in default and the
outsourcing of portions of the Company's internal audit function.
Regulatory assessments increased $834,000 or 192.6% from $433,000 in
2008 to $1,267,000 in 2009. Regulatory assessments include fees paid to the FDIC
and Comptroller by the Company's three Banks. During the first quarter of 2009,
the FDIC announced a special one-time emergency assessment. The Banks paid
$245,000 on September 30, 2009 for the one-time emergency assessment. On
November 12, 2009, the FDIC Board of Directors adopted a final rule requiring
insured depository institutions to prepay their quarterly risk-based deposit
insurance assessment for all of 2010, 2011 and 2012. On December 31, 2009, the
Banks paid $3,981,000 for these assessments, of which $464,000 was expensed.
Other post-employment benefits increased $9,000 or 2.6% from $351,000
in 2008 to $360,000 in 2009. All other operating expenses were $1,376,000 in
2009 compared to $1,476,000 in 2008, a decrease of $100,000 or 6.8%.
Income Taxes
Refer to Note 11 of the Company's consolidated financial statements
included in Item 8 - Financial Statements and Supplementary Data for an analysis
of income tax expense.
46
LIQUIDITY AND CAPITAL RESOURCES
The sections "LIQUIDITY" and "CAPITAL ADEQUACY AND RESOURCES" included
in Item 1--Business of this Annual Report on Form 10-K are incorporated herein
by reference.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The section "OFF-BALANCE SHEET ARRANGEMENTS AND DERIVATIVE FINANCIAL
INSTRUMENTS" included in Item 1--Business of this Annual Report on Form 10-K is
incorporated herein by reference.
47
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section "MARKET RISK - INTEREST RATE SENSITIVITY" included in
"Business" under Item 1 of this Annual Report on Form 10-K is incorporated
herein by reference.
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, 2009 and 2008.
- Consolidated Statements of Income (Loss) for the years ended December 31,
2009 and 2008.
- Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2009 and 2008.
- Consolidated Statements of Cash Flows for the years ended December 31, 2009
and 2008.
- Notes to Consolidated Financial Statements.
48
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Peoples Bancorporation, Inc. and Subsidiaries
Easley, South Carolina
We have audited the accompanying consolidated balance sheets of Peoples
Bancorporation, Inc. and Subsidiaries (the "Company") as of December 31, 2009
and 2008, and the related consolidated statements of income (loss),
shareholders' equity and comprehensive income, and cash flows for each of the
years then ended. 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
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, 2009 and 2008, and the
results of their operations and their cash flows for each of the years then
ended, in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management's assessment of the effectiveness of
the Company's internal control over financial reporting as of December 31, 2009
included in the accompanying Management's Annual Report on Internal Control Over
Financial Reporting included in the Company's Form 10-K filed with the
Securities and Exchange commission and, accordingly, we do not express an
opinion thereon.
Greenville, South Carolina s/Elliott Davis LLC
March 30, 2010
49
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share information)
December 31,
------------
2009 2008
---- ----
ASSETS
CASH AND DUE FROM BANKS ........................................................................ $ 11,862 $ 7,874
INTEREST - BEARING DEPOSITS IN OTHER BANKS ..................................................... 420 765
FEDERAL FUNDS SOLD ............................................................................. 14,592 9,185
--------- ---------
26,874 17,824
SECURITIES
Trading assets ............................................................................ 128 47
Available for sale ........................................................................ 103,227 96,003
Held to maturity (fair value of $8,621 (2009)
and $12,666 (2008)) ................................................................... 8,402 12,651
Other investments, at cost ................................................................ 4,456 3,546
LOANS, net of allowance for loan losses of $7,431 (2009)
and $9,217 (2008) ......................................................................... 366,143 389,494
PREMISES AND EQUIPMENT, net of accumulated depreciation ........................................ 12,270 13,200
ACCRUED INTEREST RECEIVABLE .................................................................... 2,371 2,685
ASSETS ACQUIRED IN SETTLEMENT OF LOANS ......................................................... 11,490 5,428
CASH SURRENDER VALUE OF LIFE INSURANCE ......................................................... 12,304 11,815
OTHER ASSETS ................................................................................... 8,936 7,182
--------- ---------
Total assets ..................................................................... $ 556,601 $ 559,875
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing ....................................................................... $ 55,367 $ 51,091
Interest-bearing .......................................................................... 429,629 394,278
--------- ---------
Total deposits ................................................................... 484,996 445,369
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS .................................................... 12,785 22,181
FEDERAL FUNDS PURCHASED ........................................................................ 399 1,028
ADVANCES FROM FEDERAL HOME LOAN BANK ........................................................... - 34,600
NOTE PAYABLE - OTHER ........................................................................... - 11,000
ACCRUED INTEREST PAYABLE ....................................................................... 2,049 2,636
OTHER LIABILITIES .............................................................................. 1,929 1,549
--------- ---------
Total liabilities ................................................................ 502,158 518,363
--------- ---------
COMMITMENTS AND CONTINGENCIES - Notes 11 and 12
SHAREHOLDERS' EQUITY
Preferred stock - 15,000,000 shares authorized
Preferred stock, Series T - $1,000 per share liquidation preference;
issued and outstanding - 12,660 at December 31, 2009 and
none at December 31, 2008 ............................................................. 11,991 -
Preferred stock, Series W - $1,000 per share liquidation preference;
issued and outstanding - 633 at December 31, 2009 and
none at December 31, 2008 ............................................................. 697 -
Common stock - 15,000,000 shares authorized; $1.11 par value per
share; 7,003,003 (2009) shares and 7,070,139 (2008) shares
issued and outstanding ................................................................ 7,774 7,848
Additional paid-in capital ................................................................ 41,658 41,752
Retained earnings (deficit) ............................................................... (9,702) (9,564)
Accumulated other comprehensive income .................................................... 2,025 1,476
--------- ---------
Total shareholders' equity ....................................................... 54,443 41,512
--------- ---------
Total liabilities and shareholders' equity ....................................... $ 556,601 $ 559,875
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
50
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Amounts in thousands except per share information)
For the years ended December 31,
--------------------------------
2009 2008
---- ----
INTEREST INCOME
Interest and fees on loans ...................................................... $ 23,190 $ 27,188
Interest on securities
Taxable ..................................................................... 3,468 3,050
Tax-exempt .................................................................. 1,498 1,502
Interest on federal funds sold .................................................. 9 61
------------- -------------
Total interest income .................................................. 28,165 31,801
------------- -------------
INTEREST EXPENSE
Interest on deposits ............................................................ 9,907 13,113
Interest on federal funds purchased and securities sold
under repurchase agreements ................................................. 87 343
Interest on advances from Federal Home Loan Bank ................................ 94 1,606
Interest on note payable - other ................................................ 182 105
------------- -------------
Total interest expense ................................................. 10,270 15,167
------------- -------------
Net interest income .................................................... 17,895 16,634
PROVISION FOR LOAN LOSSES ............................................................ 4,958 13,820
------------- -------------
Net interest income after provision for loan losses .................... 12,937 2,814
------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts ............................................. 1,665 1,900
Customer service fees ........................................................... 111 133
Mortgage banking ................................................................ 519 359
Brokerage services .............................................................. 192 196
Bank owned life insurance ....................................................... 548 532
Gain (loss) on sale/call of securities available for sale ....................... 10 (48)
Gain (loss) on sale of assets acquired in settlement of loans ................... 248 (41)
Impairment write-down on securities ............................................. (160) (2,890)
Other noninterest income ........................................................ 847 591
------------- -------------
Total noninterest income ............................................... 3,980 732
------------- -------------
NONINTEREST EXPENSES
Salaries and benefits ........................................................... 8,441 9,415
Occupancy ....................................................................... 986 956
Equipment ....................................................................... 1,191 1,351
Marketing and advertising ....................................................... 177 403
Communications .................................................................. 249 268
Printing and supplies ........................................................... 152 186
Bank paid loan costs ............................................................ 1,589 813
Directors fees .................................................................. 365 435
Other post employment benefits .................................................. 360 351
ATM and interchange expense ..................................................... 323 369
Legal and professional fees ..................................................... 810 650
Regulatory assessments .......................................................... 1,267 433
Other operating ................................................................. 1,376 1,476
------------- -------------
Total noninterest expenses ............................................. 17,286 17,106
------------- -------------
Loss before income taxes ............................................... (369) (13,560)
BENEFIT FOR INCOME TAXES ............................................................. (689) (5,184)
------------- -------------
Net income (loss) ...................................................... 320 (8,376)
------------- -------------
Deductions to determine amounts available to common shareholders:
Dividends declared or accumulated on preferred stock ............................ 471 -
Net accretion of preferred stock ................................................ 73 -
------------- -------------
Net loss available to common shareholders .............................. $ (224) $ (8,376)
============= =============
BASIC NET LOSS PER COMMON SHARE ...................................................... $ (0.03) $ (1.19)
============= =============
DILUTED NET LOSS PER COMMON SHARE .................................................... $ (0.03) $ (1.19)
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
51
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the years ended December 31, 2009 and 2008
(Amounts in thousands except share information)
Accumulated Total
Preferred Shares Preferred Stock Common Stock Additional Retained Other Share-
---------------- --------------- ------------ Paid-in Earnings Comprehensive holders
Series T Series W Series T Series W Shares Amount Capital (Deficit) Income Equity
-------------------------- -------- ------ ------ ------- --------- ------ ------
Balance, December 31, 2007 .... - - $ - $ - 7,056,337 $7,833 $41,624 $ - $ 784 $50,241
Net loss ...................... - - - - - - - (8,376) - (8,376)
Other comprehensive Income,
net of tax:
Unrealized holding losses on
securities available
for sale,
net income tax of $1,356 ... - - - - - - - - 2,631 2,631
Reclassification adjustment
for losses included in
net income net of income
taxes of $999 .............. - - - - - - - - (1,939) (1,939)
-------
Comprehensive income .......... (7,684)
Cash dividends ................ - - - - - - - (1,060) - (1,060)
Proceeds from stock options
exercised .................. - - - 13,802 15 56 - - - 71
Stock-based compensation ...... - - - - - - 72 - - 72
Cumulative effect of post
Retirement cost of life
insurance .................. - - - - - - - (128) - (128)
------ --- ------- ------- --------- ------ ------- ------- ------- -------
Balance, December 31, 2008 .... - - - - 7,070,139 7,848 41,752 (9,564) 1,476 41,512
Net income .................... 320 320
Other comprehensive Income,
net of tax:
Unrealized holding losses
on
securities available
for sale, net income
tax of $283 ................ - - - - - - - - 543 543
Reclassification adjustment
for losses included in net
income net of income
taxes of $4 ................ - - - - - - - - 6 6
-------
Comprehensive income .......... - - - - - - - - - 869
Issuance of preferred stock ... 12,660 633 11,910 705 - - - - - 12,615
Cash dividends on
preferred stock ............ - - - - - - - (385) - (385)
Proceeds from stock options
exercised .................. - - - - 500 1 1 - - 2
Common shares surrendered
by dissenting .............. - - - - (67,636) (75) (168) - - (243)
shareholders
Accretion (amortization)
of preferred stock ......... - - 81 (8) - - - (73) - -
Stock-based compensation ...... - - - - - - 73 - - 73
------ --- ------- ------- --------- ------ ------- ------- ------- -------
Balance, December 31, 2009 .... 12,660 633 $11,991 $ 697 7,003,003 $7,774 $41,658 $(9,702) $ 2,025 $54,443
====== === ======= ======= ========= ====== ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
52
PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
For the years ended December 31,
--------------------------------
2009 2008
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ......................................................................... $ 320 $ (8,376)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Gain on sale of premises and equipment .................................................... (5) (5)
(Gain) loss on sale of securities available for sale ...................................... (10) 48
(Gain) loss on sale of assets acquired in settlement of loans ............................. (248) 41
Net change in trading assets .............................................................. (81) 145
Impairment write-down on securities ....................................................... 160 2,890
Provision for loan losses ................................................................. 4,958 13,820
Benefit from deferred income taxes ........................................................ (603) (3,031)
Depreciation .............................................................................. 1,059 1,142
Amortization and accretion (net) of premiums and discounts on securities .................. 50 17
Stock-based compensation .................................................................. 73 72
Decrease in accrued interest receivable ................................................... 314 636
Increase in other assets .................................................................. (1,180) (3,462)
Decrease in accrued interest payable ...................................................... (587) (1,829)
Increase in other liabilities ............................................................. 380 786
-------- --------
Net cash provided by operating activities .................................... 4,600 2,894
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held to maturity .................................................. - (444)
Purchases of securities available for sale ................................................ (29,036) (28,289)
Sales (purchases) of other investments .................................................... (910) 1,249
Proceeds from principal pay downs on securities available for sale ........................ 16,115 7,419
Proceeds from the maturities and calls of securities available for sale ................... 6,000 2,750
Proceeds from the sale of securities available for sale ................................... 320 4,845
Proceeds from maturity of securities held to maturity ..................................... 4,252 865
Investment in bank owned life insurance ................................................... (489) (593)
Proceeds from sale of other real estate owned ............................................. 9,474 3,283
Net decrease in loans ..................................................................... 2,857 3,686
Proceeds from the sale of premises and equipment .......................................... 5 97
Purchase of premises and equipment ........................................................ (129) (677)
-------- --------
Net cash used for investing activities ....................................... 8,459 (5,809)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits .................................................................. 39,627 27,748
Net increase (decrease) in federal funds purchased ........................................ (1,028) 599
Net increase (decrease) in securities sold under repurchase agreements .................... (9,396) 2,357
Net decrease in advances from Federal Home Loan Bank ...................................... (45,201) (19,500)
Proceeds from the exercise of stock options ............................................... 2 71
Proceeds from the issuance of preferred stock and warrants ................................ 12,615 -
Common shares surrendered by dissenting shareholders ...................................... (243) -
Cash dividends paid ....................................................................... (385) (1,060)
-------- --------
Net cash (used) provided by financing activities ............................. (4,009) 10,215
-------- --------
Net increase in cash and cash equivalents .................................... 9,050 7,300
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................................... 17,824 10,524
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................................................... $ 26,874 $ 17,824
======== ========
CASH PAID FOR
Interest .................................................................................. $ 10,905 $ 16,996
======== ========
Income taxes .............................................................................. $ 29 $ 126
======== ========
NON-CASH TRANSACTIONS
Change in unrealized gain (loss) on available for sale securities ......................... $ 831 $ 1,049
======== ========
Loans transferred to other real estate .................................................... $ 15,536 $ 7,688
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
53
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 individual
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
("OCC"). The Company is subject to regulation by the Federal Reserve Board
("FRB").
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.
Segments
The Company, through its subsidiaries, provides a broad range of financial
services to individuals and companies. These services include demand, time and
savings deposits; lending and ATM processing and are substantially the same
across subsidiaries. While the Company's decision-makers monitor the revenue
streams of the various financial products and services by product line and by
subsidiary, the operations and the allocation of resources are managed, and
financial performance is evaluated, on an organization-wide basis. Accordingly,
the Company's banking operation is considered by management to be one reportable
operating segment.
Securities
Debt securities are classified upon purchase as available for sale, held to
maturity, 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 to maturity 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
to maturity, the Company must have the ability and intent to hold the securities
to maturity. Trading securities are carried at market value. Unrealized holding
gains or losses are recognized in income. 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 is no longer in doubt.
(Continued)
54
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the anticipated collectibility of
the loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.
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.
Assets acquired in settlement of loans
Assets acquired in settlement of loans represents properties acquired through
foreclosure and is carried at the lower of cost or fair value, adjusted for
estimated 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.
(Continued)
55
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 Accounting Standards Codification ("ASC") Topic 740.
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.
Risks 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation. These reclassifications had no effect on previously
reported net income (loss) or shareholders' equity.
Stock option compensation plans
The Company has an employee 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 Company also has another employee
stock option plan under which options may no longer be granted, but under which
exercisable options remain outstanding. The outstanding options under both plans
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 non-employee
directors' stock option plan through which non-employee directors of the Company
are 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 also has another non-employee directors' stock option plan under which
options may no longer be granted, but under which exercisable options remain
outstanding.
The Company follows the requirements of ASC Topic 718 to account for its stock
option plans. In accordance with the provisions of this statement, the Company
recorded approximately $73,000 and $72,000 of compensation expense in 2009 and
2008, respectively.
(Continued)
56
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Recently issued accounting standards
The following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the Company:
In June 2009, the FASB issued Accounting Standards Update No. 2009-01 ("ASU
2009-01"), Topic 105 - Generally Accepted Accounting Principles amendments based
on Statement of Financial Accounting Standards No. 168 - The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles. ASU 2009-01 amends the FASB Accounting Standards Codification for
the issuance of FASB Statement No. 168 ("SFAS 168"), The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles. ASU 2009-1 includes SFAS 168 in its entirety, including the
accounting standards update instructions contained in Appendix B of the
Statement. The FASB Accounting Standards Codification TM ("Codification") became
the source of authoritative U.S. generally accepted accounting principles
("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the Securities and Exchange Commission ("SEC")
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of this Statement, the
Codification superseded all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification became non-authoritative. This Statement was
effective for the Company's financial statements beginning in the interim period
ended September 30, 2009.
In October 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2009-13 ("ASU 2009-13"), Revenue Recognition
(Topic 605) - Multiple-Deliverable Revenue Arrangements - a consensus of the
FASB Emerging Issues Task Force. ASU 2009-13 addresses the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Subtopic
605-25, Revenue Recognition - Multiple-Element Arrangements, establishes the
accounting and reporting guidance for arrangements under which the vender will
perform multiple revenue-generating activities. Specifically, this subtopic
addresses how to separate deliverables and how to measure and allocate
arrangement consideration to one or more units of accounting. The amendments in
this ASU will be effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010 with early adoption
permitted. This ASU is not expected to have any effect on the Company's results
of operations, financial position or disclosures.
In October 2009, the FASB issued Accounting Standards Update No. 2009-15 ("ASU
2009-15"), Accounting for Own-Share Lending Arrangements in Contemplation of
Convertible Debt Issuances or Other Financing. ASU 2009-15 provides accounting
guidance for own-share lending arrangements issued in contemplation of the
issuance of convertible debt or other financing arrangements. An entity, for
which the cost to an investment banking firm or third-party investors of
borrowing its shares is prohibitive, may enter into share-lending arrangements
that are executed separately but in connection with a convertible debt offering.
Although the convertible debt instrument is ultimately sold to investors, the
share-lending arrangement is an agreement between the entity and an investment
bank and is intended to facilitate the ability of investors to hedge the
conversion option in the entity's convertible debt. Loaned shares are excluded
from basic and diluted earnings per share unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the
basic and diluted earnings-per-share calculation. If dividends on the loaned
shares are not reimbursed to the entity, any amounts, including contractual
dividends and participation rights in undistributed earnings, attributable to
the loaned shares shall be deducted in computing income available to common
shareholders, in a manner consistent with the two-class method in Accounting
Standards Codification Topic 260-10-45-60B, Earnings Per Share. This ASU did not
have any effect on the Company's results of operations, financial position or
disclosures.
(Continued)
57
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
In December 2009, the FASB issued Accounting Standards Update No. 2009-16 ("ASU
2009-16"), Accounting for Transfers of Financial Assets. ASU No. 2009-16
formally incorporates into the FASB Codification amendments to Statement of
Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, made by SFAS
No. 166 Accounting for Transfers of Financial Assets, an amendment of FASB
Statement No. 140, primarily to 1.) eliminate the concept of a qualifying
special-purpose entity, 2.) limit the circumstances under which a financial
asset should be derecognized when the entire financial asset has not been
transferred to a non-consolidated entity, 3.) requires additional disclosures
concerning a transferor's continuing involvement with transferred financial
assets, and 4.) requires that all servicing assets and liabilities be initially
measured at fair value. This guidance is effective as of the start of the first
annual reporting period beginning after November 15, 2009, for interim periods
within the first annual reporting period, and for all subsequent annual and
interim reporting periods. ASU 2009-16 is not expected to have a material impact
on the Company's results of operations, financial position or disclosures;
however, the Company will need to review future loan participation agreements
and other transfers of financial assets for compliance with the new standard.
In December 2009, the FASB issued Accounting Standards Update No. 2009-17 ("ASU
2009-17"), Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities. ASU No. 2009-17 formally incorporates into the FASB
Codification amendments to FASB Interpretation ("FIN") No. 46(R), Consolidation
of Variable Interest Entities, made by SFAS No. 167, Amendments to FASB
Interpretation No. 46(R) to require that a comprehensive qualitative analysis be
performed to determine whether a holder of variable interests in a variable
interest entity also has a controlling financial interest in that entity. In
addition, the amendments require that the same type of analysis be applied to
entities that were previously designated as qualified special-purpose entities.
This ASU is effective as of the start of the first annual reporting period
beginning after November 15, 2009, for interim periods within the first annual
reporting period, and for all subsequent annual and interim reporting periods.
ASU 2009-17 is not expected to have a material impact on the Company's results
of operations, financial position or disclosures.
In January 2010, the FASB issued Accounting Standards Update No. 2010-01,
Accounting for Distributions to Shareholders with Components of Stock and Cash
("ASU No. 2010-01"). ASU No. 2010-01 provides guidance on the accounting for
distributions offering shareholders the choice of receiving cash or stock. Under
such guidance, the stock portion of the distribution is not considered to be a
stock dividend, and for purposes of calculating earnings per share it is deemed
a new share issuance not requiring retroactive restatement. This guidance is
effective for the first reporting period, including interim periods, ending
after December 15, 2009. It is not expected to have a material impact on the
Company's results of operations, financial position or disclosures.
In January 2010, the FASB issued Accounting Standards Update No. 2010-02,
Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope
Clarification ("ASU No. 2010-02"). ASU No. 2010-02 amends FASB Accounting
Standards Codification ("ASC") Topic 810, Consolidation, to clarify that
deconsolidation accounting also applies to a subsidiary or group of assets that
is a business or nonprofit activity. The amended guidance also requires
additional disclosures concerning a retained investment in the period of a
deconsolidation of a subsidiary or de-recognition of a group of assets. This
guidance is effective beginning in the period an entity first adopts SFAS No.
160, Non-controlling Interests in Consolidated Financial Statements, and if it
was previously adopted, it is effective in the first interim or annual reporting
period ending on or after December 15, 2009. ASU No. 2010-02 is not expected to
have a material impact on the Company's results of operations, financial
position or disclosures.
In January 2010, the FASB issued Accounting Standards Update No. 2010-05,
Escrowed Share Arrangements and the Presumption of Compensation ("ASU No.
2010-05"). ASU No. 2010-05 officially incorporates into the FASB Codification
the SEC Staff's position concerning escrowed share arrangements and the
presumption that such arrangements are compensatory. This guidance was effective
immediately as it simply incorporated Emerging Issues Task Force ("EITF") Topic
D-110, Escrowed Share Arrangements and the Presumption of Compensation, into the
FASB Codification. It is not expected to have a material impact on the Company's
results of operations, financial position or disclosures.
(Continued)
58
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
In January 2010, the FASB issued Accounting Standards Update No. 2010-06,
Improving Disclosures about Fair Value Measurements ("ASU No. 2010-06"). ASU No.
2010-06 amends FASB ASC Topic 820-10-50, Fair Value Measurements and
Disclosures, to require additional information to be disclosed principally
regarding Level 3 measurements and transfers to and from Level 1 and 2. In
addition, enhanced disclosure is required concerning inputs and valuation
techniques used to determine Level 2 and Level 3 measurements. This guidance is
generally effective for interim and annual reporting periods beginning after
December 15, 2009; however, requirements to disclose separately purchases,
sales, issuances, and settlements in the Level 3 reconciliation are effective
for fiscal years beginning after December 15, 2010 (and for interim periods
within such years). ASU No. 2010-06 is not expected to have a material impact on
the Company's results of operations or financial position, and will have a
minimal impact on its disclosures.
In February 2010, the FASB issued Accounting Standards Update No. 2010-08,
Technical Corrections to Various Topics, ("ASU No. 2010-08"). This Accounting
Standards Update clarifies the guidance on embedded derivatives and hedging
(Subtopic 815-15) by eliminating inconsistencies and outdated provisions. ASU
No. 2010-08 is effective for the Company in the first quarter of 2010 and is not
expected to have a material impact on the Company's results of operations,
financial position or disclosures.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Banks are required to maintain average reserve balances with the FRB based
upon a percentage of deposits. The average amounts of reserve balances
maintained by the Banks at December 31, 2009 and 2008 were approximately
$756,000 and $820,000, respectively.
NOTE 3 - SECURITIES
Securities are summarized as follows as of December 31 (tabular amounts in
thousands):
2009
----
Unrealized Holding
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
TRADING ASSETS:
OTHER SECURITIES
Maturing after ten years ...................................... $ 128 $ - $ - $ 128
======= ======= ======= =======
SECURITIES AVAILABLE FOR SALE:
GOVERNMENT SPONSORED ENTERPRISE
SECURITIES
Maturing after five but within ten years ...................... $ 6,792 $ 340 $ - $ 7,132
------- ------- ------- -------
MORTGAGE BACKED SECURITIES
Maturing within one year ...................................... 1,410 21 - 1,431
Maturing after one year but within five years ................. 55,162 2,214 47 57,329
Maturing after five years but within ten years ................ 3,147 25 6 3,166
Maturing after ten years ...................................... 4,094 118 6 4,206
------- ------- ------- -------
63,813 2,378 59 66,132
------- ------- ------- -------
(Continued)
59
NOTE 3 - SECURITIES, Continued
2009
----
Unrealized Holding
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
OTHER SECURITIES
Maturing after ten years ...................................... 604 - 39 565
-------- -------- -------- --------
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing after one year but within five years ................. 457 36 - 493
Maturing after five years but within ten years ................ 4,327 98 23 4,402
Maturing after ten years ...................................... 24,166 417 80 24,503
-------- -------- -------- --------
28,950 551 103 29,398
-------- -------- -------- --------
Total securities available for sale ....................... $100,159 $ 3,269 $ 201 $103,227
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing within one year ...................................... $ 596 $ 1 $ - $ 597
Maturing after one but within five years ...................... 3,117 127 - 3,244
Maturing after five years but within ten years ................ 3,260 57 - 3,317
Maturing after ten years ...................................... 1,429 34 - 1,463
-------- -------- -------- --------
Total securities held to maturity ......................... $ 8,402 $ 219 $ - $ 8,621
======== ======== ======== ========
2008
----
Unrealized Holding
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
TRADING ASSETS:
OTHER SECURITIES
Maturing after ten years ...................................... $ 47 $ - $ - $ 47
------- ------- ------- -------
SECURITIES AVAILABLE FOR SALE:
GOVERNMENT SPONSORED ENTERPRISE SECURITIES
Maturing within one year ...................................... $ 1,000 $ 28 $ - $ 1,028
Maturing after one year but within five years ................. 7,990 384 - 8,374
Maturing after five years but within ten years ................ 1,970 1 - 1,971
------- ------- ------- -------
10,960 413 - 11,373
------- ------- ------- -------
MORTGAGE BACKED SECURITIES
Maturing after one year but within five years ................. 764 6 - 770
Maturing after five years but within ten years ................ 10,380 241 - 10,621
Maturing after ten years ...................................... 43,697 1,523 - 45,220
------- ------- ------- -------
54,841 1,770 - 56,611
------- ------- ------- -------
OTHER SECURITIES
Maturing after ten years ...................................... 767 162 99 830
------- ------- ------- -------
OBLIGATIONS OF STATES AND POLITICAL
SUBDIVISIONS
Maturing after one year but within five years ................. 457 28 - 485
Maturing after five years but within ten years ................ 3,221 107 - 3,328
Maturing after ten years ...................................... 23,521 130 275 23,376
------- ------- ------- -------
27,199 265 275 27,189
------- ------- ------- -------
Total securities available for sale ....................... $93,767 $ 2,610 $ 374 $96,003
======= ======= ======= =======
(Continued)
60
NOTE 3 - SECURITIES, Continued
2008
----
Unrealized Holding
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
SECURITIES HELD TO MATURITY:
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS
Maturing within one year ...................................... $ 1,951 $ 9 $ 2 $ 1,958
Maturing after one year but within five years ................. 4,623 76 - 4,699
Maturing after five years but within ten years ................ 4,100 46 8 4,138
Maturing after ten years ...................................... 1,977 6 112 1,871
------- ------- ------- -------
Total securities held to maturity ......................... $12,651 $ 137 $ 122 $12,666
======= ======= ======= =======
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
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, 2009.
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
----- ------ ----- ------ ----- ------
Government sponsored enterprise securities ........... $ - $ - $ - $ - $ - $ -
Mortgage backed securities ........................... 10,148 59 - - 10,148 59
Other securities ..................................... - - 476 39 476 39
State and political subdivisions ..................... 8,823 103 - - 8,823 103
------- ------- ------- ------- ------- -------
Total ................................................ $18,971 $ 162 $ 476 $ 39 $19,447 $ 201
======= ======= ======= ======= ======= =======
One individual security available for sale was in a continuous loss position for
twelve months or more.
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, 2008.
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
----- ------ ----- ------ ----- ------
Government sponsored enterprise securities .......... $ - $ - $ - $ - $ - $ -
Mortgage backed securities .......................... - - - - - -
Other securities .................................... 517 99 - - 517 99
State and political subdivisions .................... 7,625 275 - - 7,625 275
------ ------ -------- -------- ------ ------
Total ............................................... $8,142 $ 374 $ - $ - $8,142 $ 374
====== ====== ======== ======== ====== ======
No individual securities available for sale were in a continuous loss position
for twelve months or more.
(Continued)
61
NOTE 3 - SECURITIES, Continued
Securities Held to Maturity (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 ............. $2,295 $ 122 $ - $ - $2,295 $ 122
====== ====== ====== ===== ====== ======
No individual securities held to maturity were in a continuous loss position for
twelve months or more.
The Company has the ability and believes it is more likely than not it can 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. The category "other securities" above is
comprised of mortgage-backed securities, corporate debt securities, equity
securities and investments in Banker's Bank stock.
Other Investments, at Cost (tabular amounts in thousands):
The Banks, as member institutions, are required to own certain stock investments
in the Federal Home Loan Bank of Atlanta ("FHLB") and the FRB. These investments
are carried at cost and are generally pledged against any borrowings from these
institutions (see Note 10). No ready market exists for these stocks and they
have no quoted market values. The Company's investments in these stocks are
summarized below:
December 31,
------------
2009 2008
---- ----
FRB ............................................................................. $ 827 $ 483
FHLB ............................................................................ 3,629 2,585
Interest-bearing deposits in other banks (maturing after three months) .......... - 478
--------------- ---------------
$ 4,456 $ 3,546
=============== ===============
Securities with carrying amounts of $30,761,000 and $43,459,000 as of December
31, 2009 and 2008, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are summarized as follows (tabular amounts in thousands):
December 31,
------------
2009 2008
---- ----
Commercial and industrial - not secured by real estate ........................... $ 39,981 $ 43,451
Commercial and industrial - secured by real estate ............................... 120,102 111,844
Residential real estate - mortgage ............................................... 126,544 124,445
Residential real estate - construction ........................................... 72,668 104,390
Loans to individuals for household, family and other personal expenditures ....... 14,279 14,581
---------------- ---------------
373,574 398,711
Less allowance for loan losses ................................................... (7,431) (9,217)
---------------- ---------------
$ 366,143 $ 389,494
================ ===============
The composition of gross loans by rate type is as follows (tabular amounts in
thousands):
December 31,
------------
2009 2008
---- ----
Variable rate loans ........................ $123,207 $145,998
Fixed rate loans ........................... 250,367 252,713
-------- --------
$373,574 $398,711
======== ========
(Continued)
62
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, Continued
Changes in the allowance for loan losses were as follows (tabular amounts in
thousands):
For the years ended December 31,
--------------------------------
2009 2008
---- ----
BALANCE, BEGINNING OF YEAR ................... $ 9,217 $ 4,310
Provision for loan losses ............... 4,958 13,820
Loans charged off ....................... (6,989) (9,037)
Loans recovered ......................... 245 124
-------- --------
BALANCE, END OF YEAR ......................... $ 7,431 $ 9,217
======== ========
The following is a summary of information pertaining to impaired loans and
non-accrual loans (tabular amounts in thousands):
December 31,
------------
2009 2008
---- ----
Impaired loans without valuation allowance ...................................... $ 12,544 $ 13,592
Impaired loans with a valuation allowance ....................................... 2,202 3,079
---------------- --------------
Total impaired loans ............................................................ $ 14,746 $ 16,671
================ ==============
Valuation allowance related to impaired loans ................................... $ 747 $ 1,608
Total non-accrual loans ......................................................... $ 14,881 $ 16,950
Total loans past-due ninety days or more and still accruing ..................... $ - $ -
Foregone interest income on non-accrual loans ................................... $ 1,101 $ 753
Average investment in impaired loans ............................................ $ 17,781 $ 10,802
Interest income recognized on impaired loans .................................... $ - $ -
Interest income recognized on a cash basis on impaired loans .................... $ - $ -
NOTE 5 - PREMISES AND EQUIPMENT
The principal categories and estimated useful lives of premises and equipment
are summarized in the table below (tabular amounts in thousands):
December 31,
Estimated ------------
useful lives 2009 2008
------------ ---- ----
Land ...................................................... $ 3,873 $ 3,873
Building and improvements ................................. 15 - 40 years 9,966 9,951
Furniture, fixtures and equipment ......................... 3 - 10 years 8,972 8,879
--------------- --------------
22,811 22,703
Less accumulated depreciation ............................. 10,541 9,503
--------------- --------------
$ 12,270 $ 13,200
=============== ==============
Depreciation expense of approximately $1,059,000 and $1,142,000 for 2009 and
2008, respectively, is included in occupancy and equipment expenses in the
accompanying consolidated statements of income.
63
Note 6 - ASSETS ACQUIRED IN SETTLEMENT OF LOANS
The following summarizes the activity of assets acquired in settlement of loans
(tabular amounts in thousands):
For the years ended
December 31,
2009 2008
---- ----
BALANCE, BEGINNING OF YEAR ................. $ 5,428 $ 1,023
Additions - foreclosures .............. 15,536 7,688
Sales ................................ (9,344) (2,886)
Write downs ........................... (130) (397)
-------- --------
BALANCE, END OF YEAR .................. $ 11,490 $ 5,428
======== ========
NOTE 7 - DEPOSITS
The composition of deposits is as follows (tabular amounts in thousands):
December 31,
------------
2009 2008
---- ----
Demand deposits, noninterest bearing ............. $ 55,367 $ 51,091
NOW and money market accounts .................... 137,744 96,160
Savings deposits ................................. 10,370 9,771
Time certificates, $100,000 or more .............. 125,922 97,769
Other time certificates .......................... 155,593 190,578
-------- --------
Total ....................................... $484,996 $445,369
======== ========
December 31,
------------
2009 2008
---- ----
Time certificates maturing
Within one year ............................... $242,527 $265,342
After one but within two years ................ 24,539 15,651
After two but within three years .............. 13,614 6,864
After three but within four years ............. 432 259
After four years .............................. 403 231
-------- --------
281,515 288,347
Transaction and savings accounts ................. 203,481 157,022
-------- --------
$484,996 $445,369
======== ========
Certificates of deposit in excess of $100,000 totaled approximately $111,042,000
and $86,380,000 at December 31, 2009 and 2008, respectively. Interest expense on
certificates of deposit in excess of $100,000 was approximately, $2,598,000 in
2009 and $3,907,000 in 2008. The Banks had brokered time certificates of
approximately $59,565,000 at December 31, 2009 and $77,411,000 at December 31,
2008. Traditional brokered time deposits at the Banks amounted to approximately
$25,048,000 at December 31, 2009 and $44,458,000 at December 31, 2008. Brokered
time deposits, within the Certificate of Deposit Account Registry Service
("CDARS"), at the Banks amounted to approximately $34,517,000 at December 31,
2009 and $32,953,000 at December 31, 2008.
64
NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are summarized as follows (tabular
amounts in thousands):
December 31,
------------
2009 2008
---- ----
Government sponsored enterprise securities with an amortized cost
of $19,910,000 ($20,764,000 fair value) and $28,686,000
($29,673,000 fair value) at December 31, 2009 and 2008 respectively,
collateralize the agreements. ............................................ $ 12,785 $ 22,181
======== ========
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 0.53 percent and 1.56
percent for 2009 and 2008, respectively. The agreements mature daily. Securities
sold under agreements to repurchase averaged $16,122,000 and $20,832,000 during
2009 and 2008, respectively. The maximum amounts outstanding at any month-end
were $19,671,000 and $25,557,000 during 2009 and 2008, respectively.
NOTE 9 - FEDERAL FUNDS PURCHASED
At December 31, 2009, the Banks had the ability to purchase federal funds from
unrelated banks under short-term lines of credit totaling $21,500,000. These
lines of credit are available on a one to seven day basis for general corporate
purposes.
NOTE 10 - ADVANCES UNDER LINES OF CREDIT FROM FEDERAL HOME LOAN BANK AND NOTE
PAYABLE-OTHER
Under lines of credit, the Banks have the ability to borrow up to 20 percent of
their total assets from the FHLB subject to available qualifying collateral.
Borrowings may be obtained under various FHLB lending programs with various
terms. Borrowings from the FHLB require qualifying collateral (which includes
certain mortgage loans, investment securities and FHLB stock) and may require
purchasing additional stock in the FHLB.
The Banks had no advances at December 31, 2009 and advances of $34,600,000 at
December 31, 2008 at an interest rate of 0.46 percent which matured daily. At
December 31, 2009 and 2008, the lines were collateralized by qualifying mortgage
loans aggregating approximately $52,661,000 and $67,201,000, respectively, and
by FHLB stock owned by all three Banks. The Banks also had lines collateralized
by investment securities owned by the Banks in the amount of $12,649,000 and
$13,149,000 at December 31, 2009 and 2008, respectively. As of December 31,
2009, the Banks had the ability to borrow $65,310,000 in the aggregate from the
FHLB.
In 2008, the Company obtained a $15,000,000 line of credit from a correspondent
bank to enable it to inject additional capital into the Banks. The Company
subsequently drew on this line of credit and injected a total of $11,500,000
into its three Banks. At December 31, 2008 the line of credit is presented on
the consolidated balance sheet as note payable-other with an outstanding balance
of $11,000,000. This line of credit was repaid in full in April 2009 using a
portion of the proceeds upon the sale of preferred stock to the U. S. Treasury,
pursuant to its Capital Purchase Program. In December 2009, the Company
cancelled the line of credit.
65
NOTE 11 - INCOME TAXES
Provision for income taxes consists of the following (tabular amounts in
thousands):
For the years ended December 31,
--------------------------------
2009 2008
---- ----
Current tax provision
Federal ..................................................................... $ (126) $(2,153)
State ....................................................................... 40 -
------- -------
Total current taxes ..................................................... (86) (2,153
Deferred tax benefit ............................................................. (603) (3,031)
------- -------
$ (689) $(5,184)
======= =======
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 (tabular amounts in thousands):
For the years ended December 31,
--------------------------------
2009 2008
---- ----
Tax (benefit) expense at statutory rate .......................................... $ (42) $(4,610)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit .................................. 26 -
Tax-exempt interest income .................................................. (513) (511)
Investment in life insurance ................................................ (160) (150)
Other ....................................................................... - 87
------- -------
Provision for income taxes ....................................................... $ (689) $(5,184)
======= =======
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 (tabular amounts
in thousands):
December 31,
------------
2009 2008
---- ----
Deferred tax assets
Allowance for loan losses ........................................................... $ 2,526 $ 3,134
Deferred compensation ............................................................... 340 254
Other than temporary impairment ..................................................... 1,032 1,033
Alternative minimum tax credit ...................................................... 918 -
Other ............................................................................... 553 417
------- -------
5,369 4,838
------- -------
Deferred tax liabilities
Depreciation ........................................................................ (2) (104)
Prepaid expenses .................................................................... (210) (180)
Unrealized holding gains on securities available for sale ........................... (1,043) (758)
------- -------
(1,255) (1,042)
------- -------
Net deferred tax assets included in other assets ......................................... $ 4,114 $ 3,796
======= =======
The Company has analyzed the tax positions taken or expected to be taken in its
tax returns and concluded it has no liability related to uncertain tax positions
in accordance with ASC Topic 740.
66
NOTE 12 - 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, 2009, unfunded commitments
to extend credit were $70,731,000, of which $65,435,000 were at variable rates
and $5,296,000 were at fixed rates. These commitments included $4,651,000 of
unfunded amounts of construction loans, $47,179,000 of undisbursed amounts of
home equity lines of credit, $12,436,000 of unfunded amounts under commercial
lines of credit, and $6,465,000 of other commitments to extend credit. The
Company evaluates each customer's creditworthiness 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, 2009, there was $2,953,000 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.
The Company has not recorded a liability for the current carrying amount of the
obligation to perform as a guarantor, and no contingent liability was considered
necessary, as such amounts were not considered material.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company is, from time to time, a party to various lawsuits and claims
arising from the ordinary conduct of its business. Management does not expect
such matters to have any material adverse effect on the financial position or
results of operations of the Company.
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of loans receivable, investment securities,
federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal
and commercial purposes primarily in the upstate region of South Carolina. The
Company's loan portfolio is not concentrated in loans to any single borrower or
to a relatively small number of borrowers. Additionally, management is not aware
of any concentrations of loans to classes of borrowers or industries that would
be similarly affected by economic conditions. However, a substantial portion of
the Company's loans are secured by real estate.
In addition to monitoring potential concentrations of loans to particular
borrowers or groups of borrowers, industries and geographic regions, management
monitors exposure to credit risk that could arise from potential concentrations
of lending products and practices such as loans that subject borrowers to
substantial payment increases (e.g. principal deferral periods, loans with
initial interest-only periods, etc), and loans with high loan-to-value ratios.
Additionally, there are industry practices that could subject the Company to
increased credit risk should economic conditions change
(Continued)
67
NOTE 13 - COMMITMENTS AND CONTINGENCIES, Continued
over the course of a loan's life. For example, the Company makes variable rate
loans and fixed rate principal-amortizing loans with maturities prior to the
loan being fully paid (i.e. balloon payment loans). These loans are underwritten
and monitored to manage the associated risks. Management has determined that
there is no concentration of credit risk associated with its lending policies or
practices.
The Company's investment portfolio consists principally of obligations of the
United States of America, its agencies or its corporations and general
obligation municipal securities. In the opinion of management, there is no
concentration of credit risk in its investment portfolio. The Company places its
deposits and correspondent accounts with and sells its federal funds to high
quality institutions. Management believes credit risk associated with
correspondent accounts is not significant.
NOTE 14 - RELATED PARTY TRANSACTIONS
At December 31, 2009 and 2008, 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 $22,406,000 and
$21,691,000, respectively. During 2009, $6,388,000 of new loans were made to
this group and repayments of $5,673,000 were received. This same group had
deposits in the Banks of $6,863,000 and $5,839,000 at December 31, 2009 and
2008, respectively.
NOTE 15 - COMMON STOCK AND EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is computed and presented in accordance with
ASC Topic 260. The assumed conversion of stock options creates the difference
between basic and diluted net income (loss) per common share. Income (loss) per
share is calculated by dividing net income by the weighted average number of
common shares outstanding for each period presented.
December 31,
------------
2009 2008
---- ----
Net (loss) available to common shareholders .. $ (224) $ (8,376)
Weighted average shares outstanding:
Basic ........................................ 7,030,935 7,062,218
Diluted ...................................... 7,030,935 7,062,218
Loss per common share:
Basic ........................................ $ (0.03) $ (1.19)
============= =============
Diluted ...................................... $ (0.03) $ (1.19)
============= =============
Common shares totaling 58,899 were excluded from the 2009 earnings per share
calculation because they are considered anti-dilutive and 242 shares were
excluded from the calculation in 2008.
A Special Meeting of the Shareholders was called on January 9, 2009 for the sole
purpose of amending the Company's Articles of Incorporation to authorize the
Board of Directors to issue shares of Preferred Stock. A small group of
dissenting shareholders representing 67,636 shares of Common Stock exercised
their right to surrender their shares to the Company in exchange for fair value.
The Company paid $243,000 in cash for these surrendered shares in 2009. The
dissenting shareholders asserted that their shares had a greater fair value and,
in accordance with South Carolina law, the Company brought suit to have the
court determine what additional amount, if any, is due. The litigation is
ongoing.
68
NOTE 16 - PREFERRED STOCK AND RESTRICTIONS ON DIVIDENDS
On April 24, 2009 the Company entered into a Letter Agreement and Securities
Purchase Agreement (the "Purchase Agreement") with the U.S. Treasury Department
("Treasury") under the Troubled Asset Relief Program ("TARP") Capital Purchase
Program, pursuant to which the Company sold the Treasury (i) 12,660 shares of
the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series T (the
"Series T Preferred Stock") and (ii) a warrant (the "Warrant") to purchase 633
shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series
W (the "Series W Preferred Stock") for an aggregate purchase price of
$12,660,000 in cash. (The Series T Preferred Stock and Series W Preferred Stock
are referred to collectively as the "Preferred Stock,") The Warrant was
exercised by Treasury immediately, and the net proceeds from the sale of
$12,615,000 were allocated between the Series T Preferred Stock and the Series W
Preferred Stock based on their relative fair values at the time of the sale. Of
the net proceeds, $11,910,000 was allocated to the Series T Preferred Stock and
$705,000 was allocated to the Series W Preferred Stock. The accretion of the
discount recorded on the Series T Preferred Stock, net of the amortization of
the premium recorded on the Series W Preferred Stock, is offset directly against
retained earnings over a five-year period applying a level yield, and is
reported on the consolidated statement of income in the determination of the
amount of net income (loss) available to common shareholders.
The Series T Preferred Stock will pay cumulative dividends at a rate of 5% per
annum for the first five years and 9% per annum thereafter. The Series W
Preferred Stock will pay cumulative dividends at a rate of 9% per annum. The
cumulative dividend for the Preferred Stock is accrued and payable on February
15, May 15, August 15 and November 15 of each year. The Company has declared and
paid $385,000 in preferred stock dividends to the U.S. Treasury in 2009. Both
the Series T and Series W Preferred Stock qualify as Tier I capital and may be
redeemed after April 24, 2012 at the stated amount of $1,000 per share plus any
accrued and unpaid dividends. Prior to April 24, 2012, the Preferred Stock may
be redeemed only with proceeds from the sale of qualifying equity securities.
The Preferred Stock is non-voting except for class voting rights on matters that
would adversely affect the rights of the holders of the Series T or Series W
Preferred Stock.
Pursuant to the terms of the Purchase Agreement, the ability of the Company to
declare or pay dividends or other distributions on its Common Stock is subject
to restrictions, including a restriction against increasing dividends from the
last quarterly cash dividend per share declared on the Common Stock prior to
April 24, 2009. In addition, as long as the Preferred Stock is outstanding,
Common Stock dividend payments are prohibited until all accrued and unpaid
dividends are paid on such Preferred Stock, subject to certain limited
exceptions. This restriction will terminate on April 24, 2012, or earlier if the
Preferred Stock has been redeemed in whole or if the Treasury has transferred
all of the Preferred Stock to third parties. The Company paid no cash dividends
to its common shareholders in 2009.
69
NOTE 17 - STOCK OPTION COMPENSATION PLANS
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 2009 and 2008: dividend yields of $0 to $0.20 per
share, expected volatility from 22 to 39 percent, risk-free interest rates from
2.44 to 3.98 percent, and expected life of 10 years. The weighted average fair
market value of options granted approximated $1.49 in 2009 and $1.82 in 2008.
A summary of the status of the plans as of December 31, 2009 and 2008, and
changes during the years ending on those dates is presented below (all shares
and exercise prices have been adjusted for stock dividends and the stock split
since the date of grant):
Options outstanding
-------------------
Weighted Weighted
Average Average Aggregate
Number Exercise Contractual Intrinsic
of Shares Price Term (years) Value
--------- ----- ------------ -----
Outstanding at December 31, 2007 ............................... 168,749 $ 10.29
Granted ........................................................ 16,000 7.62
Exercised ...................................................... (14,615) 5.34 $ -
Forfeited or expired ........................................... (23,871) 9.89
-------
Outstanding at December 31, 2008 ............................... 146,263 10.56
Granted ........................................................ 15,500 2.77
Exercised ...................................................... (500) 2.75 $ -
Forfeited or expired ........................................... (6,395) 9.27
-------
Outstanding at December 31, 2009 ............................... 154,868 9.86 6.23 $ -
=======
Options exercisable at year-end ................................ 129,999 10.21 6.14 $ -
=======
Shares available for grant at December 31, 2009 ................ 361,150
=======
Number Weighted Average
of Shares Grant Date Fair Value
--------- ---------------------
Non-vested options at December 31, 2008 .............................. 29,297 $11.38
Granted .............................................................. 15,500 2.77
Vested ............................................................... (17,013) 11.19
Forfeited or expired ................................................. (2,915) 12.62
-------
Non-vested options at December 31, 2009 .............................. 24,869 8.02
=======
As of December 31, 2009, we have unrecognized compensation cost of $76,814
related to unvested stock options.
(Continued)
70
NOTE 17 - STOCK OPTION COMPENSATION PLANS, Continued
Options outstanding Options exercisable
------------------- -------------------
Weighted
average Weighted Weighted
Number remaining average Number average
of shares contractual exercise of shares exercise
outstanding life (years) price exercisable price
----------- ------------ ----- ----------- -----
7,721 0.2 8.16 7,721 8.16
5,646 1.0 8.80 5,646 8.80
6,318 1.3 7.60 6,318 7.60
8,016 2.3 8.86 8,016 8.86
10,461 2.5 9.34 10,461 9.34
5,730 3.3 10.47 5,730 10.47
22,096 4.3 14.49 22,096 14.49
1,823 4.6 13.71 1,823 13.71
4,046 5.3 15.66 4,046 15.66
1,158 5.5 14.77 984 14.77
2,316 5.6 14.90 1,968 14.90
5,788 5.7 14.90 4,920 14.90
1,736 5.8 14.08 1,476 14.08
1,102 6.1 12.02 771 12.02
1,102 6.2 11.89 771 11.89
6,063 6.3 10.25 4,244 10.25
6,613 6.3 11.42 5,786 11.42
1,102 6.5 10.44 771 10.44
4,280 6.7 10.43 2,996 10.43
2,204 6.8 10.21 1,542 10.21
6,422 7.0 10.48 3,532 10.48
1,050 7.2 9.95 578 9.95
3,675 7.3 9.52 2,022 9.52
6,300 7.3 11.19 6,300 11.19
1,050 7.5 11.42 578 11.42
1,050 7.9 9.57 578 9.57
1,500 8.0 8.05 600 8.05
3,500 8.3 7.75 1,400 7.75
1,000 8.3 7.50 400 7.50
7,000 8.4 7.60 7,000 8.00
500 8.5 5.35 200 5.35
1,500 8.7 7.50 600 7.50
1,000 9.0 3.25 250 3.25
7,500 9.4 2.75 7,500 2.75
1,500 9.5 2.75 375 2.75
5,000 9.6 2.70 - 2.70
------- -------
154,868 6.2 9.86 129,999 10.21
======= =======
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.
71
NOTE 18 - 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 one-hundred percent of such contributions which do not
exceed three percent of the contributor's annual salary, plus fifty percent of
such contributions as exceed three percent but do not exceed five percent of the
contributor's annual salary, subject to certain adjustments and limitations.
Contributions to the plan of $212,553 and $240,441 were charged to operations
during 2009 and 2008, respectively.
Supplemental benefits have been approved by the Board of Directors for certain
executive officers of the Company. These benefits are not qualified under the
Internal Revenue Code and they are not funded. However, a source for certain
funding is provided informally and indirectly by life insurance policies owned
by the Banks. The Company recorded expense related to these benefits of $282,360
and $260,746 in 2009 and 2008, respectively.
NOTE 19 - 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 classifications 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 1 capital to risk-weighted assets, and of Tier 1
capital to adjusted total assets. Management believes, as of December 31, 2009,
that the Banks meet all capital adequacy requirements to which they are subject.
On October 15, 2008, one of the Company's Bank subsidiaries, the assets of which
represent approximately 25% of the Company's total consolidated assets, entered
into a formal agreement with the OCC for the Bank to take various actions with
respect to the operation of the Bank. The actions include:
a. creation of a committee of the Bank's board of directors to monitor
compliance with the agreement and make monthly reports to the board of
directors and the OCC;
b. development, implementation and adherence to a program to improve the
Bank's loan portfolio management;
c. adoption, implementation and adherence to written policies and
procedures for maintaining an adequate allowance for loan and lease
losses in accordance with generally accepted accounting principles and
regulatory guidance;
d. protection of its interest in its criticized assets (those assets
classified as "loss," "doubtful," "substandard," or "special mention"
by internal or external loan review or examination), and adoption,
implementation and adherence to a written program designed to
eliminate the basis of the criticism, as well as restricting further
extensions of credit to borrowers whose loans are subject to
criticism;
e. development, implementation and adherence to a written program to
improve its construction loan underwriting standards;
f. adoption, implementation and adherence to a written asset
diversification program that appropriately identifies and manages
concentration of credit risk;
g. adoption, implementation and adherence to a strategic plan, a capital
program and a profit plan;
h. ensuring that the level of liquidity at the Bank is sufficient to
sustain the Bank's current operations and meet anticipated or
extraordinary demand; and
(Continued)
72
NOTE 19 - REGULATORY MATTERS, continued
i. obtaining a determination of no supervisory objection from the OCC
before accepting brokered deposits.
Additionally, the Bank is required by the agreement to submit numerous periodic
reports to the OCC regarding various aspects of the foregoing actions.
The agreement resulted from the OCC's examination of the Bank that commenced in
the second quarter of 2008. Since the latter part of 2006 the Bank has
experienced an increase in criticized assets as the economy in the Bank's
primary lending areas has come under increasing downward pressure. The
substantive actions called for by the agreement should strengthen the Bank and
make it more efficient in the long-term. Implementation of the agreement has
increased the Bank's administrative costs somewhat for the near-term, but the
amount of such increase is not expected to be material to the Company.
The Banks' actual capital amounts and ratios and minimum regulatory
amounts and ratios are presented as follows:
To be well
capitalized under
For capital prompt corrective
adequacy purposes action provisions
----------------- -----------------
Actual Minimum Minimum
------ ------- -------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollar amounts in thousands)
Peoples Bancorporation, Inc.:
As of December 31, 2009
Total Capital (to risk-weighted assets) ..... $ 54,568 13.67% $ 31,934 8.00% N/A N/A
Tier 1 Capital (to risk-weighted assets) .... 49,546 12.41 15,970 4.00 N/A N/A
Tier 1 Capital (to adjusted total assets) ... 49,546 9.03 21,947 4.00 N/A N/A
As of December 31, 2008
Total Capital (to risk-weighted assets) ..... 45,435 10.77 33,749 8.00 N/A N/A
Tier 1 Capital (to risk-weighted assets) .... 40,040 9.49 16,877 4.00 N/A N/A
Tier 1 Capital (to adjusted total assets) ... 40,040 7.33 21,850 4.00 N/A N/A
The Peoples National Bank:
As of December 31, 2009
Total Capital (to risk-weighted assets) ..... 33,201 12.87 20,638 8.00 $ 25,797 10.00%
Tier 1 Capital (to risk-weighted assets) .... 29,954 11.61 10,320 4.00 15,480 6.00
Tier 1 Capital (to adjusted total assets) ... 29,954 8.73 13,725 4.00 17,156 5.00
As of December 31, 2008
Total Capital (to risk-weighted assets) ..... 34,922 12.44 22,458 8.00 28,072 10.00
Tier 1 Capital (to risk-weighted assets) .... 31,297 11.15 11,228 4.00 16,841 6.00
Tier 1 Capital (to adjusted total assets) ... 31,297 9.06 13,818 4.00 17,272 5.00
Bank of Anderson, N.A.:
As of December 31, 2009 (1)
Total Capital (to risk-weighted assets) ..... 13,111 15.16 10,378 12.00 N/A N/A
Tier 1 Capital (to risk-weighted assets) .... 12,025 13.90 8,651 10.00 N/A N/A
Tier 1 Capital (to adjusted total assets) ... 12,025 9.01 10,677 8.00 N/A N/A
As of December 31, 2008 (1)
Total Capital (to risk-weighted assets) ..... 13,922 15.27 10,941 12.00 N/A N/A
Tier 1 Capital (to risk-weighted assets) .... 12,777 14.02 9,113 10.00 N/A N/A
Tier 1 Capital (to adjusted total assets) ... 12,777 9.58 10,670 8.00 N/A N/A
(Continued)
73
NOTE 19 - 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
------ ----- ------ ----- ------ -----
(dollar amounts in thousands)
Seneca National Bank:
As of December 31, 2009
Total Capital (to risk-weighted assets) 6,703 12.31 4,356 8.00 5,445 10.00
Tier 1 Capital (to risk-weighted assets) 6,017 11.05 2,178 4.00 3,267 6.00
Tier 1 Capital (to adjusted total assets) 6,017 8.08 2,979 4.00 3,723 5.00
As of December 31, 2008
Total Capital (to risk-weighted assets) 7,198 14.44 3,988 8.00 4,985 10.00
Tier 1 Capital (to risk-weighted assets) 6,574 13.19 1,994 4.00 2,990 6.00
Tier 1 Capital (to adjusted total assets) 6,574 9.76 2,695 4.00 3,368 5.00
(1) Minimum ratios have been revised to meet minimum required regulatory ratios
as part of the formal agreement with the Comptroller.
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820 requires disclosure of fair value information, whether or not
recognized in the balance sheets, when it is practical to estimate the fair
value. ASC Topic 820 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, federal funds sold and purchased,
short-term FHLB advances, and securities sold under repurchase agreements.
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 cash surrender value life insurance approximates its carrying
value.
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 certificates of
deposit are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments.
Fair value for note payable-other 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.
(Continued)
74
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (Continued)
Fair value of off-balance sheet instruments is 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,
------------
2009 2008
---- ----
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
Financial assets:
Cash and due from banks ................................... $ 11,862 $ 11,862 $ 7,874 $ 7,874
Interest-bearing deposits in other banks .................. 420 420 765 765
Federal funds sold ........................................ 14,592 14,592 9,185 9,185
Trading assets ............................................ 128 128 47 47
Securities available for sale ............................. 103,227 103,227 96,003 96,003
Securities held to maturity ............................... 8,402 8,621 12,651 12,666
Other investments ......................................... 4,456 4,456 3,546 3,546
Loans (gross) ............................................. 373,574 370,420 398,711 395,447
Cash surrender value life insurance ....................... 12,304 12,304 11,815 11,815
Financial liabilities:
Deposits .................................................. 484,996 477,788 445,369 442,221
Securities sold under repurchase agreements ............... 12,785 12,785 22,181 22,181
Federal funds purchased ................................... 399 399 1,028 1,028
Advances from Federal Home Loan Bank ...................... - - 34,600 34,600
Note payable - other ...................................... - - 11,000 11,000
The ASC for fair value provides a framework for measuring and disclosing fair
value under generally accepted accounting principles and requires disclosures
about the fair value of assets and liabilities recognized in the balance sheet
in periods subsequent to initial recognition, whether the measurements are made
on a recurring basis (for example, available-for-sale investment securities) or
on a nonrecurring basis (for example, impaired loans).
Fair value is identified as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. The standard establishes a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
(Continued)
75
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS, (Continued)
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 1 assets and liabilities include debt and equity securities and
derivative contracts that are traded in an active exchange market, as
well as U.S. Treasury and other securities that are highly liquid and
are actively traded in over-the-counter markets.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted 2 prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include debt securities
with quoted prices that are traded less frequently than exchange-traded
instruments and derivative contracts whose value is determined using a
pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data.
This category generally includes U. S. Government and agency
mortgage-backed debt securities and impaired loans that are carried at
the appraisal value of the underlying collateral.
Level 3 Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments
for which the determination of fair value requires significant
management judgment or estimation. For example, this category generally
includes certain private equity investments, retained residual
interests in securitizations, residential mortgage servicing rights,
and highly-structured or long-term derivative contracts.
Assets and liabilities measured at fair value on a recurring basis are as
follows as of December 31, 2009 (tabular amounts in thousands):
Quoted market price
in active markets for Significant
identical other Significant
assets/liabilities observable inputs unobservable inputs
(Level 1) (Level 2) (Level 3) Total
--------- --------- --------- -----
Recurring Basis:
Available for sale
investment securities ........................ $ - $103,227 $ - $103,227
Trading assets ................................. 128 - - 128
-------- -------- -------- --------
Total .......................................... $ 128 $103,227 $ - $103,355
======== ======== ======== ========
Nonrecurring Basis:
Impaired loans ................................. $ - $ 14,746 - $ 14,746
Other real estate owned ........................ - 11,490 - 11,490
-------- -------- -------- --------
Total .......................................... $ - $ 26,236 - $ 26,236
======== ======== ======== ========
76
NOTE 21 - CONDENSED FINANCIAL INFORMATION
Following is condensed financial information of Peoples Bancorporation, Inc.
(parent company only) (tabular amounts in thousands):
CONDENSED BALANCE SHEETS
December 31,
------------
2009 2008
---- ----
ASSETS
Cash ...................................... $ 1,589 $ 373
Investment in bank subsidiaries ........... 52,892 52,123
Other assets .............................. 294 287
------- -------
$54,775 $52,783
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable ............................. $ - $11,000
Other liabilities ......................... 332 271
Shareholders' equity ...................... 54,443 41,512
------- -------
$54,775 $52,783
======= =======
CONDENSED STATEMENTS OF INCOME
For the years ended December 31,
--------------------------------
2009 2008
---- ----
INCOME
Fees and dividends from subsidiaries ...... $ 5,189 $ 6,724
------- -------
EXPENSES
Interest expense .......................... 182 104
Salaries and benefits ..................... 3,477 3,751
Occupancy ................................. 7 9
Equipment ................................. 392 457
Other operating ........................... 1,139 1,394
------- -------
5,197 5,715
------- -------
EQUITY IN UNDISTRIBUTED NET INCOME (LOSS)
OF BANK SUBSIDIARIES ...................... 220 (9,481)
------- -------
Income (loss) before income taxes ...... 212 (8,472)
INCOME TAX BENEFIT ............................. (108) (96)
------- -------
Net income (loss) .......................... 320 $(8,376)
======= =======
(Continued)
77
NOTE 21 - CONDENSED FINANCIAL INFORMATION, Continued
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
2009 2008
---- ----
OPERATING ACTIVITIES
Net income (loss) ......................................................................... $ 320 $ (8,376)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities
Equity in undistributed net (income) loss of bank subsidiaries ....................... (220) 9,481
Stock based compensation ............................................................. 73 72
(Increase) decrease in other assets .................................................. (7) 1,026
(Decrease) increase in other liabilities ............................................. 61 (314)
-------- --------
Net cash provided by operating activities ......................................... 227 1,889
FINANCING ACTIVITIES
Payments for investments in bank subsidiaries ............................................. - (12,500)
Net change in borrowings .................................................................. (11,000) 11,000
Proceeds from the exercise of stock options ............................................... 2 71
Proceeds from the issuance of preferred stock ............................................. 12,615 -
Common shares surrendered for cash by dissenting shareholders ............................. (243) -
Cash dividends ............................................................................ (385) (1,060)
Proceeds (repayment) of advances from subsidiaries ........................................ - (1,200)
-------- --------
Net cash provided by (used) for financing activities ............................. 989 (3,689)
-------- --------
Net increase (decrease) in cash .................................................. 1,216 (1,800)
CASH, BEGINNING OF YEAR ........................................................................ 373 2,173
-------- --------
CASH, END OF YEAR .............................................................................. $ 1,589 $ 373
======== ========
78
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(T). CONTROLS AND PROCEDURES
Disclosure 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.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). A system of internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of management,
including the principal executive officer and the principal financial officer,
the Company's management has evaluated the effectiveness of its internal control
over financial reporting as of December 31, 2009 based on the criteria
established in a report entitled "Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission" and the
interpretive guidance issued by the Securities and Exchange Commission in
Release No. 34-55929. Based on this evaluation, the Company's management has
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2009.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting because management's report was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
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 2009 that was not so disclosed.
79
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth under the captions "ELECTION OF DIRECTORS AND
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE 2010 ANNUAL MEETING," "EXECUTIVE
OFFICERS," "GOVERNANCE MATTERS - Committees of the Board - Audit Committee," and
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy Statement
to be used in conjunction with the 2010 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.
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
407(d)(5) 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
The information set forth under the caption "MANAGEMENT COMPENSATION"
in the Proxy Statement is incorporated herein by reference.
80
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.
The following table sets forth aggregated information as of December
31, 2009 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 to be Weighted-average exercise Number of securities
issued upon price of outstanding remaining available for
exercise of options, warrants and future issuance
outstanding options, rights under equity compensation
warrants and rights plans (excluding securities
reflected in column (a))
(a) (b) (c)
------------------ --------------- -------------- -----------------
Equity compensation
Plans approved by
Security holders 154,868 $ 9.86 361,150
Equity compensation
Plans not approved
By security holders - - -
------- ------ -------
Total 154,868 $ 9.86 361,150
======= ====== =======
For further information about the Company's plans as set forth in the
above table, see Note 17 of the consolidated financial statements set forth in
Item 8 of this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information set forth under the caption "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" and "GOVERNANCE MATTERS - Director Independence" in the
Proxy Statement is incorporated herein by reference. Each member of our Audit,
Compensation and Nominating Committees is independent as such term is defined by
the Nasdaq Stock Market, LLC Marketplace Rules.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth under the caption "INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM" in the Proxy Statement is incorporated herein by
reference.
81
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements and Financial Schedules
The following consolidated financial statements and report of
independent registered public accounting firm 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, 2009 and 2008
Consolidated Statements of Income - Years ended December 31, 2009 and
2008
Consolidated Statements of Cash Flows - Years ended December 31, 2009
and 2008
Consolidated Statements of Shareholders' Equity and Comprehensive
Income - Years ended December 31, 2009 and 2008
Notes to Consolidated Financial Statements - December 31, 2009
(a) (3) Listing of Exhibits:
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation, as amended (incorporated by
reference to Registrant's Form 10-Q for the quarter ended
March 31, 2009.
3.2 Bylaws, as amended (incorporated by reference to exhibits to
Registrant's Current Report on Form 8-K filed November 24,
2008.
4.1 Specimen Common Stock Certificate (incorporated by reference
to exhibits to Registrant's Registration Statement on Form S-4
(Number 33-46649)).
4.2 Form of Certificate for Registrant's Series T Preferred Stock
(incorporated by reference to Form 8-K filed April 28, 2009).
4.3 Form of Certificate for Registrant's Series W Preferred Stock
(incorporated by reference to Form 8-K filed April 28, 2009).
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)).
82
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 Peoples Bancorporation, Inc. 2007 Non-Employee Directors Stock
Option Plan (incorporated by reference to Registrant's Form
10-Q for the quarter ended June 30, 2007).
10.6 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and R. Riggie Ridgeway
(incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 2004 (the "2004 10-K")).
10.7 Employment Agreement, dated September 2, 2008 between the
Company and William B. West (incorporated by reference to
Forms 8-K filed September 4, 2008 and July 27, 2009).
10.8 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and C. Kyle Thomas
(incorporated by reference to the 2004 10-K).
10.9 Employment Agreement, dated September 2, 2008, between The
Peoples National Bank and L. Andrew Westbrook, III
(incorporated by reference to Forms 8-K filed September 4,
2008 and July 27, 2009).
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 Ralph R.
Ridgeway (incorporated by reference to exhibits to
Registrant's Form 10-K for the year ended December 31, 2002).
10.12 Salary Continuation Agreement between the Company and Robert
E. Dye, Jr., dated October 24, 2006 (incorporated by reference
to Form 8-K filed October 30, 2006).
10.13 Salary Continuation Agreement between the Company and Daniel
B. Minnis, dated October 24, 2006 (incorporated by reference
to Form 8-K filed October 30, 2006).
10.14 Salary Continuation Agreement between the Company and C. Kyle
Thomas, dated October 24, 2006 (incorporated by reference to
Form 8-K filed October 30, 2006).
10.15 Salary Continuation Agreement between the Company and William
B. West, dated October 24, 2006 (incorporated by reference to
Form 8-K filed October 30, 2006).
10.16 Salary Continuation Agreement between the Company and L.
Andrew Westbrook, III, dated October 24, 2006 (incorporated by
reference to Form 8-K filed October 30, 2006).
10.17 Formal Agreement between Bank of Anderson, N. A., and the
Comptroller of the Currency dated October 15, 2008
(incorporated by reference to Form 10-K for the year ended
December 31, 2009).
10.18 Letter Agreement, dated April 24, 2009, between Peoples
Bancorporation, Inc., and the United States Department of the
Treasury with respect to the issuance and sale of the Series T
Preferred Stock and the Warrant (incorporated by reference to
Form 8-K filed April 28, 2009).
83
21. Subsidiaries of the Registrant (incorporated by reference to
exhibits to the 2004 10-K).
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
99.1 Chief Executive Officer Certification pursuant to 31 C.F.R.
Section 30.15
99.2 Chief Financial Officer Certification pursuant to 31 C.F.R.
Section 30.15
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this amended Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Peoples Bancorporation, Inc.
Dated: March 30, 2010 By: /s/ R. Riggie Ridgeway
-----------------------------------
R. Riggie Ridgeway
Chief Executive Officer
Dated: March 30, 2010 By: /s/ 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 amended 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/ Paul C. Aughtry, III Director March 30, 2010
--------------------------------------------
Paul C. Aughtry, III
/s/ Charles E. Dalton Director March 30, 2010
--------------------------------------------
Charles E. Dalton
/s/ Robert E. Dye, Jr. Senior Vice March 30, 2010
--------------------------------------------
Robert E. Dye, Jr. President, Secretary
and Director
/w/ W. Rutledge Galloway Director March 30, 2010
--------------------------------------------
W. Rutledge Galloway
Director March __, 2010
--------------------------------------------
R. David Land
85
/s/ E. Smyth McKissick, III Director March 30, 2010
--------------------------------------------
E. Smyth McKissick, III
/s/ Eugene W. Merritt, Jr. Director March 30, 2010
--------------------------------------------
Eugene W. Merritt, Jr.
/s/ George B. Nalley, Jr. Chairman and March 30, 2010
--------------------------------------------
George B. Nalley, Jr. Director
Director March __, 2010
--------------------------------------------
G. Weston Nalley
/s/ Timothy J. Reed Director March 30, 2010
--------------------------------------------
Timothy J. Reed
/s/ R. Riggie Ridgeway Chief Executive March 30, 2010
--------------------------------------------
R. Riggie Ridgeway Officer and
Director
/s/ William R. Rowan, III Director March 30, 2010
--------------------------------------------
William R. Rowan, III
/s/ D. Gray Suggs Director March 30, 2010
--------------------------------------------
D. Gray Suggs
/s/ A. J. Thompson, Jr, M. D. Director March 30, 2010
--------------------------------------------
A. J. Thompson, Jr., M. D.
/s/ William B. West Executive Vice March 30, 2010
--------------------------------------------
William B. West President, Treasurer
and Director
/s/ L. Andrew Westbrook, III President, Chief March 30, 2010
--------------------------------------------
L. Andrew Westbrook, III Operating Officer,
and Director
86
EXHIBIT INDEX
Exhibit No. Description of Exhibit
3.1 Articles of Incorporation, as amended (incorporated by
reference to Registrant's Form 10-Q for the quarter ended
March 31, 2009.
3.2 Bylaws, as amended (incorporated by reference to exhibits to
Registrant's Current Report on Form 8-K filed November 24,
2008.
4.1 Specimen Common Stock Certificate (incorporated by reference
to exhibits to Registrant's Registration Statement on Form S-4
(Number 33-46649)).
4.2 Form of Certificate for Registrant's Series T Preferred Stock
(incorporated by reference to Form 8-K filed April 28, 2009).
4.3 Form of Certificate for Registrant's Series W Preferred Stock
(incorporated by reference to Form 8-K filed April 28, 2009).
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 Peoples Bancorporation, Inc. 2007 Non-Employee Directors Stock
Option Plan (incorporated by reference to Registrant's Form
10-Q for the quarter ended June 30, 2007).
10.6 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and R. Riggie Ridgeway
(incorporated by reference to Registrant's Form 10-K for the
year ended December 31, 2004 (the "2004 10-K")).
10.7 Employment Agreement, dated September 2, 2008 between the
Company and William B. West (incorporated by reference to
Forms 8-K filed September 4, 2008 and July 27, 2009).
10.8 Non-competition, Severance and Employment Agreement, dated
February 23, 2005 between the Company and C. Kyle Thomas
(incorporated by reference to the 2004 10-K).
10.9 Employment Agreement, dated September 2, 2008, between The
Peoples National Bank and L. Andrew Westbrook, III
(incorporated by reference to Forms 8-K filed September 4,
2008 and July 27, 2009).
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).
87
10.11 Split 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).
10.12 Salary Continuation Agreement between the Company and Robert
E. Dye, Jr., dated October 24, 2006 (incorporated by reference
to Form 8-K filed October 30, 2006).
10.13 Salary Continuation Agreement between the Company and Daniel
B. Minnis, dated October 24, 2006 (incorporated by reference
to Form 8-K filed October 30, 2006).
10.14 Salary Continuation Agreement between the Company and C. Kyle
Thomas, dated October 24, 2006 (incorporated by reference to
Form 8-K filed October 30, 2006).
10.15 Salary Continuation Agreement between the Company and William
B. West, dated October 24, 2006 (incorporated by reference to
Form 8-K filed October 30, 2006).
10.16 Salary Continuation Agreement between the Company and L.
Andrew Westbrook, III, dated October 24, 2006 (incorporated by
reference to Form 8-K filed October 30, 2006).
10.17 Formal Agreement between Bank of Anderson, N. A., and the
Comptroller of the Currency dated October 15, 2008
(incorporated by reference to Form 10-K for the year ended
December 31, 2009).
10.18 Letter Agreement, dated April 24, 2009, between Peoples
Bancorporation, Inc., and the United States Department of the
Treasury with respect to the issuance and sale of the Series T
Preferred Stock and the Warrant (incorporated by reference to
Form 8-K filed April 28, 2009).
21. Subsidiaries of the Registrant (incorporated by reference to
exhibits to the 2004 10-K).
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
99.1 Chief Executive Officer Certification pursuant to 31 C.F.R.
Section 30.15
99.2 Chief Financial Officer Certification pursuant to 31 C.F.R.
Section 30.15
88