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EX-32 - PEOPLES BANCORPORATION INC /SC/peoples10q1-11ex32.htm
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EX-31.1 - PEOPLES BANCORPORATION INC /SC/peoples10q1-11ex31_1.htm
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended
Commission file
March 31, 2011
000-20616

PEOPLES BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)

South Carolina
57-09581843
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
1818 East Main Street, Easley, South Carolina
29640
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number:   (864) 859-2265

 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  ___X___                  No _______

Indicate by check mark whether the registrant 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 a 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 number of outstanding shares of the issuer’s $1.11 par value common stock
as of May 2, 2011 was 7,003,063.

 
 
 

 
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements

Peoples Bancorporation, Inc. and Subsidiaries
     
Consolidated Balance Sheets
(Dollars in thousands except per share and share data)
     
 
   
March 31,
2011
   
December 31,
2010
   
March 31,
2010
 
   
Unaudited
   
Audited
   
Unaudited
 
ASSETS
                 
CASH AND DUE FROM BANKS
  $ 9,015     $ 6,612     $ 8,562  
INTEREST-BEARING DEPOSITS IN OTHER BANKS
    8       1       476  
FEDERAL FUNDS SOLD
    18,366        10,631        18,586  
     Total cash and cash equivalents
    27,389       17,244       27,624  
SECURITIES
                       
Trading assets
    204       76       152  
Available for sale
    138,884       130,650       103,119  
Held to maturity (market value of $6,878, $7,375
                       
and $8,029)
    6,727       7,249       7,809  
        Other investments, at cost
    4,319       4,319       4,456  
LOANS-less allowance for loan losses of $8,082, $7,919 and $8,665
    323,161       332,794       360,457  
PREMISES AND EQUIPMENT, net of accumulated
                       
depreciation and amortization
    10,864       11,023       12,154  
ACCRUED INTEREST RECEIVABLE
    2,222       2,288       2,272  
ASSETS ACQUIRED IN SETTLEMENT OF LOANS
    13,313       13,344       12,596  
CASH SURRENDER VALUE OF LIFE INSURANCE
    12,909       12,791       12,424  
OTHER ASSETS
     8,896        9,292        9,363  
TOTAL ASSETS
  $ 548,888     $ 541,070     $ 552,426  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
LIABILITIES
                       
DEPOSITS
                       
Noninterest-bearing
  $ 52,202     $ 48,151     $ 50,015  
Interest-bearing
     427,689        426,603        429,958  
Total deposits
    479,891       474,754       479,973  
SECURITIES SOLD UNDER REPURCHASE
                       
AGREEMENTS
    12,445       10,362       15,051  
ACCRUED INTEREST PAYABLE
    1,588       1,639       2,025  
OTHER LIABILITIES
     2,332        2,017        2,112  
Total Liabilities
     496,256        488,772        499,161  
SHAREHOLDERS’ EQUITY
                       
Preferred stock – 15,000,000 shares authorized
 Preferred stock Series T - $1,000 per share liquidation preference;
    issued and outstanding-12,660 shares at March 31, 2011,
                       
    December 31, 2010 and March 31, 2010.
    12,176       12,139       12,028  
Preferred stock Series W - $1,000 per share liquidation preference;
    issued and outstanding – 633 shares at March 31, 2011,
                       
    December 31, 2010 and March 31, 2010.
    678       682       693  
Common stock – 15,000,000 shares authorized, $1.11
                       
   par value per share, 7,003,063 shares issued and outstanding at
                       
   March 31, 2011, December 31, 2010 and March 31, 2010.
    7,774       7,774       7,774  
Additional paid-in capital
    41,707       41,701       41,666  
Retained earnings (deficit)
    (9,918 )     (10,142 )     (11,007 )
Accumulated other comprehensive income
     215        144        2,111  
Total Shareholders’ Equity
     52,632        52,298        53,265  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 548,888     $ 541,070     $ 552,426  

See Notes to Unaudited Consolidated Financial Statements which are an integral part of these statements.

 
1

 
 
Peoples Bancorporation, Inc. and Subsidiaries
     
Consolidated Statements of Income (Loss)
   
(Dollars in thousands except share and per share  data)
 
Three Months Ended
   
March 31,
   
2011
   
2010
   
(Unaudited)
INTEREST INCOME
         
Interest and fees on loans
  $ 4,862     $ 5,489  
Interest on securities
           
Taxable
    1,003       864  
Tax-exempt
    366       367  
Interest on federal funds
    9       8  
Total interest income
    6,240       6,728  
             
INTEREST EXPENSE
           
Interest on deposits
    1,493       1,970  
Interest on federal funds purchased and securities
           
sold under repurchase agreements
    21       20  
Total interest expense
    1,514       1,990  
     Net interest income
    4,726       4,738  
             
PROVISION FOR LOAN LOSSES
    1,040       3,425  
Net interest income after provision for loan losses
    3,686       1,313  
             
NON-INTEREST INCOME
           
Service charges on deposit accounts
    333       363  
Customer service fees
    40       40  
Mortgage banking
    100       85  
Brokerage services
    56       53  
Bank owned life insurance
    138       136  
Other noninterest income
    386       257  
           Total non-interest income
    1,053       934  
 
NON-INTEREST EXPENSES
           
Salaries and benefits
    2,045       2,061  
Occupancy and equipment
    463       511  
    Marketing and advertising
    53       45  
    Communications
    53       63  
    Printing and supplies
    28       37  
    Bank paid loan costs
    40       45  
    Net cost of operation of other real estate
    556       334  
    ATM/Debit card expenses
    69       60  
    Legal and professional fees
    96       99  
    Director fees
    78       94  
    Regulatory assessments
    379       322  
    Other post employment benefits
    100       88  
Other operating expenses
    344       373  
          Total non-interest expenses
    4,304       4,132  
Income (loss) before income taxes
    435       (1,885 )
PROVISION (BENEFIT) FOR INCOME TAXES
    5       (785 )
             
Net income (loss)
    430       (1,100 )
Deductions to determine amounts available to common shareholders
           
Dividends declared or accumulated on preferred stock
    173       172  
Net accretion of discount on preferred stock
    33       33  
             
Net income (loss) available to common shareholders
  $ 224     $ (1,305 )
             
INCOME  (LOSS) PER COMMON SHARE:
           
BASIC
  $ 0.03     $ (0.19 )
DILUTED
  $ 0.03     $ (0.19 )
WEIGHTED AVERAGE COMMON SHARES:
           
BASIC
    7,003,063       7,003,063  
DILUTED
    7,003,063       7,003,063  
DIVIDENDS PAID PER COMMON SHARE
  $ -     $ -  
   
See Notes to Unaudited Consolidated Financial Statements which are an integral part of these statements.
 
 
 
 
2

 
Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of
Shareholders’ Equity and Comprehensive Income
For the three months ended March 31, 2011 and 2010
(Dollars in thousands)
(Unaudited)
 
                   
Additional
Paid-in
Capital
    Retained Earnings(Deficit)    
Accumu-
lated
Other Compre-
hensive
Income
   
 Total Share- holder
Equity
 
  Preferred Stock      Preferred Stock                        
   Series T       Series W    Common Stock                  
  Shares     Amount     Shares     Amount     Shares     Amount                  
                                                                         
Balance, December 31, 2009 12,660     $ 11,991     633     $ 697     7,003,063     $ 7,774     $ 41,658     $ (9,702 )   $ 2,025     $ 54,443  
Net income (loss) -       -     -       -     -       -       -       (1,100 )     -       (1,100 )
Other comprehensive Income,
   net of tax:
                                                                       
Unrealized holding gains on
                                                                       
  securities available for sale,
                                                                       
   net income tax of $44
-       -     -       -     -       -       -       -       86       86  
Comprehensive income (loss)
                                                                    (1,014 )
Cash dividends on
                                                                       
   preferred stock
-       -     -       -     -       -       -       (172 )     -       (172 )
Accretion (amortization)
                                                                       
   of preferred stock
-       37     -       (4 )   -       -       -       (33 )     -       -  
Stock-based compensation
-       -     -       -     -       -       8       -       -       8  
                                                                         
Balance, March 31, 2010
12,660     $ 12,028     633     $ 693     7,003,063     $ 7,774     $ 41,666     $ (11,007 )   $ 2,111     $ 53,265  
                                                                         
Balance, December 31, 2010  12,660     $ 12,139     633     $ 682     7,003,063     $ 7,774     $ 41,701     $ (10,142 )   $ 144     $ 52,298  
Net income
-       -     -       -     -       -       -       430       -       430  
Other comprehensive Income,
   net of tax:
                                                                       
Unrealized holding losses on
                                                                       
  securities available for sale,
                                                                       
   net income tax of $38
-       -     -       -     -       -       -       -       71       71  
Comprehensive income
                                                                    501  
Cash dividends on
                                                                       
   preferred stock
-       -     -       -     -       -       -       (173 )     -       (173 )
Accretion (amortization)
                                                                       
   of preferred stock
-       37     -       (4 )   -       -       -       (33 )     -       -  
Stock-based compensation
-       -     -       -     -       -       6       -       -       6  
                                                                         
Balance, March 31, 2011
12,660     $ 12,176     633     $ 678     7,003,063     $ 7,774     $ 41,707     $ (9,918 )   $ 215     $ 52,632  

See Notes to Unaudited Consolidated Financial Statements which are an integral part of these statements.
 
 
 
3

 

 
          Peoples Bancorporation, Inc. and Subsidiaries
     
               Consolidated Statements of Cash Flows
     
                             (Dollars in thousands)
 
Three months Ended
 
 
March 31,
   
2011
   
2010
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income (loss)
  $ 430     $ (1,100 )
Adjustments to reconcile net income (loss) to net cash  provided by
               
 operating activities:
               
Gain from trading assets
    (128 )     (24 )
    (Gain) loss on sale of other real estate
    (119     5  
Provision for loan losses
    1,040       3,425  
Depreciation and amortization
    194       229  
Amortization and accretion (net) of premiums and
               
discounts on securities
    226       74  
    Stock-based compensation
    6       8  
Decrease in accrued interest receivable
    66       99  
(Increase) decrease in other assets
    478       (531 )
Decrease in accrued interest payable
    (51 )     (24 )
Increase in other liabilities
     315        183  
Net cash provided by operating activities
     2,457        2,344  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of securities available for sale
    (14,648 )     (7,153 )
Proceeds from principal pay-downs on securities available for sale
    6,293       5,315  
Proceeds from the maturities and calls of securities available for sale
    -       2,000  
Proceeds from the maturities and calls of securities held to maturity
    525       595  
    Increase in cash surrender value of life insurance
    (118 )     (120 )
Proceeds from the sale of other real estate owned
    2,064       1,792  
Net (increase) decrease in loans
    6,174       (637 )
Write down of assets acquired in settlement of loans
    386       55  
Purchase of premises and equipment
     (35 )      (113 )
Net cash provided by investing activities
     641        1,734  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net increase (decrease) in deposits
    5,137       (5,023 )
Net increase in securities sold under repurchase agreements
    2,083       2,266  
    Net decrease in federal funds purchased
    -       (399 )
    Cash dividends paid on preferred stock
     (173 )      (172 )
Net cash used in (provided by) financing activities
     7,047        (3,328 )
Net increase in cash and cash equivalents
    10,145       750  
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
     17,244        26,874  
CASH AND CASH EQUIVALENTS, END OF  PERIOD
  $ 27,389     $ 27,624  
                 
CASH PAID FOR
               
Interest
  $ 1,565     $ 2,015  
Income taxes
  $ 35     $ 41  
NON-CASH TRANSACTIONS
               
Change in unrealized gain  on available for sale securities
  $ 71     $ 86  
Loans transferred to other real estate
  $ 2,419     $ 2,899  
                 
See Notes to Unaudited Consolidated Financial Statements which are an integral part of these statements.


 
4

 


PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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”).

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    A summary of these policies is included in the 2010 Annual Report on Form 10-K and incorporated herein by reference.

STATEMENT OF CASH FLOWS

           Cash and cash equivalents includes currency and coin, cash items in process of collection, amounts due from banks and federal funds sold.  All have maturities of three months or less.

EARNINGS (LOSS) PER COMMON SHARE

    Earnings (loss) per common share is computed and presented in accordance with the related topic in the Financial Accounts Standards Board (“FASB”) Accounting Standards Codification. The assumed conversion of stock options creates the difference between basic and diluted net income per share.  Income per common share is calculated by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for each period presented.  Stock options on 137,778 and 154,868 shares of the Company’s common stock are excluded from the computation of net loss per diluted share at March 31, 2011 and March 31, 2010, respectively, because their inclusion would be anti-dilutive due to their exercise prices being greater that the market value of shares and the net loss in the 2010 period.

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Net (loss) income available to common
 
 
   
 
 
  shareholders (in thousands)
  $ 224     $ (1,305 )
                 
Weighted average shares outstanding:
               
Basic
    7,003,063       7,003,063  
Effect of dilutive securities:
               
     Stock options
    -       -  
Diluted
    7,003,063       7,003,063  
                 
Income (loss) per common share:
               
Basic
  $ 0.03     $ (0.19 )
Diluted
  $ 0.03     $ (0.19 )


 
5

 

INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent.  Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any.  The Company has the positive intent and ability to hold such securities to maturity.  Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax as accumulated other comprehensive income as a separate component of stockholders’ equity until realized.  Interest earned on investment securities is included in interest income.  Realized gains and losses on the sale of securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold.  Trading securities are carried at market value and changes in market value are recorded as realized gains or losses at each period end.

Securities are summarized as follows as of March 31, 2011 (tabular amounts in thousands):

TRADING ASSETS:

   
Amortized
   
Unrealized holding
   
Fair
 
   
Cost
   
Gains
   
Losses
   
value
 
EQUITY SECURITIES
  $ 204     $ -     $ -     $ 204  
 
                               
SECURITIES AVAILABLE FOR SALE:
                               
                                 
GOVERNMENT SPONSORED ENTERPRISE
                               
SECURITIES
                               
Maturing after five years but within ten years
  $ 1,588     $ 111     $ -     $ 1,699  
                                 
MORTGAGE BACKED SECURITIES
                               
Maturing within one year
    230       11       -       241  
Maturing after one year but within five years
    65,219       1,337       405       66,151  
Maturing after five years but within ten years
    8,921       -       172       8,749  
Maturing after ten years
    26,022       53       916       25,159  
       100,392       1,401       1,493        100,300  
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing after one year but within five years
    1,297       83       -       1,380  
Maturing after five years but within ten years
    14,368       268       100       14,536  
Maturing after ten years
    20,311       233       176       20,368  
      35,976       584       276       36,284  
OTHER SECURITIES
                               
Maturing after ten years
    601       -       -       601  
                                 
Total securities available for sale
  $ 138,557     $ 2,096     $ 1,769     $ 138,884  
                                 
SECURITIES HELD TO MATURITY:
                               
                                 
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing within one year
  $ 1,913     $ 25     $ -     $ 1,938  
Maturing after one but within five years
    1,324       49       -       1,373  
Maturing after five years but within ten years
    2,969       72       -       3,041  
Maturing after ten years
    521       5       -       526  
Total securities held to maturity
  $ 6,727     $ 151     $ -     $ 6,878  


 
6

 
Securities are summarized as follows as of December 31, 2010 (tabular amounts in thousands):
 
TRADING ASSETS:

   
Amortized
   
Unrealized holding
   
Fair
 
   
Cost
   
Gains
   
Losses
   
value
 
EQUITY SECURITIES
  $ 76     $ -     $ -     $ 76  
 
                               
SECURITIES AVAILABLE FOR SALE:
                               
                                 
GOVERNMENT SPONSORED ENTERPRISE
                               
SECURITIES
                               
Maturing after five years but within ten years
  $ 1,588     $ 138     $ -     $ 1,726  
                                 
MORTGAGE BACKED SECURITIES
                               
Maturing after one year but within five years
    61,031       1,345       406       61,970  
Maturing after five years but within ten years
    11,832       75       223       11,684  
Maturing after ten years
    22,797       87       632       22,252  
      95,660       1,507       1,261       95,906  
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing after one year but within five years
    1,297       83       -       1,380  
Maturing after five years but within ten years
    10,575       108       108       10,575  
Maturing after ten years
    20,713       116       343       20,486  
      32,585       307       451       32,441  
OTHER SECURITIES
                               
Maturing after ten years
    601       -       24       577  
                                 
Total securities available for sale
  $ 130,434     $ 1,952     $ 1,736     $ 130,650  
                                 
SECURITIES HELD TO MATURITY:
                               
                                 
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing within one year
  $ 1,546     $ 17     $ -     $ 1,563  
Maturing after one but within five years
    1,918       61       -       1,979  
Maturing after five years but within ten years
    3,271       55       -       3,326  
Maturing after ten years
    514       -       7       507  
Total securities held to maturity
  $ 7,249     $ 133     $ 7     $ 7,375  

Securities are summarized as follows as of March 31, 2010 (tabular amounts in thousands):
 
TRADING ASSETS:
 
   
Amortized
    Unrealized holding    
Fair
 
   
Cost
   
Gains
   
Losses
   
value
 
EQUITY SECURITIES
  $ 152     $ -     $ -     $ 152  
 
                               
SECURITIES AVAILABLE FOR SALE:
                               
                                 
GOVERNMENT SPONSORED ENTERPRISE
                               
SECURITIES
                               
Maturing after five years but within ten years
  $ 4,801     $ 338     $ -     $ 5,139  
                                 
                                 
 
      Amortized       Unrealized holding       Fair  
      Cost       Gains       Losses       value  
MORTGAGE BACKED SECURITIES
                       
Maturing within one year
    1,097       30       -       1,127  
Maturing after one year but within five years
    50,557       2,132       13       52,676  
Maturing after five years but within ten years
    10,368       130       81       10,417  
Maturing after ten years
    3,552       133       -       3,685  
      65,574       2,425       94       67,905  
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing after one year but within five years
    457       38       -       495  
Maturing after five years but within ten years
    5,426       171       6       5,591  
Maturing after ten years
    23,059       458       98       23,419  
      28,942       667       104       29,505  
OTHER SECURITIES
                               
Maturing after ten years
    603       -       33       570  
                                 
Total securities available for sale
  $ 99,920     $ 3,430     $ 231     $ 103,119  
                                 
SECURITIES HELD TO MATURITY:
                               
                                 
OBLIGATIONS OF STATES AND POLITICAL
                               
SUBDIVISIONS
                               
Maturing within one year
  $ 377     $ 8     $ -     $ 385  
Maturing after one but within five years
    2,942       117       -       3,059  
Maturing after five years but within ten years
    3,056       58       -       3,114  
Maturing after ten years
    1,434       37       -       1,471  
Total securities held to maturity
  $ 7,809     $ 220     $ -     $ 8,029  
 
 
7

The following table shows gross unrealized loss and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011:

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
 
Mortgage backed securities
  $ 44,864     $ 1,487     $ 494     $ 6     $ 45,358     $ 1,493  
States and political subdivisions
    12,391       265       139       11       12,530       276  
Total
  $ 57,255     $ 1,752     $ 633     $ 17     $ 57,888     $ 1,769  

Two individual securities available for sale were 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, 2010.

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
 
Mortgage backed securities
  $ 52,426     $ 1,260     $ 602     $ 1     $ 53,028     $ 1,261  
Other securities
    488       24       -       -       488       24  
State and political subdivisions
    15,074       436       136       15       15,210       451  
Total
  $ 67,988     $ 1,720     $ 738     $ 16     $ 68,726     $ 1,736  

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
 
State and political subdivisions
  $ 507     $ 7     $ -     $ -     $ 507     $ 7  
Total
  $ 507     $ 7     $ -     $ -     $ 507     $ 7  

          Three individual securities available for sale were in a continuous loss position for twelve months or more.
 
The following table shows gross unrealized loss and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010:

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
 
Mortgage backed securities
  $ 9,237     $ 94     $ -     $ -     $ 9,237     $ 94  
Other Securities
    -       -       481       33       481       33  
States and political subdivisions
    4,796       104       -       -       4,796       104  
Total
  $ 14,033     $ 198     $ 481     $ 33     $ 14,514     $ 231  

Two individual securities available for sale were in a continuous loss position for twelve months or more.
 
8

 
The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuers, and therefore, these losses are not considered other-than-temporary.

OTHER INVESTMENTS, at cost

The Banks, as member institutions, are required to own certain stock investments in the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank.  These investments are carried at cost.  No ready market exists for these stocks and they have no quoted market values.

LOANS

Loans are summarized as follows (tabular amounts in thousands):
   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
                   
Commercial
  $ 27,447     $ 28,362     $ 32,905  
Real Estate:
                       
  Residential real estate
    102,844       106,759       108,932  
  Commercial real estate
    190,909       192,351       212,562  
  Commercial construction
    3,356       6,152       7,388  
Consumer and other
    6,687       7,089       7,335  
      331,243       340,713       369,122  
Less allowance for loan losses
    (8,082 )     (7,919 )     (8,665 )
    $ 323,161     $ 332,794     $ 360,457  

The Company, through the Banks, makes loans to individuals and small- to medium-sized businesses for various personal and commercial purposes, primarily in South Carolina.  Credit concentrations can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country.  Credit risk associated with these concentrations could arise when a significant amount of loans, with similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment to be adversely affected.  The Company regularly monitors its credit concentrations.  The Company does not have a significant concentration in any individual borrower.  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.

The composition of gross loans by rate type is as follows (tabular amounts in thousands):
 
   
March 31,
   
December31,
   
March 31,
 
   
2011
   
2010
   
2010
 
Variable rate loans
  $ 100,989     $ 107,250     $ 116,286  
Fixed rate loans
     230,254        233,463        252,836  
    $ 331,243     $ 340,713     $ 369,122  

 
9

 
Changes in the allowance for loan losses were as follows (tabular amounts in thousands):

   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
BALANCE, BEGINNING OF YEAR
  $ 7,919     $ 7,431     $ 7,431  
Provision for loan losses
    1,040       6,625       3,425  
Loans charged off
    (884 )     (6,572 )     (2,214 )
Loans recovered
    7       435       23  
BALANCE, END OF YEAR
  $ 8,082     $ 7,919     $ 8,665  

The following table reflects charge-offs and recoveries per loan category (tabular amounts in thousands):
 
   
March 31, 2011
   
December 31, 2010
   
March 31, 2010
 
   
Charge-offs
   
Recoveries
   
Charge-offs
   
Recoveries
   
Charge-offs
   
Recoveries
 
Commercial
  $ 116     $ 3     $ 1,866     $ 329     $ 304     $ 9  
Residential real estate
    385       -       1,160       77       89       12  
Commercial real estate
    21       1       938       6       50       1  
Commercial Construction
    303       -       2,589       5       1,760       -  
Consumer and other
    59       3       19       18       11       1  
     Total
  $ 884     $ 7     $ 6,572     $ 435     $ 2,214     $ 23  

The allocation of the allowance for loan losses by portfolio segment at March 31, 2011 was as follows (tabular amounts in thousands):

   
  Commercial
   
   Residential
  Real Estate
   
    Commercial
  Real Estate
   
    Commercial
     Construction
   
 Consumer
and Other
   
Total
 
Specific Reserves:
                                   
Impaired Loans
  $ -     $ -     $ 128     $ -     $ -     $ 128  
General Reserve
    695       910       5,636       496       217       7,954  
     Total
  $ 695     $ 910     $ 5,764     $ 496     $ 217     $ 8,082  
                                                 
Loans individually
                                               
  evaluated for impairment
  $ -     $ 4,559     $ 11,165     $ 502     $ 28     $ 16,254  
Loans collectively
                                               
  evaluated for impairment
    27,447       98,285       179,745       2,854       6,658       314,989  
     Total
  $ 27,447     $ 102,844     $ 190,910     $ 3,356     $ 6,686     $ 331,243  

The allocation of the allowance for loan losses by portfolio segment at December 31, 2010 was as follows (tabular amounts in thousands):

   
  Commercial
   
   Residential
   Real Estate
   
  Commercial
 Real Estate
   
     Commercial
      Construction
   
Consumer
and Other
   
  Total
 
Specific Reserves:
                                   
Impaired Loans
  $ -     $ 186     $ 951     $ -     $ -     $ 1,137  
General Reserve
    513       900       4,677       527       165       6,782  
     Total
  $ 513     $ 1,086     $ 5,628     $ 527     $ 165     $ 7,919  
                                                 
Loans individually
                                               
  evaluated for impairment
  $ 483     $ 3,916     $ 11,203     $ -     $ 17     $ 15,619  
Loans collectively
                                               
  evaluated for impairment
    27,879       102,843       181,148       6,152       7,072       325,094  
     Total
  $ 28,362     $ 106,759     $ 192,351     $ 6,152     $ 7,089     $ 340,713  
                                                 

 
10

 
Impaired loans were as follows:
 
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 (tabular amounts in thousands):

   
 
   
Impaired Loans - With
 
   
Impaired Loans – With Allowance
   
No Allowance
 
               
  Allowance for
             
   
   Unpaid
   
   Recorded
   
Loan Losses
   
   Unpaid
   
   Recorded
 
   
   Principal
   
   Investment
   
    Allocated
   
   Principal
   
   Investment
 
Commercial
  $ -     $ -     $ -     $ -     $ -  
Real Estate:
                                       
  Residential real estate
    -       -       -       4559       5,042  
  Commercial real estate
    709       709       128       10,456       11,689  
  Commercial construction
    -       -       -       502       502  
Consumer and other
    -       -       -       28       28  
     Total
  $ 709     $ 709     $ 128     $ 15,545     $ 17,261  

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010 (tabular amounts in thousands):

   
 
   
Impaired Loans - With
 
   
Impaired Loans – With Allowance
   
No Allowance
 
               
Allowance for
             
   
Unpaid
   
Recorded
   
Loan Losses
   
Unpaid
   
Recorded
 
   
Principal
   
Investment
   
Allocated
   
Principal
   
Investment
 
Commercial
  $ -     $ -     $ -     $ 483     $ 483  
Real Estate:
                                       
  Residential real estate
    740       740       186       2,661       3,008  
  Commercial real estate
    5,318       4,505       951       6,158       5,635  
  Commercial construction
    -       -       -       1,047       1,231  
Consumer and other
    -       -       -       25       17  
     Total
  $ 6,058     $ 5,245     $ 1,137     $ 10,374     $ 10,374  

The following is a summary of information pertaining to impaired loans and non-accrual loans at March 31, 2010 (tabular amounts in thousands):

   
     2010
 
Impaired loans without valuation allowance
  $ 7,766  
Impaired loans with a valuation allowance
    9,246  
Total impaired loans
  $ 17,012  
Valuation allowance related to impaired loans
  $ 2,126  
Total non-accrual loans
  $ 16,496  
Total loans past due ninety days or more and still accruing
  $ 120  
         

Non-performing loans and impaired loans are defined differently.  As such, some loans may be included in both categories, whereas other loans may only be included in one category.
 
 
11

 
 
Delinquent Loans at March 31, 2011, were as follows (tabular amounts in thousands):

   
 
   
 
   
   Greater than
   
 
         
 
 
   
  30-59 Days
   
  60-89 Days
   
  90 Days
   
  Total
   
  Total
   
  Total
 
   
  Past Due
   
  Past Due
   
  Past Due
   
  Past Due
   
  Current
   
  Loans
 
Commercial
  $ 44     $ -     $ -     $ 44     $ 27,403     $ 27,447  
Real Estate:
                                               
  Residential real estate
    165       16       2,228       2,409       100,435       102,844  
  Commercial real estate
    3,494       451       4,410       8,355       182,555       190,910  
  Commercial construction
    -       -       -       -       3,356       3,356  
Consumer and other
    2       3       17       22       6,664       6,686  
     Total
  $ 3,705     $ 470     $ 6,655     $ 10,830     $ 320,413     $ 331,243  

Delinquent Loans at December 31, 2010, were as follows (tabular amounts in thousands):

   
 
   
 
   
   Greater than
   
 
         
 
 
   
   30-59 Days
   
   60-89 Days
   
  90 Days
   
  Total
   
  Total
   
  Total
 
   
   Past Due
   
  Past Due
   
  Past Due
   
  Past Due
   
  Current
   
  Loans
 
Commercial
  $ 10     $ -     $ 483     $ 493     $ 27,869     $ 28,362  
Real Estate:
                                               
  Residential real estate
    1,842       70       612       2,524       104,235       106,759  
  Commercial real estate
    1,330       1,785       6,570       9,685       182,666       192,351  
  Commercial construction
    -       -       728       728       5,424       6,152  
Consumer and other
    25       174       -       199       6,890       7,089  
     Total
  $ 3,207     $ 2,029     $ 8,393     $ 13,629     $ 327,084     $ 340,713  

Credit Quality Indicators
 
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:  current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying loans as to credit risk.  Loans classified as substandard or special mention are reviewed monthly by the Company for further deterioration or improvement to determine if appropriately classified.  All commercial loans greater than $50,000 are reviewed when originated and a sample of smaller consumer relationships are reviewed after origination.  Larger relationships are reviewed on an annual basis or more frequently if needed. In addition, during the renewal process of any loans, as well if a loan becomes past due, the Company will evaluate the loan grade.
 
Loans excluded from the scope of the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the borrower contacts one of the Banks for a modification.  In these circumstances, the loan is specifically evaluated for potential classification as to special mention or substandard, or may even be charged-off.  The following definitions are used for risk ratings:
 
Special Mention. Loans classified as special mention have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the Bank’s credit position at some future date.
Substandard.  Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligors or of the collateral pledged, if any.  Loans so classified have well-defined weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, condition, and values, highly questionable and improbable.
 
 
12

 
The tables below set forth total loans and the amounts of loans by type in each of these risk categories
 
 
MMarch 31, 2011
                             
   
    Total
   
    Pass Credits
   
   Special
  Mention
   
    Substandard
   
Doubtful
 
Commercial
  $ 27,447     $ 22,270     $ 2,449     $ 2,728     $ -  
Real Estate:
                                       
  Residential real estate
    102,844       95,421       5,237       2,186       -  
  Commercial real estate
    190,909       145,975       26,809       18,125       -  
  Commercial construction
    3,356       1,404       915       1,037       -  
Consumer and other
    6,687       6,233       34       420       -  
     Total
  $ 331,243     $ 271,303     $ 35,444     $ 24,496     $ -  
 
                               
December 31, 2010
                             
   
   Total
   
    Pass Credits
   
   Special
   Mention
   
    Substandard
   
    Doubtful
 
Commercial
  $ 28,362     $ 25,961     $ 1,064     $ 1,335     $ 2  
Real Estate:
                                       
  Residential real estate
    106,759       102,778       1,729       2,252       -  
  Commercial real estate
    192,351       140,917       17,851       33,583       -  
  Commercial construction
    6,152       3,453       1,052       1,647       -  
Consumer and other
    7,089       7,071       18       -       -  
     Total
  $ 340,713     $ 280,180     $ 21,714     $ 38,817     $ 2  
 
ASSETS ACQUIRED IN SETTLEMENT OF LOANS

The following table summarizes the composition of assets acquired in settlement of loans as of the dates noted (tabular amounts in thousands):

   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
   
Amount
      #    
Amount
      #    
Amount
      #  
Construction and
     land development
  $ 10,507       39     $ 9,964       38     $ 11,232       59  
Residential real estate
    2,103       12       2,870       13       1,053       11  
Commercial real estate
     703       11        510        3        311        3  
  Total assets acquired
     in settlement of loans
  $ 13,313       62     $ 13,344       54     $ 12,596       73  

The following summarizes activity with respect to assets acquired in settlement of loans (tabular amounts in thousands):

   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
BALANCE, BEGINNING OF YEAR
  $ 13,344     $ 11,490     $ 11,490  
Additions - foreclosures
    2,420       9,943       2,898  
Sales
    (2,029 )     (7,017 )     (1,721 )
Write downs
    (422 )     (522 )     (71 )
Valuation reserve
    -       (550 )     -  
BALANCE, END OF YEAR
  $ 13,313     $ 13,344     $ 12,596  

 
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STOCK-BASED COMPENSATION

The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model.  During the first three months of 2011, no options to purchase shares were granted.
 
 
At March 31, 2011 an aggregate of 351,650 shares were reserved for issuance upon exercise of options. The following is a summary of the status of the Company’s plans as of March 31, 2011 and changes during the three months ended March 31, 2011.

   
 
 
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Contractual
Term (Years)
   
Aggregate
Intrinsic
Value
 
Outstanding, December 31, 2010
    143,424     $ 9.36              
Granted
    -       -              
Exercised
    -       -              
Forfeited
     (5,646 )     8.53              
Outstanding, March 31, 2011
    137,778     $ 9.39       5.78     $ -  
                                 
Options exercisable, March 31, 2011
    121,773     $ 9.85       5.45     $ -  

For the first three months of 2011, we recognized compensation cost of approximately $6,000 related to unvested stock options.

FAIR VALUE

The FASB Accounting Standards Codification 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:

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 Securities 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 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.
 
 
 
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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 are as follows as of March 31, 2011 (tabular amounts in thousands):

   
Quoted market price in active markets for identical assets/liabilities
   
Significant other observable inputs
   
Significant unobservable inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Recurring Basis:
                       
Available for sale investment
                       
securities:
                       
  Government Sponsored Securities
  $ -     $ 1,699     $ -     $ 1,699  
  Mortgage Backed Securities
    -       100,300       -       100,300  
  Obligations of States and
                               
    Political Subdivisions
    -       36,284       -       36,284  
  Other Securities
    -       601       -       601  
Trading Assets
    204       -       -       204  
Total
  $ 204     $ 138,884     $ -     $ 139,088  
                                 

Nonrecurring Basis:
 
 
         
 
       
Impaired loans
  $ -     $ 16,126     $ -     $ 16,126  
Other real estate owned
    -       13,313       -        13,313  
Total
  $ -     $ 29,439     $ -     $ 29,439  

Assets and liabilities measured at fair value are as follows as of December 31, 2010 (tabular amounts in thousands):

   
Quoted market price in active markets for identical assets/liabilities
   
Significant other observable inputs
   
Significant unobservable inputs
       
   
(Level 1)
   
(Level 2)
   
(Level 3)
   
Total
 
Recurring Basis:
                       
Available for sale investment
                       
securities:
                       
  Government Sponsored Securities
  $ -     $ 1,726     $ -     $ 1,726  
  Mortgage Backed Securities
    -       95,906       -       95,906  
  Obligations of States and
                               
   Political Subdivisions
    -       32,441       -       32,441  
  Other Securities
    -       577       -       577  
Trading Assets
    76       -       -       76  
Total
  $ 76     $ 130,650     $ -     $ 130,726  
                                 
Nonrecurring Basis:
                               
Impaired loans
  $ -     $ 14,482     $ -     $ 14,482  
Other real estate owned
    -       13,344       -       13,344  
Total
  $ -     $ 27,826     $ -     $ 27,826  
 
 
15

 
The following is a description of the valuation methodologies used for instruments measured at fair value.

Available for sale investment securities and trading assets – When quoted market prices are available in an active market, the securities are classified as Level 1 in the valuation hierarchy.  Level 1 securities for the Company include certain treasury securities and equity securities.  If quoted market prices are not available, but fair values can be estimated by observing quoted prices of securities with similar characteristics, the securities are classified as Level 2 on the valuation hierarchy.  For the Company, Level 2 securities include mortgage backed securities, collateralized mortgage obligations, government sponsored entity securities, and corporate bonds.   In cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Impaired loans – Impaired loans are loans that are measured for impairment using the practical methods permitted by the FASB Accounting Standards Codification.  Fair values for impaired loans in the above table are collateral dependent and are estimated based on underlying collateral values, which are then adjusted for the cost related to liquidation of the collateral.

Other real estate owned – Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs.

Disclosure about Fair Value of Financial Instruments

The FASB Accounting Standards Codification for the Disclosures about Fair Value of Financial Instruments requires disclosure of fair value information, whether or not recognized in the balance sheets, when it is practical to estimate the fair value.  The Codification defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company’s common stock, premises and equipment and other assets and liabilities.

Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, interest-bearing deposits in other banks and federal funds sold and purchased.

Securities are valued using quoted fair market prices.  Other investments are valued at par value.

Fair value for variable rate loans that reprice frequently, loans held for sale, for loans that mature in less than three months and impaired loans is based on the carrying value. Fair value for fixed rate mortgage loans, personal loans, and all other loans (primarily commercial) maturing after three months is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality.

Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. Certificate of deposit accounts and securities sold under repurchase agreements maturing within one year are valued at their carrying value. The fair value of certificate of deposit accounts and securities sold under repurchase agreements maturing after one year are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

 
16

 
Fair value for long-term FHLB advances is based on discounted cash flows using the Company’s current incremental borrowing rate. Discount rates used in these computations approximate rates currently offered for similar borrowings of comparable terms and credit quality.

Fair value of off-balance sheet instruments 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.  These are generally short-term at variable rates; both the carrying amount and fair value are immaterial.

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):

   
March 31,
2011
   
December 31,
2010
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
amount
   
value
   
amount
   
value
 
Financial assets
                       
Cash and due from banks
  $ 9,015     $ 9,015     $ 6,612     $ 6,612  
Interest-bearing deposits in other banks
    8       8       1       1  
Federal funds sold
    18,366       18,366       10,631       10,631  
Trading assets
    204       204       76       76  
Securities available for sale
    138,884       138,884       130,650       130,650  
Securities held to maturity
    6,727       6,878       7,249       7,375  
Other investments
    4,319       4,319       4,319       4,319  
Loans (gross)
    331,243       326,435       340,713       338,445  
Cash surrender value of life insurance
    12,909       12,909       12,791       12,791  
                                 
Financial liabilities:
                               
Deposits
  $ 479,891     $ 478,629     $ 474,754     $ 471,323  
Securities sold under repurchase agreements
    12,445       12,445       10,362       10,362  

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to include these disclosures in its interim and annual financial statements.  See Loan Note above.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.   The determination is based on both whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties.

 
17

 
Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

SUBSEQUENT EVENTS

In accordance with accounting guidance regarding subsequent events, Management performed an evaluation to determine whether there have been any subsequent events since the balance sheet date that would be required to be disclosed in these financial statements, and concluded that there were none.

MANAGEMENT’S OPINION

The accompanying unaudited consolidated financial statements of Peoples Bancorporation, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q according to guidelines set forth by the SEC.  Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation have been included. The results of operations for any interim period are not necessarily indicative of the results to be expected for an entire year.

 
18

 
 
 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 Company’s 2010 Annual Report on Form  10-K.  Results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be attained for any other period.

Overview
 
 
The Company is a bank holding company with three wholly owned bank subsidiaries: The Peoples National Bank, Easley, South Carolina, a national bank which commenced business operations in August 1986; Bank of Anderson, National Association, Anderson, South Carolina, a national bank which commenced business operations in September 1998; and Seneca National Bank, Seneca, South Carolina, a national bank which commenced business operations in February 1999 (sometimes referred to herein as the “Banks”).

           Currently the Company engages in no significant operations other than the ownership of its three subsidiaries and the support thereof.  The Company conducts its business from nine full-service banking offices located in the upstate area of South Carolina.

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:

 
19

 
·  
future economic and business conditions;
·  
lack of sustained growth in the economies of the Company's market areas;
·  
government monetary and fiscal policies;
·  
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;
·  
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;
·  
credit risks;
·  
higher than anticipated levels of defaults on loans;
·  
perceptions by depositors about the safety of their deposits;
·  
ability to weather the current economic downturn;
·  
the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;
·  
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;
·  
changes in laws and regulations, including tax, banking and securities laws and regulations;
·  
the effect of agreements with regulatory authorities, which restrict various activities and impose additional administrative requirements without commensurate benefits;
·  
changes in requirements of regulatory authorities;
·  
changes in accounting policies, rules and practices;
·  
cost and difficulty of implementing changes in technology or products;
·  
loss of consumer or investor confidence;
·  
the effects of war or other conflicts, acts of terrorism or other  catastrophic events that may affect general economic conditions and economic confidence; and
·  
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.

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.

Critical Accounting Policies

Peoples Bancorporation, Inc. (the “Company”) has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company’s financial statements.  The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements included in Item 8 “Financial Statements and Supplementary Data” of the Company’s 2010 Annual Report on Form 10-K.

 
20

 
Certain accounting policies involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies.  The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates and such differences could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company.

Of these significant accounting policies, the Company considers its policies regarding the allowance for loan losses (the “Allowance”) to be its most critical accounting policy due to the significant degree of management judgment involved in determining the amount of the Allowance.  The Company has developed policies and procedures for assessing the adequacy of the Allowance, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio.  Many of the Company’s estimates also rely heavily on real estate appraisals by third parties which are themselves estimates. 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 the “Provision and Allowance for Loan Losses, Loan Loss Experience” section in Item 7--“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s 2010 Annual Report on Form 10-K and the “Balance Sheet Review--Allowance for Loan Losses” and “Earnings Performance--Provision for Loan Losses” sections of this report on Form 10-Q for a detailed description of the Company’s estimation process and methodology related to the Allowance.



 
21

 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EARNINGS PERFORMANCE

Overview

The Company’s consolidated operations for the three months ended March 31, 2011 resulted in net income of $430,000 compared to a net loss of $1,100,000 for the three months ended March 31, 2010.  After deducting for dividends on preferred stock and net accretion of preferred stock, the three-month period ended March 31, 2011 resulted in net income available to common shareholders of $224,000 or $0.03 per diluted share compared to a net loss of $1,305,000 or $0.19 per diluted share for the first quarter of 2010, an increase of $1,529,000 or $0.22 per diluted share.  The return on average common equity, which is annualized net income (or loss) available to common shareholders as a percentage of average total common equity, for the three months ended March 31, 2010 was 2.27%, compared to (12.72)% for the three months ended March 31, 2010.  Return on average assets, which is annualized net income (or loss) divided by average assets, for the three months ended March 31, 2011 was 0.32%, compared to (3.16)% for the three months ended March 31, 2010.

Interest Income, Interest Expense and Net Interest Income

The largest component of the Company’s revenue is interest income.  Net interest income, which is the difference between the interest earned on assets and the interest paid for the liabilities used to fund those assets, measures the gross profit from lending and investing activities and is the primary contributor to the Company’s earnings.  Net interest income before provision for loan losses decreased $12,000, or 0.3%, to $4,726,000 for the quarter ended March 31, 2011 compared to $4,738,000 for the quarter ended March 31, 2010.  The Company’s net interest margin for the three months ended March 31, 2011 was 3.87%, compared to 3.65% for the quarter ended March 31, 2010.

The Company’s total interest income for the first quarter of 2011 was $6,240,000 compared to $6,728,000 for the first quarter of 2010, a decrease of $488,000, or 7.3%.  Interest and fees on loans, the largest component of total interest income, decreased by $627,000 in the first quarter of 2011 to $4,862,000 from $5,489,000 for the first quarter of 2010, a decrease of 11.4%.  The decrease in interest and fees on loans for the three-month period was due to lower market interest rates and lower average loan balances.  Interest on taxable securities, the second largest component of total interest income, increased by $139,000 or 16.1% to $1,003,000 in the first quarter of 2011 compared to $864,000 for the first quarter of 2010.  This increase in interest on taxable securities for the three-month period was due to higher market interest rates and higher average balances. Interest on tax-exempt securities decreased by $1,000 or 0.3% to $366,000 in the first quarter of 2011 compared to $367,000 for the first quarter of 2010.  Interest on federal funds sold was $9,000 in the first quarter of 2011 compared to $8,000 for the first quarter of 2010.

The Company’s total interest expense for the first quarter of 2011 was $1,514,000 compared to $1,990,000 for the first quarter of 2010, a decrease of $476,000, or 23.9%.  Interest expense on deposits, the largest component of total interest expense, decreased by $477,000 in the first quarter of 2011 to $1,493,000 compared to $1,970,000 for the first quarter of 2010, a decrease of 24.2%.  The decrease in interest expense on deposits for the three-month period is attributable to lower interest rates, and partially offset by higher average balances.  Interest on securities sold under repurchase agreements, the second largest component of total interest expense, increased $1,000 or 5.0% to $21,000 in the first quarter of 2011 compared to $20,000 for the first quarter of 2010.

 
22

 
Provision for Loan Losses

The provision for loan losses charged to operations during the three months ended March 31, 2011 was $1,040,000 compared to $3,425,000 for the three months ended March 31, 2010, a decrease of $2,385,000 or 69.6%.  The changes in the Company’s provision for loan losses for the first quarter of 2011 are based on management’s evaluation of the Company’s overall credit quality and its estimate of loan losses inherent in the loan portfolio.  See “BALANCE SHEET REVIEW – Allowance for Loan Losses.”

Non-interest Income

Non-interest income increased $119,000 or 12.7% to $1,053,000 for the first quarter of 2011 compared to $934,000 for the first quarter of 2010.  Service fees on deposits, the largest component of non-interest income decreased $30,000 or 8.3% to $333,000 for the first quarter of 2011 compared to $363,000 for the first quarter of 2010, possibly as a result of customers managing their deposit accounts more carefully.

Mortgage banking fees increased from $85,000 in the first quarter of 2010 to $100,000 in the first quarter of 2011, an increase of $15,000 or 17.6%.  The increase in mortgage banking income is due to increased levels of residential mortgage loan originations at the Banks.  Brokerage service income increased from $53,000 in the first quarter of 2010 to $56,000 in the first quarter of 2011, an increase of $3,000 or 5.7% due to higher commissions from both the volume and mix of products.  Bank owned life insurance income increased $2,000 or 1.5% in the first quarter of 2011 to $138,000 compared to $136,000 for the first quarter of 2010.

Other non-interest income increased $129,000 or 50.2% from $257,000 during the first quarter of 2010 to $386,000 for the first quarter of 2011, largely attributable to a $104,000 increase in the gain on trading assets of $128,000 during the first quarter of 2011, compared to $24,000 for the same period of 2010.  There was also a $32,000 increase in interchange income on check cards to $199,000 for the first quarter of 2011 compared to $167,000 for the first quarter of 2010.

There were no gains realized on the sale of securities available for sale during the first quarter of 2011 or 2010.

Non-interest Expense

Total non-interest expense increased $172,000 or 4.2% to $4,304,000 for the first quarter of 2011 from $4,132,000 for the first quarter of 2010.  Salaries and benefits, the largest component of non-interest expense, decreased $16,000 or 0.8%, to $2,045,000 for the first quarter of 2011 from $2,061,000 for the first quarter of 2010.

Occupancy and furniture and equipment expenses decreased $48,000 or 9.4% to $463,000 in the first quarter of 2011 compared to $511,000 in the first quarter of 2010, due in part to the closing of The Peoples National Bank’s Mills Avenue branch in Greenville, South Carolina during the fourth quarter of 2010.  Communication expense decreased $10,000 or 15.9% from $63,000 in the first quarter of 2010 to $53,000 during the first quarter of 2011.  Printing and supplies decreased $9,000 or 24.3% from $37,000 for the first quarter of 2010 to $28,000 for the first quarter of 2011.  These decreases were the result of continued efforts by management to limit and reduce expenses in response to weakened economic conditions.

 
23

 
Net cost of operation of other real estate owned increased $222,000 or 66.5% to $556,000 in the first quarter of 2011 compared to $334,000 in the first quarter of 2010.  There was a net gain of $119,000 in the first quarter of 2011 on the sale of other real estate owned compared to a loss of $5,000 for the same period in 2010, an increase of $124,000.  Rental income on other real estate owned during the first three months of 2011 amounted to $29,000 compared to $18,000 during the same period of 2010, an increase of $11,000. Expenses included in the net cost of operation of other real estate owned include write-downs of other real estate owned, taxes paid, legal fees, utilities, maintenance, etc.  These expenses increased $357,000 or 102.9% to $704,000 in the first three months of 2011 compared to $347,000 for the first three months of 2010.  Included in the $704,000 expense incurred in the first three months of 2011 is $387,000 in write-downs of other real estate to current market values, compared to $55,000 in the first three months of 2010.  Bank paid loan costs decreased $5,000 or 11.1% to $40,000 in the first quarter of 2011 compared to $45,000 in the first quarter 2010.

Marketing and advertising expense increased $8,000 or 17.8% to $53,000 during the first quarter of 2011 from $45,000 for the first quarter of 2010.  This increase is attributable to a higher level of marketing activity at the Banks, although marketing activity was still somewhat restricted by the weak economy.  Interchange and ATM expense increased $9,000 or 15.0% to $69,000 for the first three months of 2011, compared to $60,000 for the same period of 2010.  Legal and professional expenses decreased $3,000 or 3.0% to $96,000 for the first quarter of 2011 compared to $99,000 for the first quarter of 2010.

Regulatory assessments increased $57,000 or 17.7% from $322,000 for the first quarter of 2010 to $379,000 for the first quarter of 2011. Regulatory assessments include fees paid to the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) by the Company’s three Banks.

All other operating expenses were $344,000 in the first quarter of 2011 compared to $373,000 for the first quarter of 2010, a decrease of $29,000 or 7.8%.

Income Taxes

Income taxes amounted to $5,000 for the first three months of 2011 compared to a tax benefit for the first three months of 2010 of $785,000.  The provision for income taxes is an estimate, and management considers several factors in making this estimate, including current pre-tax income levels, the amount of tax-exempt income, and a comparison of prior period estimates to income taxes ultimately determined.
 
 
24

 
 
BALANCE SHEET REVIEW

Loans

Outstanding loans represent the largest component of earning assets at 66.7% of total earning assets.  As of March 31, 2011 the Company held total gross loans outstanding of $331,243,000, a decrease of $9,470,000 or 2.8% from $340,713,000 in total gross loans outstanding at December 31, 2010, and a decrease of $37,879,000 or 10.3% from $369,122,000 in total gross loans outstanding at March 31, 2010.  The decrease in outstanding loans comes primarily as the result of lower loan demand from creditworthy borrowers at the Company’s three bank subsidiaries, with additional decreases resulting from a number of loans that were charged-off or converted into other real estate owned through foreclosures or deeds in lieu of foreclosure.

Loan Portfolio Composition
 
March 31,
   
December 31,
   
March 31,
 
(Dollars in thousands)
 
2011
   
2010
   
2010
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Commercial
  $ 27,447     $ 28,362     $ 32,905  
Real Estate:
                       
  Residential real estate
    102,844       106,759       108,932  
  Commercial real estate
    190,910       192,351       212,562  
  Commercial construction
    3,356       6,152       7,388  
Consumer and other
    6,686       7,089       7,335  
     Gross loans
  $ 331,243     $ 340,713     $ 369,122  

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 three months ended March 31, 2011 was 5.79%, compared to 5.91% for the three months ended March 31, 2010.  The Federal Reserve continues to keep the federal funds target rate near zero for an “extended period” of time.  A large portion of the Company’s adjustable-rate loans, which constitute approximately 30.5% of the loan portfolio, reprice following an interest-rate change by the Federal Reserve.

The Company’s loan portfolio consists principally of residential mortgage loans, commercial loans, and consumer loans. The vast majority of these loans is made to borrowers located in South Carolina and is concentrated in the Company’s market areas.

The Company’s real estate loans are primarily construction loans and other loans secured by real estate, both commercial and residential, located within the Company’s trade areas. The Company does not actively pursue long-term, fixed-rate mortgage loans for retention in its loan portfolio.  However, the Banks do employ mortgage loan originators who originate such loans that are pre-sold at origination to third parties.

The Company’s commercial lending activity is directed principally towards businesses whose demand for funds falls within each Bank’s legal lending limits and which are potential deposit customers of the Banks.  This category of loans includes loans made to individuals, partnerships, and corporate borrowers, which are obtained for a variety of business purposes. Particular emphasis is placed on loans to small and medium-sized businesses. The Company’s commercial loans are spread throughout a variety of industries, with no industry or group of related industries accounting for a significant portion of the commercial loan portfolio. Commercial loans are made on either a secured or an unsecured basis. When taken, security usually consists of liens on inventories, receivables, equipment, furniture and fixtures. Unsecured commercial loans are generally short-term with emphasis on repayment strengths and low debt-to-worth ratios.

 
25

 
The Company’s direct consumer loans consist primarily of secured installment loans to individuals for personal, family, and household purposes, including automobile loans to individuals and pre-approved lines of credit.

Management believes that the loan portfolio is adequately diversified. The Company has no foreign loans or loans for highly leveraged transactions. The Company has few if any agricultural loans.

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. The Company complies with the FASB Accounting Standards Codification when determining the adequacy of the allowance for loan losses. 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 borrower’s ability to repay, the volume of outstanding loans, the trends in delinquent, non-accruing and potential problem loans, and the quality of collateral securing non-performing and problem loans.  By considering the above factors, management attempts to determine the amount of reserves necessary to provide for inherent losses in the loan portfolios of its subsidiaries. However, the amount of reserves may change in response to changes in the financial condition of larger borrowers, changes in the Company’s local economies, industry trends, and regulatory requirements.

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 needed to adequately monitor its loan portfolios and the adequacy of the allowance for loan losses.

 
26

 
At March 31, 2011, the allowance for loan losses was $8,082,000 or 2.44% of gross outstanding loans, compared to $7,919,000 or 2.32% of gross outstanding loans at December 31, 2010 and $8,665,000 or 2.35% of gross outstanding loans at March 31, 2010.  During the first three months of 2011, the Company experienced net charge-offs of $877,000 or 0.26% of average loans, compared to net charge-offs of $2,191,000, or 0.59% of average loans during the first three months of 2010.  The Company’s provision for loan losses was $1,040,000 for the first three months of 2011 compared to $3,425,000 in the first three months of 2010.

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 accelerates from the historical trend, management may 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 sets forth ratios of net charge-offs and the allowance for loan losses to the items stated:

Asset Quality Ratios:
   
March 31,
   
December 31,
 
March 31,
 
   
2011
   
2010
 
2010
 
                         
Net charge-offs to average loans
   outstanding during the period
    0.26 %     1.71 %     0.59 %
Net charge-offs to total loans
   outstanding at end of period
    0.26 %     1.80 %     0.59 %
Allowance for loan losses to
   average loans
    2.41 %     2.20 %     2.33 %
Allowance for loan losses to
    total loans at end of  period
    2.44 %     2.32 %     2.35 %
Net charge-offs to allowance for
    loan losses at end of period
    10.85 %     77.50 %     25.29 %
Net charge-offs to provision for
    loan losses
    84.33 %     92.63 %     63.97 %

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 March 31, 2011.  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:

 
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-  
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 continues to be proactive in foreclosure actions and sales.  Management believes these actions should start to decrease the Company’s non-performing assets levels.

Securities

The primary objective of the Company’s securities portfolio is to provide for the liquidity needs of the Company and to contribute to profitability by providing a stable flow of dependable earnings.  The Company invests primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States, other taxable securities, and certain obligations of states and municipalities.  The Company had $204,000 in trading assets at March 31, 2011, compared to $76,000 at December 31, 2010 and $152,000 in trading assets at March 31, 2010.  The Company uses its investment portfolio to provide liquidity for unexpected deposit liquidation or loan generation, to meet the Company’s interest-rate sensitivity goals, to secure public deposits, and to generate income.  At March 31, 2011 securities totaled $150,134,000, which represented 30.2% of total earning assets.  Total securities increased $7,840,000 or 5.5% from $142,294,000 invested as of December 31, 2010 and increased $34,598,000 or 30.0% from $115,536,000 invested as of March 31, 2010.  The size of the Company’s investment portfolio is managed and fluctuates from time to time based on the amount of public deposits held, loan demand, liquidity needs, investment strategy, and other pertinent factors.

At March 31, 2011 the Company’s total investments classified as available for sale had an amortized cost of $138,557,000 and a market value of $138,884,000 for a net unrealized gain of $327,000.  This compares to an amortized cost of $130,434,000 and a market value of $130,650,000 for an unrealized gain of $216,000 on the Company’s investments classified as available for sale at December 31, 2010.  At March 31, 2010 the Company’s total investments classified as available for sale had an amortized cost of $99,920,000 and a market value of $103,119,000 for an unrealized gain of $3,199,000.  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 the amortized cost, the Company has the ability and intent to hold securities that are in an unrealized loss position until a market price recovery or maturity, and therefore these securities are not considered impaired on an other-than-temporary basis.

 
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Securities with carrying amounts of $30,453,000 at March 31, 2011 were pledged to secure public deposits and for other purposes required or permitted by law.

Other Real Estate Owned

The Company’s other real estate owned was $13,313,000 at March 31, 2011, a decrease of $31,000 or 0.2% from $13,344,000 at December 31, 2010 and an increase of $717,000, or 5.7% from $12,596,000 at March 31, 2010.  During the first three months of 2011, the Company acquired $2,420,000 in other real estate, sold $2,029,000 in properties and wrote-down $422,000 of other real estate owned.  During 2010, the Company acquired $9,943,000 in other real estate, sold $7,017,000 in properties and wrote-down $522,000.

The following table summarizes the composition of other real estate owned as of the dates noted (tabular amounts in thousands):
 
   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
   
Amount
      #    
Amount
      #    
Amount
      #  
Construction and land
    development
  $ 10,507       39     $ 9,964       38     $ 11,232       59  
Residential real estate
    2,103       12       2,870       13       1,053       11  
Commercial real estate
     703       11        510        3        311        3  
  Total assets acquired in
     settlement of loans
  $ 13,313       62     $ 13,344       54     $ 12,596       73  


Cash Surrender Value of Life Insurance

           The Company’s cash surrender value of life insurance was $12,909,000 at March 31, 2011, an increase of $118,000, or 0.9%, from the $12,791,000 held at December 31, 2010 and an increase of $485,000, or 4.0%, from the $12,424,000 held at March 31, 2010.  The increase in cash surrender value of life insurance is due to 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.

Cash and Cash Equivalents

The Company’s cash and cash equivalents increased $10,145,000, or 58.8%, to $27,389,000 at March 31, 2011 from $17,244,000 at December 31, 2010, and decreased $235,000, or 0.9%, from $27,624,000 at March 31, 2010.  From time to time there are swings in the level of cash and cash equivalents, which are due to normal fluctuations in the Banks’ needs and sources for immediate and short-term liquidity.

Deposits

The Banks’ primary source of funds for loans and investments is their deposits.  Total deposits increased $5,137,000 or 1.1%, to $479,891,000 at March 31, 2011 from $474,754,000 at December 31, 2010 and decreased $82,000, or 0.02%, from $479,973,000 at March 31, 2010.  Competition for deposit accounts is primarily based on the interest rates paid, location convenience and services offered.

 
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For the three months ended March 31, 2011, interest-bearing deposits averaged $426,993,000 compared to $429,879,000 for the same period of 2010.  From time to time the Banks solicit certificates of deposit from various sources through brokers.  This is done to reduce the need for funding from other short-term sources such as federal funds purchased and short-term borrowings from the Federal Home Loan Bank of Atlanta, as well as to manage the interest rate risk at the Banks.  At March 31, 2011 brokered deposits totaled $40,993,000, compared to $43,194,000 and $46,797,000 in brokered deposits at December 31, 2010 and March 31, 2010, respectively.  At March 31, 2011, of the total brokered deposits $15,872,000 was acquired through the Certificate of Deposit Account Registry Service (“CDARS”), compared with $18,073,000 at December 31, 2010 and $24,489,000 at March 31, 2010. The Company considers brokered funds to be an attractive alternative funding source available to use while continuing its efforts to maintain and grow its local deposit base.

The average interest rate paid on interest-bearing deposits was 1.40% during the three months ended March 31, 2011 compared to 1.83% for the same period of 2010 and 1.68% for the twelve months ended December 31, 2010.  In pricing deposits, the Company considers its liquidity needs, the direction and levels of interest rates, and local market conditions.  At March 31, 2011 interest-bearing deposits comprised 89.1% of total deposits compared to 89.9% at December 31, 2010 and 89.6% at March 31, 2010.

The Company's core deposit base consists largely 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, these core deposits still continue to provide the Company with a large source of relatively stable funds. Core deposits as a percentage of total deposits averaged approximately 76% at March 31, 2011, 71% at December 31, 2010 and 75% at March 31, 2010. 2009.  Time deposits of $100,000 or more represented 24.4% of total deposits at March 31, 2011, 25.4% at December 31, 2010 and 25.3% at March 31, 2010. The Company’s larger denomination time deposits are generally garnered from customers within the local market areas of its Banks, and therefore may have a greater degree of stability than is typically associated with this source of funds at other financial institutions.  The permanent increase of the maximum FDIC insurance amount from $100,000 to $250,000 may also provide stability to time deposits over $100,000 but less than $250,000.

Borrowings

The Company’s borrowings are typically comprised of federal funds purchased, securities sold under repurchase agreements, and short-term advances from the Federal Home Loan Bank (“FHLB”).  At March 31, 2011 borrowings totaled $12,445,000, compared to $10,362,000 at December 31, 2010 and $15,051,000 at March 31, 2010, all of which were comprised of securities sold under repurchase agreements.  Federal funds purchased and short-term FHLB advances are used primarily for the immediate cash needs of the Company.

LIQUIDITY

Liquidity management involves meeting the cash flow requirements of the Company.  The Company’s liquidity position is primarily dependent upon its need to respond to short-term demand for funds caused by increased loan demand and withdrawals from deposit accounts.  The Company’s primary liquidity sources include cash and due from banks, federal funds sold, securities available for sale and a line of credit established with a correspondent bank. In addition, the Company (through the Banks) has the ability to borrow funds on a short-term basis from the Federal Reserve System and to purchase federal funds from other financial institutions.  The Banks are also members of the Federal Home Loan Bank System and have the ability to borrow both short-term and long-term funds on a secured basis. At March 31, 2011, The Peoples National Bank had total borrowing capacity from the FHLB equal to $64,150,000, all of which was unused. Bank of Anderson, N.A. had total borrowing capacity from the FHLB equal to $28,920,000, all of which was unused at March 31, 2011.  Seneca National Bank had established secured lines of credit with the FHLB at March 31, 2011 of $11,340,000, all of which was unused.  At March 31, 2011, the Banks also had unused federal funds lines of credit with various correspondent banks totaling $22,000,000.

 
30

 
Peoples Bancorporation, Inc., the parent holding company, has limited liquidity needs outside those of its subsidiaries, and requires funds to pay limited operating expenses and dividends.  The parent company’s liquidity needs are fulfilled through management fees assessed to each subsidiary bank and from dividends passed up to the parent company from the Banks.

During the first three months of 2011, the Company made capital expenditures of approximately $35,000 related to minor equipment upgrades.  The Company also makes other capital expenditures in the normal course of business.

Company management believes its liquidity sources are adequate to meet its operating needs and is not aware of any trends that may result in the Company’s liquidity materially increasing or decreasing.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31

 
OFF-BALANCE SHEET RISK AND DERIVATIVE FINANCIAL INSTRUMENTS

The Company, through the operations of the Banks, makes contractual commitments to extend credit in the ordinary course of its business activities.  These commitments are legally binding agreements to lend money to customers of the Banks at predetermined interest rates for a specified period of time.  At March 31, 2011, the Banks had issued commitments to extend credit of $68,753,000 through various types of arrangements.  The commitments generally expire within one year.  Past experience indicates that many of these commitments to extend credit will expire not fully used.  As described under “Liquidity,” the Company believes that it has adequate sources of liquidity to fund commitments that are drawn upon by the borrowers.

In addition to commitments to extend credit, the Banks also issue standby letters of credit, which are assurances to a third party that it will not suffer a loss if the Bank’s customer fails to meet its contractual obligation to the third party.  Standby letters of credit totaled $1,960,000 at March 31, 2011.  Past experience indicates that many of these standby letters of credit will expire unused.  However, through its various sources of liquidity, the Company believes that it will have the necessary resources to meet these obligations should the need arise.  Various types of collateral secure most of the standby letters of credit.  The Company believes that the risk of loss associated with standby letters of credit is comparable to the risk of loss associated with its loan portfolio.

Neither the Company nor the Banks are involved in any other off-balance sheet contractual relationships or transactions that could result in liquidity needs or other commitments or significantly impact earnings.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
32

 
CAPITAL ADEQUACY AND RESOURCES

The capital needs of the Company have been met through the retention of earnings and from the proceeds of prior stock offerings.

The Company and the Banks are required to maintain certain capital ratios by federal banking regulators.  The following table sets forth the capital ratios for the Company and the Banks as of March 31, 2011:

CAPITAL RATIOS
(Dollars in thousands)
 
     Actual    
 Well
Capitalized
Requirement
   
 Adequately
Capitalized
Requirement
 
      Amount      
Ratio  
     
Amount  
     
Ratio  
     
Amount  
     
Ratio  
 
Total Risk-based Capital
  $ 53,157       14.46 %     N/A       N/A     $ 29,409       8.00 %
Tier 1 Risk-based Capital
    48,561       13.21       N/A       N/A       14,704       4.00  
Leverage Ratio
    48,561       8.98       N/A       N/A       21,631       4.00  
                                                 
The Peoples National Bank (1):
                                               
Total Risk-based Capital
  $ 31,749       13.76 %   $ 23,073       10.00 %   $ 18,459       8.00 %
Tier 1 Risk-based Capital
    28,827       12.49       13,848       6.00       9,232       4.00  
Leverage Ratio
    28,827       8.87       16,250       5.00       13,000       4.00  
                                                 
Bank of Anderson, N. A. (1):
                                               
Total Risk-based Capital
  $ 13,343       15.74 %   $ 8,477       10.00 %   $ 6,782       8.00 %
Tier 1 Risk-based Capital
    12,277       14.48       5,087       6.00       3,391       4.00  
Leverage Ratio
    12,277       8.50       7,222       5.00       5,777       4.00  
                                                 
Seneca National Bank (1):
                                               
Total Risk-based Capital
  $ 7,195       13.82 %   $ 5,206       10.00 %   $ 4,165       8.00 %
Tier 1 Risk-based Capital
    6,585       12.65       3,123       6.00       2,082       4.00  
Leverage Ratio
    6,585       8.82       3,733       5.00       2,986       4.00  

 
(1)  The OCC has established individual minimum capital ratios for the three Banks pursuant to 12 C.F.R. Section 3.10.  These minimum requirements exceed the normal regulatory requirements to be well capitalized.   Currently each of the Banks is required to maintain 12% total risk-based capital, 10% tier 1 risk-based capital, and 8% leverage ratio.  Each of the Banks exceeded these required capital levels at March 31, 2011.




 
33

 

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK

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 Banks 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 Banks 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 March 31, 2011 the Company was positioned so that net interest income would increase $464,000 over the next twelve months if market interest rates were to suddenly rise by 100 basis points at the beginning of the same period.  Conversely, net interest income would decline by $268,000 over the next twelve months if interest rates were to suddenly decline by 100 basis points at the beginning of the same period.  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 actions that the Company and its customers could undertake in response to changes in interest rates.

Additionally, each of the Banks measures anticipated changes in its theoretical 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 Committee of each bank 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 these objectives.
 
 
 
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Item 4.  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 period covered by this quarterly report, were effective.

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.


 
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PART II.  OTHER INFORMATION

Item 6.                 Exhibits

     Exhibits.

31.1  
Rule 13a-14(a) / 15d-14(a) Certifications
31.2  
Rule 13a-14(a) / 15d-14(a) Certifications
32      
Section 1350 Certifications
 
 
              
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




   
PEOPLES BANCORPORATION, INC.
     
     
Dated:  May 11, 2011
By:
/s/ L. Andrew Westbrook, III
   
L. Andrew Westbrook, III
   
President & Chief Executive Officer
     
     
Dated:  May 11, 2011
By:
/s/ Robert E. Dye, Jr.
   
Robert E. Dye, Jr.
   
Senior Vice President & Chief Financial Officer
   
(principal financial officer)
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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Exhibit Index

Exhibit No.                           Description of Exhibit

31.1               Rule 13a-14(a) / 15d-14(a) Certifications
31.2               Rule 13a-14(a) / 15d-14(a) Certifications
32                  Section 1350 Certifications




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
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