SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended Commission file
September 30, 1998 000-20616
PEOPLES BANCORPORATION, INC.
(Exact name of small business issuer as specified in charter)
South Carolina 57-09581843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 East Main Street, Easley, South Carolina 29640
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (864) 859-2265
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
The number of outstanding shares of the issuer's $1.67 par value common stock as
of November 5, 1998 was 2,620,619.
Transitional Small Business Disclosure Format:
Yes [ ] No [X]
<PAGE>
PEOPLES BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
Unaudited Audited
--------- -------
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS .............................................................. $ 5,703 $ 3,909
FEDERAL FUNDS SOLD ................................................................... 15,640 4,570
SECURITIES
Available for sale ................................................................. 26,530 20,321
Held for investment (market value of $4,081
and $3,954) ...................................................................... 3,951 3,852
LOANS - less allowance for loan losses of $1,057
and $987 ......................................................................... 79,746 75,862
PREMISES AND EQUIPMENT, net of accumulated
depreciation and amortization .................................................... 4,117 2,674
ACCRUED INTEREST RECEIVABLE .......................................................... 1,018 878
OTHER ASSETS ......................................................................... 1,681 1,350
-------- ---------
TOTAL ASSETS ......................................................................... $138,386 $ 113,416
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing ................................................................ $ 14,758 $ 11,008
Interest-bearing ................................................................... 94,684 85,182
-------- ---------
Total deposits .................................................................. 109,442 96,190
SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS ......................................................................... 5,963 4,433
NOTES PAYABLE TO FEDERAL HOME LOAN BANK .............................................. 2,000 2,031
ACCRUED INTEREST PAYABLE ............................................................. 775 861
OTHER LIABILITIES .................................................................... 324 392
-------- ---------
Total liabilities ............................................................... 118,504 103,907
-------- ---------
SHAREHOLDERS' EQUITY
Common Stock-10,000,000 shares authorized, $1.67 par
value per share, 2,432,047 shares and 1,687,250 shares
outstanding at September 30, 1998 and December 31, 1997,
respectively ....................................................................... 4,062 2,817
Additional paid-in capital ........................................................... 13,447 5,158
Retained earnings .................................................................... 2,345 1,553
Unrealized gain (loss) on securities available for sale .............................. 28 (19)
-------- ---------
Total shareholders' equity ...................................................... 19,882 9,509
-------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY ............................................. $138,386 $ 113,416
======== =========
</TABLE>
1
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PEOPLES BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans ................................. $ 1,888 $ 1,849 $ 5,506 $ 5,182
Interest on securities
Taxable ............................................... 375 273 1,067 848
Tax-exempt ............................................ 58 63 176 182
Interest on fed funds ...................................... 170 55 368 140
---------- ---------- ---------- ----------
Total interest income ...................................... 2,490 2,240 7,117 6,352
INTEREST EXPENSE
Interest on deposits ....................................... 1,033 932 3,096 2,574
Interest on federal funds purchased and securities
sold under repurchase agreements ...................... 49 35 127 108
Interest on notes payable Federal Home
Loan Bank ............................................. 29 94 85 265
---------- ---------- ---------- ----------
Total interest expense ..................................... 1,111 1,061 3,309 2,947
---------- ---------- ---------- ----------
Net interest income ........................................ 1,379 1,179 3,809 3,405
PROVISION FOR LOAN LOSSES .................................. 152 116 154 217
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ........................................... 1,227 1,063 3,655 3,188
NON-INTEREST INCOME
Service fees and other income .............................. 309 200 852 560
Gain on sales of securities available for sale ............. 0 0 0 3
---------- ---------- ---------- ----------
309 200 852 563
NON-INTEREST EXPENSE
Salaries and benefits ...................................... 655 427 1,684 1,260
Occupancy .................................................. 54 49 162 129
Equipment .................................................. 92 65 238 191
Other operating expenses ................................... 380 211 941 612
---------- ---------- ---------- ----------
1,181 752 3,025 2,193
Income before income taxes ................................. 355 510 1,482 1,558
PROVISION FOR INCOME TAXES ................................. 114 168 486 514
---------- ---------- ---------- ----------
Net income ................................................. $ 240 $ 342 $ 995 $ 1,044
========== ========== ========== ==========
INCOME PER COMMON SHARE:
BASIC ................................................. $ 0.10 $ 0.21 $ 0.41 $ 0.65
========== ========== ========== ==========
DILUTED ............................................... $ 0.09 $ 0.20 $ 0.39 $ 0.62
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC ................................................. 2,432,047 1,628,662 2,432,047 1,607,342
========== ========== ========== ==========
DILUTED ............................................... 2,567,016 1,710,095 2,564,678 1,673,605
========== ========== ========== ==========
DIVIDENDS PAID PER COMMON SHARE ............................ $ 0.035 $ 0.03 $ 0.105 $ 0.09
========== ========== ========== ==========
</TABLE>
2
<PAGE>
EOPLES BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income ..................................................... $240 $342 $ 995 $1,044
Other comprehensive income, net of tax:
Unrealized income (loss) on securities
arising during period ...................................... 63 33 47 17
---- ---- ------ ------
Comprehensive income ........................................... $303 $375 $1,042 $1,060
==== ==== ====== ======
</TABLE>
3
<PAGE>
PEOPLES BANCORPORATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
($ in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income ............................................................................... $ 995 $ 1,044
Adjustments to reconcile net cash provided
by operating activities:
Loss (gain) on sales of securities ..................................................... 0 (3)
Provision for loan losses .............................................................. 154 217
Depreciation ........................................................................... 163 109
Net amortization and (accretion) of premiums and
discounts on securities ................................................................ 88 42
(Increase) in accrued interest receivable .............................................. (139) (135)
(Increase) in other assets ............................................................. (404) (151)
Increase (decrease) in accrued interest payable ........................................ (86) 78
Increase (decrease) in other liabilities ............................................... (68) 79
-------- --------
Net cash provided by operating activities ........................................... 704 1,281
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities held for investment .............................................. (103) (550)
Purchases of securities available for sale ............................................... (21,562) (12,150)
Proceeds from the maturity of securities available for sale .............................. 12,034 3,650
Proceeds from the sale of securities available for sale .................................. 0 2,251
Proceeds from the call of securities available for sale .................................. 3,200 2,850
Purchase of Executive Officer's Life Insurance Investment ................................ 0 (1,090)
Net (increase) decrease in loans ......................................................... (3,884) (11,641)
Proceeds from the sale of property ....................................................... 0 39
Purchase of premises and equipment ....................................................... (1,606) (481)
-------- --------
Net cash used by investing activities ............................................... (11,920) (17,123)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ................................................................. 13,252 11,172
Net (decrease) in securities sold under
repurchase agreements .................................................................. 1,530 (480)
Net (decrease) increase in notes payable to Federal home Loan Bank ....................... (31) (418)
Proceeds from sale of common stock ....................................................... 9,497 0
Proceeds from stock options exercised .................................................... 36 31
Cash dividend ............................................................................ (204) (144)
-------- --------
Net cash provided by financing activities ........................................... 24,081 10,161
-------- --------
Net increase (decrease) in cash and cash equivalents ................................ 12,864 (5,682)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................................... 8,479 12,327
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................................. $ 21,343 $ 6,645
======== ========
CASH PAID FOR
Interest ................................................................................. $ 3,395 $ 2,615
======== ========
Income taxes ............................................................................. $ 503 $ 448
======== ========
</TABLE>
4
<PAGE>
PEOPLES BANCORPORATION, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of these policies is included in the 1997 Annual Report to
shareholders.
STATEMENT OF CASH FLOWS
Cash includes currency and coin, cash items in process of collection,
amounts due from banks and federal funds sold.
COMMON STOCK
The Board of Directors declared a cash dividend of $0.035 per common share
to shareholders of record September 14, 1998, June 18, 1998 and March 19, 1998,
payable October 6, 1998, June 30, 1998 and March 31, 1998, respectively
The Company adopted SFAS No. 128, Earnings per Share, on December 31, 1997.
This statement requires that the Company present basic and diluted net income
per share. The assumed conversion of stock options creates the difference
between basic and diluted net income per share. Income per share is calculated
by dividing net income by the weighted average number of common shares
outstanding for each period presented. The weighted average number of common
shares outstanding for basic net income per common share was 2,432,047 at
September 30, 1998 and 1,607,342 at September 30, 1997. The weighted average
number of common shares outstanding for diluted net income per common share was
2,564,678 at September 30, 1998 and 1,673,605 at September 30, 1997.
The Company issued a five-percent common stock dividend and a two-for-one
stock split in 1997. Net income per common share in 1997 has been restated to
reflect these transactions.
In July 1998 the Company completed the sale of 500,000 shares of its Common
Stock. In connection with this offering, the Company received net proceeds of
$6,460,000 of which $4,500,000 was used to capitalize the Company's newest
subsidiary, Bank of Anderson, National Association, and the remainder is to be
used to support expected internal growth. This offering was oversubscribed
shortly after it commenced and was, therefore, terminated on July 22, 1998.
On August 25, 1998, the Company commenced the sale of an additional 425,000
shares of its Common Stock in part to provide subscribers who were not able to
purchase shares in the prior offering with the opportunity to purchase shares.
In connection with this offering, the Company received net proceeds of
$5,490,000 of which $3,500,000 will be used to form a new de novo bank in
Seneca, South Carolina with the remainder to be used for general corporate
purposes. This offering was fully subscribed and was, therefore, terminated on
October 16, 1998.
NON-PERFORMING LOANS
As of September 30, 1998, there were ten non-accrual loans totaling
$508,000, two restructured loans totalling $211,000 and one loan 90 days past
due or more as to principal or interest payments in the amount of $324,000.
MANAGEMENT'S OPINION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Peoples Bancorporation, Inc. contain all adjustments
necessary to fairly present the financial results for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of the results to be expected for an entire year.
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the 1997
Annual Report of Peoples Bancorporation, Inc. on Form 10-KSB/A. Results of
operations for the nine-month period ending September 30, 1998 are not
necessarily indicative of the results to be attained for any other period.
Forward Looking Statements
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products and similar matters. 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 forward-looking statements. The
risks and uncertainties that may affect the operations, performances,
development and results of the Company's business include, but are not limited
to, the following: risks from changes in economic and industry conditions;
changes in interest rates; risks inherent in making loans including repayment
risks and value of collateral; dependence on senior management; and
recently-enacted or proposed legislation. Statements contained in this filing
regarding the demand for Peoples Bancorporation's products and services,
changing economic conditions, interest rates, consumer spending and numerous
other factors may be forward-looking statements and are subject to uncertainties
and risks.
OVERVIEW
Peoples Bancorporation, Inc. (the "Company"), headquartered in Easley, South
Carolina, was incorporated on March 6, 1992 for the primary purpose of effecting
the reorganization of The Peoples National Bank, Easley, South Carolina into a
bank holding company structure, which reorganization resulted in the ownership
by the Company of 100% of the issued and outstanding shares of common stock of
The Peoples National Bank. On September 3, 1998 the Company acquired 100% of the
issued and outstanding shares of common stock of Bank of Anderson, N. A.,
Anderson, South Carolina, a de novo bank sponsored by the Company. Bank of
Anderson, N. A. commenced operations on September 3, 1998 in temporary
facilities.
Both The Peoples National Bank and Bank of Anderson, N. A., are nationally
chartered financial institutions. The Peoples National Bank operates three
offices, one each in Easley, Pickens and Powdersville, South Carolina. Bank of
Anderson, N.A. operates from one location in the city of Anderson, South
Carolina.
In September of 1997, The Peoples National Bank received regulatory approval
to open a branch office in Seneca, South Carolina which is located in Oconee
County, South Carolina. Construction was begun on this office with the land,
building construction and equipment costs estimated to be approximately
$965,000. The Peoples National Bank has withdrawn its application to form this
branch because of the Company's decision to form a de novo bank in Seneca to be
named Seneca National Bank and to be housed in the facilities formerly scheduled
to be utilized as a branch of The Peoples National Bank. Company management is
in the process of seeking all necessary regulatory approval for the
establishment of this de novo bank. If all necessary regulatory approvals are
received, Seneca National Bank will be chartered as a national bank, and will
become a wholly owned subsidiary of the Company.
The Company entered into a construction contract during the second quarter
of 1998 for the construction of a building in Anderson South Carolina to house
the permanent operations of Bank of Anderson, N. A. The land, building
construction and equipment costs are estimated to total approximately $1,125,000
6
<PAGE>
The Company began construction of a central operations center, located
adjacent to The Peoples National Bank's main office in Easley, during the second
quarter of 1998. This building, which will house the central operations and
administrative offices of the Company, is expected to be completed in the fourth
quarter of 1998 with a projected cost of approximately $600,000.
The Company and its two existing bank subsidiaries presently employ
seventy-four (74) full-time and part-time persons. With the addition of the
Seneca bank, the Company expects to employ an additional six (6) persons.
EARNINGS REVIEW
The Company's net income for the third quarter of 1998 was $240,000, or
$0.14 per share ($0.09 diluted per share), compared to net income of $342,000,
or $0.21 per share ($0.20 diluted per share) for the third quarter of 1997. Net
income for the nine months ended September 30, 1998 was $995,000 or $0.41 per
share ($0.39 diluted per share), compared to $1,044,000, or $0.65 per share
($0.62 diluted per share) for the nine months ended September 30, 1997. Return
on average equity for the nine months and three months ended September 30, 1998
was 10.15% and 7.35%, respectively, compared to 15.60% and 15.33%, respectively,
for the same periods in 1997. Return on average assets for the nine months ended
September 30, 1998 was 1.06% compared to 1.32% for the same period in 1997. For
the third quarter of 1998, return on average assets was 0.76%, compared to 1.30%
for the same period in 1997.
The decrease in the Company's net income and profitability ratios from
1997's levels is directly attributable to pre-opening and early operating losses
associated with the Company's new subsidiary, Bank of Anderson, N.A., which
commenced banking operations on September 3, 1998, and the addition of several
key management positions at the parent company level. After tax losses
associated with Bank of Anderson, N.A. for the first nine months of 1998
amounted to $131,000, and management expects this subsidiary's operations to
continue to negatively impact the Company's performance for the remainder of
1998. In addition, the Company expects to begin incurring additional expenses
associated with the formation of Seneca National Bank during the fourth quarter,
which will also negatively impact the Company's performance during the upcoming
quarter. The operations of both Bank of Anderson, N.A. and Seneca National Bank
will also negatively impact the economic results of the Company in 1999.
Net Interest Income
The largest component of the Company's net income is net interest income.
Net interest income, which is the difference between the interest earned on
interest-earning assets and the interest paid on interest-bearing liabilities,
measures the gross profit from lending and investing activities and is the
primary contributor to the Company's earnings. Net interest income before the
provision for loan losses for the third quarter of 1998 amounted to $1,379,000,
an increase of $200,000, or 16.9%, over the third quarter of 1997. Net interest
income before the provision for loan losses for the nine months ended September
30, 1998 amounted to $3,809,000, an increase of $404,000, or 11.9%, over the
same period in 1997. This represents a 4.43% net interest margin (net interest
income divided by average earning assets) on average earning assets of
$114,527,000. For this same period in 1997, the net interest margin was 4.40%
based on average earning assets of $103,592,000. This slight increase in the net
interest margin resulted primarily from lower deposit costs than the decrease in
earning asset yields.
Non-interest Income
Non-interest income, excluding securities transactions, increased $110,000,
or 55.5%, to $309,000 for the third quarter of 1998 compared to $199,000 for the
third quarter of 1997. For the first nine months of 1998, non-interest income,
excluding securities transactions, increased $289,000, or 51.2%, to $852,000
compared to $563,000 for the first nine months of 1997. A $203,000 increase in
7
<PAGE>
origination fees on mortgage loans; earnings of $30,000 on the Bank's salary
continuation plan; and earnings of $71,000 from the Bank's specialized
investment program were the main contributors to the increase in non-interest
income in both 1998 periods when compared to the 1997 periods. No gain or loss
was realized on the sale of available for sale securities during the first nine
months of 1998. The Company recorded a $2,740 gain on the sale of available for
sale securities during the first nine months of 1997.
Non-interest Expense
Non-interest expense increased $429,000, or 57.1%, to $1,181,000 for the
third quarter of 1998 compared to $752,000 for the third quarter of 1997. For
the first nine months of 1998, non-interest expense increased $832,000, or
37.9%, to $3,025,000, compared to $2,193,000 for the same period in 1997.
Salaries and benefits, the largest single category of non-interest expense
items, increased $228,000, or 53.5%, to $655,000 in the 1998 quarter and
$424,000, or 33.6%, to $1,684,000 for the nine month period in 1998 due to
normal salary increases, the addition of several key employees during the last
six months of 1997 and the second quarter of 1998, and the full staffing of the
Bank of Anderson, N.A., during the third quarter of 1998. Occupancy and
equipment expense, collectively, increased $32,000, or 27.5%, in the 1998
quarter and $79,000, or 24.8%, for the first nine months of 1998 primarily due
to an increase in the purchase and maintenance of equipment for The Peoples
National Bank and Bank of Anderson, N.A. Other operating expenses increased
$170,000, or 80.7%, and $329,000, or 53.7%, for the 1998 quarter and the 1998
nine month period ending September 30, 1998, respectively, primarily as a result
of an increase in marketing expenses due to advertising commitments made by The
Peoples National Bank and advertising associated with the opening of Bank of
Anderson, N.A.; increases in computer expenses associated with the installation
of a wide area network and Year 2000 compliance issues; increases in stationary,
printing and supplies expense associated with the opening of Bank of Anderson,
N.A. and increases in expenses associated with the Company's Salary Continuation
Plan.
Provision for Loan Losses
The amount charged to the provision for loan losses by the Company is based
on management's judgement as to the amount required to maintain an allowance
adequate to provide for potential losses in the Company's loan portfolio.
The provision for loan losses charged to operations during the nine months
ended September 30, 1998 was $154,000 compared to a charge of $217,000 for the
same nine month period in 1997. The decrease is due primarily to a decrease in
net charge-offs experienced in the 1998 period when compared to the 1997 period.
BALANCE SHEET REVIEW
Loans
Outstanding loans represent the largest component of earning assets at 63.7%
of total earning assets. As of September 30, 1998, the Company had total gross
loans outstanding of $80,803,000, an increase of $3,954,000, or 5.1%, from
$76,849,000 in outstanding gross loans at December 31, 1997. For the first nine
months of 1998, the Company's loans averaged $77,168,000 compared to $72,755,000
for the same period of 1997. The increase resulted primarily from loans
generated by Bank of Anderson.
The interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. The average
yield on the company's loans for the nine months ended September 30, 1998 was
9.34% compared to 9.41% for the first nine months of 1997 and to 9.35% for the
twelve months ended December 31, 1997. The decline in the Company's loan yield
was primarily attributable to a shift in the composition of the loan portfolio
to a higher concentration of mortgage loans which generally carry lower rates of
interest than other types of loans. At September 30, 1998 approximately 33.8% of
the Company's outstanding loans carried adjustable rates of interest.
8
<PAGE>
The Company's loan portfolio consists principally of loans secured by real
estate, commercial loans and consumer loans. Substantially all of these loans
are to borrowers located in South Carolina and are concentrated in the Company's
market areas. The Company has no foreign loans or loans for highly leveraged
transactions.
Allowance for Loan Losses
The purpose of the Company's allowance for loan losses is to absorb loan
losses that occur in the loan portfolio. The allowance for loan losses
represents management's estimate of an amount adequate in relation to the risk
of future losses inherent in the loan portfolio.
While it is the Company's policy to charge off in the current period loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy, industry
trends and conditions affecting individual borrowers, management's judgment of
the allowance is necessarily approximate and imprecise. The Company is also
subject to regulatory examinations and determinations as to adequacy 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.
Management determines the adequacy of the allowance for loan losses
quarterly and considers a variety of factors in establishing the level of the
allowance and the related provision, which is charged to expense. In assessing
the adequacy of the allowance, management relies predominantly on its ongoing
review of the loan portfolio, 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 review considers the
judgements of management, an external loan review person and also those of bank
regulatory agencies that review the loan portfolio as part of their regular
examination process. The Comptroller of the Currency, as part of its routine
examination process of various national banks, including The Peoples National
Bank and Bank of Anderson, N. A., may require additions to the allowance based
upon information available to them at the time of their examination.
Management considers the allowance for loan losses adequate to absorb
possible losses on loans outstanding at September 30, 1998 and in the opinion of
management, there are no material risks or significant loan concentrations in
the present portfolio.
The allowance for loan losses at September 30, 1998 was $1,057,000, or
1.31%, of total loans outstanding compared to $921,000, or 1.18% and $987,000,
or 1.30%, at September 30, 1997 and December 31, 1997, respectively. Net
charge-offs during the first nine months of 1998 were $84,000, compared to net
charge-offs of $57,000 for the first nine months 1997 and to net charge-offs of
$98,000 for the year ended December 31, 1997.
At September 30, 1998 the Company had $508,000 in non-accruing loans, two
restructured loans totalling $211,000 and one loan more than ninety days past
due in the amount of $323,639 on which interest was still being accrued. This
compares to $563,000 in non-accruing loans, $11,000 in restructured loans and
$104,000 in loans more than ninety days past due on which interest was still
being accrued at September 30, 1997. At December 31, 1997, there was $757,000 in
non-accruing loans; one $10,000 restructured loan and a $142,000 loan more than
ninety days past due on which interest was still being accrued. Non-performing
assets as a percentage of loans and other real estate owned were 1.03%, 0.85%
and 1.17%, at September 30, 1998, September 30, 1997 and December 31, 1997,
respectively. The allowance for loan losses as a percentage of non-performing
loans was 127%, 108% and 91% at September 30, 1998, September 30, 1997 and
December 31, 1997 respectively.
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The Company accounts for impaired loans in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") 114,
Accounting by Creditors for Impairment of a Loan. SFAS No. 114, as amended by
SFAS No. 118, requires that impaired loans be measured based on the present
value of expected future cash flows or the underlying collateral values as
defined in the pronouncement. The Company includes the provisions of SFAS NO.
114, if any, in the allowance for loan losses. When the ultimate 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 first to principal
then to interest income. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent that
any interest has been foregone. Further cash receipts are recorded as recoveries
on any amounts previously charged off. On each of September 30, 1998, September
30, 1997 and December 31, 1998, the Company had no impaired loans.
Securities and Federal Funds Sold
Investment securities constituted 24.1% and 22.9% of earning assets as
of September 30, 1998 and December 31, 1997, respectively. At September 30,
1998, securities totaled $30,481,000, up $6,308,000 from December 31, 1997's
balance of $24,173,000. The increase in investment securities resulted from the
investment of excess funds attributable to an increase in deposits coupled with
soft loan demand.
At September 30, 1998 the book value of the Company's Available-for-Sale
portfolio was $26,488,000 and the market value of its Available-for-Sale
portfolio was $26,530,000 resulting in an unrealized gain before tax of $42,000.
The Company's total securities averaged $28,518,000 for the first nine months of
1998, 29.4% above the first nine months of 1997 average of $22,041,000.
The Company uses its investment portfolio to provide liquidity for
unexpected deposit liquidation or loan generation, to meet the Company's
interest rate sensitivity goals and to generate income. The Company emphasizes
safety in its selection of investment securities and, accordingly, the
investment portfolio is limited to securities of the United States government or
its agencies, mortgage backed securities and investment grade state and
municipal securities. The Company does not invest in corporate bonds nor does it
hold any trading securities.
At September 30, 1998 Fed Funds sold amounted to $15,640,000, a
$11,070,000, or 242.2%, increase over the $4,570,000 sold at December 31, 1997.
The increase is largely attributable to the investment of funds received from
the Company's two latest common stock offerings and overnight funds sold by Bank
of Anderson, N. A.
Deposits
The Company's primary source of funds for loans and investments is
deposits. Deposits increased 13.8% to $109,442,000 at September 30, 1998 from
$96,190,000 at December 31, 1997. The increase resulted principally from account
promotions at The Peoples National Bank and deposits generated by Bank of
Anderson. Competition for deposit accounts is primarily based on the interest
rates paid, location convenience and services offered.
During the first nine months of 1998, interest-bearing deposits averaged
$91,019,000 compared to $74,362,000 for the same period in 1997, and to
$76,516,106 for the twelve months ended December 31, 1997. The average interest
rate paid on interest-bearing deposits was 4.50% for the first nine months of
1998 compared to 4.72% for the first nine months of 1997. During the first nine
months of 1998, deposit pricing continued to be very competitive in the
Company's market areas, resulting in little downward pressure on deposit
interest rates. The Company expects this competitive deposit environment to
continue. In pricing deposits, the Company considers its liquidity needs, the
direction and levels of interest rates, anticipated loan demand and local market
10
<PAGE>
conditions. As of September 30, 1998, interest-bearing deposits comprised 86.5%
of total deposits. The Company does not believe that it has any brokered
deposits.
The Company's core deposit base consists of consumer time deposits,
savings accounts, NOW accounts, money market accounts and checking accounts.
Although such core deposits are becoming increasingly interest rate sensitive
for both the Company and the industry as a whole, such core deposits continue to
provide the Company with a large and stable source of funds. The Company closely
monitors its reliance on certificates greater than $100,000, which are generally
considered less stable and less reliable than core deposits.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity management entails meeting the cash flow requirements of the
Company. The primary cash flow requirements include withdrawals of deposits,
extensions of credit, payment of operating expenses, repayment of purchased
funds and dividends. The Company's principal sources of funds for liquidity
purposes are customer deposits, principal and interest payments on loans,
maturities and sale of debt securities, temporary investments and earnings. In
addition, the Company (through The Peoples National Bank and Bank of Anderson)
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. The
Peoples National Bank is also a member of the Federal Home Loan Bank System and
has the ability to borrow both short-term and longer term funds on a secured
basis. At September 30, 1998, The Peoples National Bank had $2,000,000 in
long-term borrowings from the Federal Home Loan Bank of Atlanta and an unused
borrowing capacity of $14,000,000.
The Company monitors and controls the mix and maturities of its assets and
liabilities through asset/liability management. The essential purposes of
asset/liability management are (i) to ensure adequate liquidity to fund demands
from depositors and borrowers and (ii) to maintain an appropriate balance
between interest sensitive assets and liabilities. Interest sensitive assets and
liabilities are those that are subject to repricing in the near term, including
both floating rate instruments and those with approaching maturities. The
objective of interest sensitivity management is to maintain reasonably stable
growth in net interest income despite changes in market interest rates by
maintaining the proper mix of interest sensitive assets and liabilities. Over
the past several years, volatile interest rates and greater reliance on
market-sensitive deposits, increasing both the importance and the difficulty of
interest sensitivity management, have characterized the environment in which
financial institutions operate. Throughout this period, management has sought to
maintain a general equilibrium between interest sensitive assets and liabilities
in order to insulate net interest income from significant adverse changes in
market rates.
The Company routinely reviews its interest sensitivity gap or the
difference between total interest sensitive assets and liabilities for a static
time period. While the static gap is a widely used measure of
interest-sensitivity, it is not, in management's opinion, a true indicator of
the Company's interest rate sensitive position. Consequently, the Company also
uses an asset/liability simulation model, which quantifies balance sheet and
earnings variations under different interest rate environments, to measure and
manage interest rate risk.
CAPITAL ADEQUACY
The capital needs of the Company have been met through the retention of
earnings and from the proceeds of prior public stock offerings.
Federal banking regulations have established certain capital adequacy
standards required to be maintained by banks and bank holding companies. At
September 30, 1998, the Company, The Peoples National Bank and Bank of Anderson,
N.A. were in compliance with each of the applicable capital requirements and
11
<PAGE>
exceeded the "well capitalized" regulatory guidelines. The following table sets
forth the capital ratios for the Company, The Peoples National Bank and Bank of
Anderson, N.A. as of September 30, 1998:
CAPITAL RATIOS
(Amounts in Thousands)
<TABLE>
<CAPTION>
Well Adequately
Capitalized Capitalized
Actual Requirement Requirement
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Company:
<S> <C> <C> <C> <C> <C> <C>
Total Risk-based Capital .................. 20,911 22.95% 9,112 10% 7,289 8%
Tier 1 Risk-based Capital ................. 19,854 21.79% 5,467 6% 3,645 4%
Leverage Ratio ............................ 19,854 15.81% 6,278 5% 5,023 4%
The Peoples National Bank:
Total Risk-based Capital .................. 10,821 13.44% 8,051 10% 6,441 8%
Tier 1 Risk-based Capital ................. 9,814 12.19% 4,830 6% 3,220 4%
Leverage Ratio ............................ 9,814 7.64% 6,423 5% 5,138 4%
Bank of Anderson, N.A.:
Total Risk-based Capital .................. 4,402 105.6% 417 10% 333 8%
Tier 1 Risk-based Capital ................. 4,369 104.8% 250 6% 167 4%
Leverage Ratio ............................ 4,369 61.4% 356 5% 285 4%
</TABLE>
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principals 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 most other industries, virtually all of the assets and
liabilities of a financial institution 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 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 which have large investments in plant and
inventories, it does have an 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.
EFFECTS OF REGULATORY ACTION
The management of the Company and the Banks are not aware of any current
recommendations by regulatory authorities, which if they were to be implemented,
would have a material effect on liquidity, capital resources, or operations.
12
<PAGE>
YEAR 2000 READINESS DISCLOSURE
The Company recognizes that there is a business risk in computerized
systems as the new century approaches. Many computer-based information systems
in use today exclude the century as part of the date definition, which could
cause inaccurate interest calculations on loans and deposits. A number of
computer systems used by the Company in its day-to-day operations will be
affected by the "Year 2000 Problem." Management has established a Year 2000
Project Team (the "Y2K Team") which has identified all affected systems and is
currently working to ensure that this event will not disrupt operations. The Y2K
Team reports regularly to the Company's Board of Directors. The Company is also
working closely with all outside computer vendors to ensure that all software
corrections and warranty commitments are obtained and to implement internal
"mock" testing. Testing of all systems has begun and will be completed by
December 1998. Alternative vendors/programs have been identified for all
critical function areas, as classified by the Y2K Team, and will be purchased
and installed in the event the primary vendor can not provide satisfactory Y2K
compliance by July 31, 1999. Plans are also in place in the event critical
systems fail on January 1, 2000. The estimated cost to the Company for these
corrective actions is $100,000, which is included in the Company's 1998 and 1999
budgets. Incomplete or untimely compliance, however, could have a material
adverse effect on the Company, the dollar amount of which cannot be accurately
quantified at this time because of the inherent variables and uncertainties
involved. Factors which could contribute to the Company's experiencing an
adverse effect include the availability of skilled personnel and compliant
software, the performance of vendors, the ability of entities with which the
Company does business and the Company's customers to resolve their Year 2000
problems and the ability to identify noncompliant software and the applications
or functions affected.
ACCOUNTING AND REPORTING MATTERS
In June 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (FASB 130), was issued, and established standards for
reporting and displaying comprehensive income and its components, as recognized
under accounting standards, to be displayed in a financial statement with the
same prominence as other financial statements. Accordingly, the Consolidated
Statements of Comprehensive Income (Loss) have been included in the financial
statements.
In June 1997, the FASB issued SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS 131 requires that a public enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
segment assets, information about the way that the operating segments were
determined and other items. The Statement is effective for the fiscal years
beginning after December 15, 1997. The Company does not anticipate that adoption
of SFAS 131 will have a material effect on its financial statements.
In June 1998, the FASB issued SFAS 133. "Accounting for Derivative
Instrument and Hedging Activities." All derivatives are to be measured at fair
value and recognized in the statement of financial position as assets or
liabilities. The statement is effective for fiscal years and quarters beginning
June 15, 1999. Because the Company does not use derivative transactions at this
time, management does not expect that this standard would have a significant
effect on the Company.
In April 1998, the FASB issued SFAS 132, Employers' Disclosure about
Pensions and Other Postretirement Benefits." The new Statement revises the
required disclosure for employee benefit plans, but it does not change the
measurement or recognition of such plans. While the new standard requires some
additional information about benefit plans, it helps preparers of financial
13
<PAGE>
statements by eliminating certain disclosures and by standardizing the
disclosures for pensions and other postretirement benefits to the extent
practicable. SFAS 132 supercedes the disclosure requirements of SFAS 87,
"Employers' Accounting for Pensions," SFAS 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS 106. "Employers' Accounting for Postretirement
Benefits Other than Pensions." The new disclosures are effective for the fiscal
years beginning after December 15, 1997. The adoption of SFAS 132 will not have
an impact on the financial statements of the Company due to the disclosure only
requirements.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal use" (SOP 98-1), which provided
guidance as to when it is or is not appropriate to capitalize the cost of
software developed or obtained for internal use. SPO 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company does not anticipate that adoption of SOP
98-1 will have a material effect on its financial statements.
In October 1998, the FASB issued SFAS 143, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." The new statement established accounting and
reporting standards for certain activities of mortgage banking enterprises. The
statement is effective for the first quarter beginning after December 15, 1998.
The statement will have no effect on the financial statement of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and legal actions
arising in the normal course of business. Management believes
that these proceedings will not result in a material loss to the
Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended September 30, 1998
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES BANCORPORATION, INC.
Dated: November 9, 1998 By: /s/ Robert E. Dye
-------------------
Robert E. Dye
President and Chairman of the Board
Dated: November 9, 1998 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit No. from
Item 601 of
Regulation S-B Description
------------------ ------------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1998, (unaudited) and the
Consolidated Statement of Income for the nine months ended September 30, 1998,
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,910
<INT-BEARING-DEPOSITS> 94,684
<FED-FUNDS-SOLD> 15,640
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,530
<INVESTMENTS-CARRYING> 3,951
<INVESTMENTS-MARKET> 4,081
<LOANS> 80,803
<ALLOWANCE> 1,057
<TOTAL-ASSETS> 138,386
<DEPOSITS> 109,442
<SHORT-TERM> 5,963
<LIABILITIES-OTHER> 324
<LONG-TERM> 2,000
0
0
<COMMON> 4,062
<OTHER-SE> 15,820
<TOTAL-LIABILITIES-AND-EQUITY> 138,386
<INTEREST-LOAN> 5,506
<INTEREST-INVEST> 1,527
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,117
<INTEREST-DEPOSIT> 3,096
<INTEREST-EXPENSE> 3,309
<INTEREST-INCOME-NET> 3,809
<LOAN-LOSSES> 154
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,025
<INCOME-PRETAX> 1,482
<INCOME-PRE-EXTRAORDINARY> 995
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 995
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 4.43
<LOANS-NON> 508
<LOANS-PAST> 324
<LOANS-TROUBLED> 211
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 987
<CHARGE-OFFS> 122
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,057
<ALLOWANCE-DOMESTIC> 1,057
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
