10-K/A 1 peoples10-ka09.txt United States SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A Amendment No. 1 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____ Commission File No. 000-20616 Peoples Bancorporation, Inc. (Exact name of Registrant as specified in its charter) South Carolina 57-0951843 -------------- ---------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 1818 East Main Street, Easley, South Carolina 29640 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (864) 859-2265 Securities Registered Pursuant to Section 12 (b) of the Securities Exchange Act of 1934: None Securities Registered Pursuant to Section 12 (g) of the Securities Exchange Act of 1934: Common Stock, $1.11 Par Value (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes [ X ] No [ ] Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant (4,592,334 shares) on June 30, 2008, the last day of the Registrant's most recently completed second fiscal quarter, was approximately $32,586,000. The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant (4,813,264 shares) on March 13, 2009 was approximately $12,081,000. For the purpose of this determination, officers, directors and holders of 5% or more of the Registrant's common stock are considered affiliates of the Registrant. The number of shares outstanding of the Registrant's common stock, as of March 13, 2009: 7,070,139 shares of $1.11 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE None EXPLANATORY NOTE This Amendment No. 1 to Registrant's Form 10-K for the year ended December 31, 2008, is being filed for the purpose of including the information required by Part III of this form. Registrant had originally intended to incorporate the Part III information by reference into the Form 10-K pursuant to General Instruction G(3). However, Registrant subsequently delayed the date of its annual meeting of shareholders, and its definitive proxy materials will not be filed within 120 days of Registrant's fiscal year end as required by General Instruction G(3). CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS This report contains "forward-looking statements" within the meaning of the securities laws. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forwarding-looking statements. All statements that are not historical facts are statements that could be "forward-looking statements." You can identify these forward-looking statements through the use of words such as "may," "will," "should," "could," "would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek," "plan," "predict," "target," "potential," "believe," "intend," "estimate," "project, " "continue," or other similar words. Forward-looking statements include, but are not limited to, statements regarding the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, business operations and proposed services. These forward-looking statements are based on current expectations, estimates and projections about the banking industry, management's beliefs, and assumptions made by management. Such information includes, without limitation, discussions as to estimates, expectations, beliefs, plans, strategies, and objectives concerning future financial and operating performance. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements. The risks and uncertainties include, but are not limited to: o future economic and business conditions; o lack of sustained growth in the economies of the Company's market areas; o government monetary and fiscal policies; o the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities; o the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services, as well as competitors that offer banking products and services by mail, telephone, computer and/or the Internet; o credit risks; o higher than anticipated levels of defaults on loans; o perceptions by depositors about the safety of their deposits; o ability to weather the current economic downturn; o the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans; o the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains, revenue growth and/or expense savings from such endeavors; o changes in laws and regulations, including tax, banking and securities laws and regulations; o changes in accounting policies, rules and practices; o cost and difficulty of implementing changes in technology or products; o loss of consumer or investor confidence; o the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and o other factors and information described in this report and in any of the other reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934. 1 All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished. PART I ITEM 1. BUSINESS The Company Peoples Bancorporation, Inc. (the "Company") was incorporated under South Carolina law on March 6, 1992, for the purpose of becoming a bank holding company by acquiring all of the common stock of The Peoples National Bank, Easley, South Carolina. The Company commenced operations on July 1, 1992 upon effectiveness of the acquisition of The Peoples National Bank. In 2000 the Company elected to become a financial holding company, but it did not engage in any activities permitted to financial holding companies, other than those that are also permissible for bank holding companies. During the fourth quarter of 2008, the Company elected to change its status as a financial holding company back to that of a bank holding company. The Company has three wholly-owned subsidiaries: The Peoples National Bank, Easley, South Carolina, a national bank which commenced business operations in August 1986; Bank of Anderson, National Association, Anderson, South Carolina, a national bank which commenced business operations in September 1998; and, Seneca National Bank, Seneca, South Carolina, a national bank which commenced business operations in February 1999 (sometimes referred to herein as the "Banks"). The Company engages in no significant operations other than the ownership of its three subsidiaries and the support thereof. The Company conducts its business from nine banking offices located in the Upstate Area of South Carolina. The principal offices of the Company are located at 1818 East Main Street, Easley, South Carolina 29640. The Company's telephone number is (864) 859-2265. The principal office of The Peoples National Bank is located at 1800 East Main Street, Easley, South Carolina 29640. The principal office of Bank of Anderson, National Association is located at 201 East Greenville Street, Anderson, South Carolina 29621, and the principal office of Seneca National Bank is located at 201 Highway 123 Bypass, Seneca, South Carolina 29678. General Business Some of the major services which the Company provides through its banking subsidiaries include checking accounts; NOW accounts; savings and other time deposits of various types; daily repurchase agreements; alternative investment products such as annuities, mutual funds, stocks and bonds; loans for business, agriculture, real estate, personal uses, home improvement and automobiles; residential mortgage loan origination; credit cards; letters of credit; home equity lines of credit; safe deposit boxes; wire transfer services; Internet banking and use of ATM facilities. The Banks do not have trust powers. The Company has no material concentration of deposits from any single customer or group of customers. No significant portion of its loans is concentrated within a single industry or group of related industries and the Company does not have any foreign loans. There are no material seasonal factors that would have an adverse effect on the Company. As a bank holding company, the Company is a legal entity separate and distinct from its subsidiaries. The Company coordinates the financial resources of the consolidated enterprises and maintains financial, operational and administrative systems that allow centralized evaluation of subsidiary operations and coordination of selected policies and activities. The Company's operating revenues and net income are derived primarily from its subsidiaries through dividends and fees for services performed. 2 Territory Served and Competition The Peoples National Bank serves its customers from six locations; two offices in the city of Easley and one office in the city of Pickens, South Carolina, which are located in Pickens County; one office in the unincorporated community of Powdersville, South Carolina, which is located in the northeast section of Anderson County; and two offices in the city of Greenville, South Carolina, which is located in Greenville County. Easley, South Carolina is located approximately 10 miles west of Greenville, South Carolina. Pickens, South Carolina is located approximately 8 miles north of Easley, and Powdersville, South Carolina is located approximately 12 miles southeast of Easley. Bank of Anderson, National Association, serves its customers from one location in the City of Anderson and another location in Anderson County, South Carolina. Anderson is located approximately 25 miles southwest of Greenville, South Carolina and approximately 25 miles south of Easley in Anderson County, South Carolina. Seneca National Bank serves its customers from one location in the City of Seneca, South Carolina. Seneca is located approximately 30 miles northwest of Easley, South Carolina in Oconee County, South Carolina. Each subsidiary of the Company is a separately chartered bank, and therefore each bank is responsible for developing and maintaining its own customers and accounts. Located in Easley, South Carolina, The Peoples National Bank's customer base is primarily derived from Greenville and Pickens County, South Carolina and the northeast section of Anderson County, South Carolina. Bank of Anderson's primary service area is Anderson County, South Carolina, and more particularly the City of Anderson. Seneca National Bank derives most of its customer base from the City of Seneca and surrounding Oconee County, South Carolina. The Banks compete with several large national banks, which dominate the commercial banking industry in their service areas and in South Carolina generally. In addition, the Banks compete with other community banks, savings institutions and credit unions. In Pickens County, there are thirty (30) competitor bank offices, two (2) savings institution, and two (2) credit union offices. In Anderson County there are sixty-three (63) competitor bank offices, two (2) savings institutions, and five (5) credit union offices. In Oconee County, there are nineteen (19) competitor bank offices, six (6) savings institution offices, and one (1) credit union office. In Greenville County there are one hundred fifty-eight (158) competitor bank offices, nine (9) savings institution offices, and nine (9) credit union offices. The Peoples National Bank had approximately 12.2% of the deposits of FDIC-insured institutions in Pickens County and 0.2% in Greenville County. The Peoples National Bank and Bank of Anderson, combined, had approximately 6.7% of the deposits of FDIC-insured institutions in Anderson County. Seneca National Bank had approximately 6.8% of the deposits of FDIC-insured institutions in Oconee County. The foregoing information is as of June 30, 2008, the most recent date for which such information is available from the FDIC. Many competitor institutions have substantially greater resources and higher lending limits than the Banks, and they perform certain functions for their customers, including trust services and investment banking services, which none of the Banks is equipped to offer directly. However, the Banks do offer some of these services through correspondent banks. In addition to commercial banks, savings institutions and credit unions, the Banks compete with other financial intermediaries and investment alternatives, including, but not limited to, mortgage companies, consumer finance companies, money market mutual funds, brokerage firms, insurance companies, leasing companies and other financial institutions. Several of these non-bank competitors are not subject to the same regulatory restrictions as the Company and its subsidiaries and many have substantially greater resources than the Company. The extent to which other types of financial institutions compete with commercial banks has increased significantly within the past few years as a result of federal and state legislation that has, in several respects, deregulated financial institutions. The full impact of existing legislation and subsequent laws that deregulate the financial services industry cannot be fully assessed or predicted. 3 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDER'S EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following is a presentation of the average consolidated balance sheets of the Company for the years ended December 31, 2008, 2007 and 2006. This presentation includes all major categories of interest-earning assets and interest-bearing liabilities:
AVERAGE CONSOLIDATED BALANCE SHEETS (dollars in thousands) For the years ended December 31, -------------------------------- 2008 2007 2006 ---- ---- ---- Assets Cash and Due from Banks ...................................... $ 9,852 $ 10,846 $ 11,038 Taxable Securities ........................................... 57,918 57,467 65,455 Tax-Exempt Securities ........................................ 38,968 38,106 20,529 Federal Funds Sold ........................................... 3,791 2,381 4,256 Gross Loans .................................................. 416,161 384,691 369,666 Less: Loan Loss Reserve ..................................... 5,937 4,073 4,036 --------- --------- --------- Net Loans .................................................... 410,224 380,618 365,630 --------- --------- --------- Other Assets ................................................. 32,953 29,476 26,311 --------- --------- --------- Total Assets ................................................. $ 553,706 $ 518,894 $ 493,219 ========= ========= ========= Liabilities and Shareholders' Equity Noninterest-bearing Deposits ................................. $ 46,778 $ 51,760 $ 55,660 Interest-bearing Deposits: Interest Checking ........................................ 64,239 58,207 54,712 Savings Deposits ......................................... 9,119 8,849 10,560 Money Market ............................................. 29,421 25,608 36,367 Certificates of Deposit .................................. 252,641 233,310 206,728 Individual Retirement Accounts ........................... 30,004 29,620 28,786 --------- --------- --------- Total Interest-bearing Deposits .............................. 385,424 355,594 337,153 --------- --------- --------- Short-term Borrowings ........................................ 69,127 55,034 47,384 Notes Payable - Other ........................................ 1,846 2,342 5,000 Other Liabilities ............................................ 3,561 6,038 3,838 --------- --------- --------- Total Liabilities ........................................ 506,736 470,768 449,035 --------- --------- --------- Common Stock ................................................. 7,839 7,476 7,004 Additional Paid-in Capital ................................... 41,680 38,988 35,205 Retained Earnings (Deficit) .................................. (2,549) 1,662 1,975 --------- --------- --------- Total Shareholders' Equity ............................... 46,970 48,126 44,184 --------- --------- --------- Total Liabilities and Shareholders' Equity ....................................................... $ 553,706 $ 518,894 $ 493,219 ========= ========= =========
4 The following is a presentation of an analysis of the net interest income of the Company for the years ended December 31, 2008 and 2007 with respect to each major category of interest-earning assets and each major category of interest-bearing liabilities:
Year Ended December 31, 2008 (dollars in thousands) Average Interest Average Assets Amount Earned/Paid Yield/Rate ------ ----------- ---------- Securities - Taxable .......................................... $ 57,918 $ 3,017 5.21% Tax-Exempt ....................................... 38,968 1,502 5.84%(1) Interest-bearing Deposits at Other Banks ...................... 668 33 4.49% Federal Funds Sold ............................................ 3,791 61 1.61% Gross Loans (2) ............................................... 416,161 27,188 6.53% -------- --------- Total Earning Assets ...................................... $517,506 $ 31,801 6.29%(1) ======== ========= Liabilities Interest Checking ............................................. $ 64,239 $ 761 1.18% Savings Deposits .............................................. 9,119 40 0.44% Money Market .................................................. 29,421 731 2.48% Certificates of Deposit ....................................... 252,641 10,298 4.08% Individual Retirement Accounts ................................ 30,004 1,283 4.28% -------- --------- 385,424 13,113 Short-term Borrowings ......................................... 69,127 1,949 2.82% Long-term Borrowings .......................................... 1,846 105 5.69% -------- --------- Total Interest-bearing Liabilities ........................ $456,397 $ 15,167 3.32% ======== ========= Excess of Interest-earning Assets over Interest-bearing Liabilities ........................... $ 61,109 ========= Net Interest Income ........................................... $ 16,634 ========= Interest Rate Spread .......................................... 2.97%(1) Net Yield on Earning Assets (3) ............................... 3.36%(1)
(1) Yield adjusted to a fully taxable equivalent basis using a federal tax rate of 34%. (2) For purposes of these analyses, non-accruing loans are included in the average balances. Loan fees included in interest earned are not material to the presentation. (3) Net yield on interest-earning assets is calculated by dividing net interest income by total interest-earning assets. 5
Year Ended December 31, 2007 (dollars in thousands) Average Interest Average Assets Amount Earned/Paid Yield/Rate ------ ----------- ---------- Securities - Taxable .......................................... $ 57,467 $ 2,994 5.21% Tax-Exempt ....................................... 38,106 1,422 5.65%(1) Interest-bearing Deposits at Other Banks ...................... 781 43 5.51% Federal Funds Sold ............................................ 2,381 128 5.38% Gross Loans (2) ............................................... 384,691 30,959 8.05% -------- --------- Total Earning Assets ...................................... $483,426 $ 35,546 7.50%(1) ======== ========= Liabilities Interest Checking ............................................. $ 58,207 $ 739 1.27% Savings Deposits .............................................. 8,849 39 0.44% Money Market .................................................. 25,608 608 2.37% Certificates of Deposit ....................................... 233,310 11,537 4.94% Individual Retirement Accounts ................................ 29,620 1,385 4.68% -------- --------- 355,594 14,308 Short-term Borrowings ......................................... 55,034 2,201 4.00% Long-term Borrowings .......................................... 2,342 113 4.82% -------- --------- Total Interest-bearing Liabilities ........................ $412,970 $ 16,622 4.02% ======== ========= Excess of Interest-earning Assets over Interest-bearing Liabilities ........................... $ 70,456 ========= Net Interest Income ........................................... $ 18,924 ========= Interest Rate Spread .......................................... 3.49%(1) Net Yield on Earning Assets (3) ............................... 4.07%(1)
(1) Yield adjusted to a fully taxable equivalent basis using a federal tax rate of 34%. (2) For purposes of these analyses, non-accruing loans are included in the average balances. Loan fees included in interest earned are not material to the presentation. (3) Net yield on interest-earning assets is calculated by dividing net interest income by total interest-earning assets. 6 RATE/VOLUME ANALYSIS OF NET INTEREST INCOME The effect of changes in average balances (volume) and rates on interest income, interest expense and net interest income, for the periods indicated, is shown in the tables below. The effect of a change in volume has been determined by applying the average rate in the two periods to the change in average balances between the two periods. The effect of a change in rate has been determined by applying the average balance of the two periods to the change in the average rate between the two periods.
Year Ended December 31, 2008 compared to 2007 (dollars in thousands) Change in Change in Total Volume Rate Change ------ ---- ------ Interest earned on: Securities Taxable .................................................. $ 28 $ (15) $ 13 Tax-Exempt (1) ........................................... 33 47 80 Federal Funds Sold ............................................ 49 (116) (67) Gross Loans (2) ............................................... 2,294 (6,065) (3,771) ------- ------- ------- Total Interest Income ......................................... 2,404 (6,149) (3,745) ------- ------- ------- Interest paid on: Interest Checking ............................................. 74 (52) 22 Savings Deposits .............................................. 1 - 1 Money Market .................................................. 93 30 123 Certificates of Deposit ....................................... 872 (2,111) (1,239) Individual Retirement Accounts ................................ 17 (119) (102) ------- ------- ------- 1,057 (2,252) (1,195) Short-term Borrowings ......................................... 480 (732) (252) Notes Payable - Other ......................................... (26) 18 (8) ------- ------- ------- Total Interest Expense ........................................ 1,511 (2,966) (1,455) ------- ------- ------- Change in Net Interest Income ................................. $ 893 $(3,183) $(2,290) ======= ======= =======
(1) Tax-exempt income is shown on an actual, rather than, taxable equivalent basis. (2) For purposes of these analyses, non-accruing loans are included in the average balances. Loan fees included in interest earned are not material to the presentation. As reflected in the table above, less interest was earned during 2008 compared to 2007 due to lower rates and was partially offset by increased volume of loans and other earning assets. Interest expense was also lower in 2008 compared to 2007 due to lower rates and was partially offset by increased volume of deposits and other interest-bearing liabilities. The net effect of these differences was an overall decrease in the Company's net interest income. 7
Year Ended December 31, 2007 compared to 2006 (dollars in thousands) Change in Change in Total Volume Rate Change ------ ---- ------ Interest earned on: Securities Taxable .................................................. $ (239) $ 816 $ 577 Tax-Exempt (1) ........................................... 650 72 722 Federal Funds Sold ............................................ (101) (13) (114) Gross Loans (2) ............................................... 1,185 1,198 2,383 ------- ------- ------- Total Interest Income ......................................... 1,495 2,073 3,568 ------- ------- ------- Interest paid on: Interest Checking ............................................. 22 399 421 Savings Deposits .............................................. (3) 4 1 Money Market .................................................. (393) 294 (99) Certificates of Deposit ....................................... 1,177 1,880 3,057 Individual Retirement Accounts ................................ 35 181 216 ------- ------- ------- 838 2,758 3,596 Short-term Borrowings ......................................... 291 225 516 Long-term Borrowings .......................................... (131) - (131) ------- ------- ------- Total Interest Expense ........................................ 998 2,983 3,981 ------- ------- ------- Change in Net Interest Income ................................. $ 497 $ (910) $ (413) ======= ======= =======
(1) Tax-exempt income is shown on an actual, rather than, taxable equivalent basis. (2) For purposes of these analyses, non-accruing loans are included in the average balances. Loan fees included in interest earned are not material to the presentation. As reflected in the table above, most of the decrease in net interest income of $413,000 during 2007 was due to the change in rates. The $3,568,000 increase in interest income was related to the change in volume and change in rates in the loan portfolio. Substantially all the $3,981,000 increase in interest expense was related to rate increases on deposits, combined with the volume increase on certificates of deposit. LOAN PORTFOLIO The Company engages, through the Banks, in a full complement of lending activities, including commercial, consumer, installment, and real estate loans. Types of Loans Commercial lending is directed principally towards businesses whose demands for funds fall within each Bank's legal lending limits and which are potential deposit customers of the Banks. This category of loans includes loans made to individuals, partnerships or corporate borrowers, and which are obtained for a variety of business purposes. Particular emphasis is placed on loans to small and medium-sized businesses. The Company's commercial loans are spread throughout a variety of industries, with no industry or group of related 8 industries accounting for a significant portion of the commercial loan portfolio. Commercial loans are made on either a secured or unsecured basis. When taken, security usually consists of liens on inventories, receivables, equipment, and furniture and fixtures. Unsecured commercial loans are generally short-term with emphasis on repayment strengths and low debt-to-worth ratios. At December 31, 2008 approximately $8,841,000, or 5.7% of commercial loans, were unsecured compared to approximately $9,510,000 or 6.1% at December 31, 2007. The Company's real estate loans are primarily construction loans and loans secured by real estate, both commercial and residential, located within the Company's market areas. The Company does not actively pursue long-term, fixed-rate residential mortgage loans for retention. However, the Banks do employ mortgage loan originators who originate loans that are pre-sold at origination to third parties. The Banks' direct consumer loans consist primarily of secured installment loans to individuals for personal, family and household purposes, including automobile loans to individuals, and pre-approved lines of credit. Distribution and Maturities of Loan Portfolio Management believes the loan portfolio is adequately diversified. The largest component of the loan portfolio continues to be secured by real estate, including certain commercial and industrial loans secured by real estate, mortgage loans, and construction loans. These loans represent $340,679,000 or 85.4% of total loans at December 31, 2008, compared to $354,618,000 or 84.6% at December 31, 2007. There are no foreign loans and few if any agricultural loans. The following table presents various categories of loans contained in the Company's loan portfolio and the total amount of all loans at year-end for 2008, 2007, 2006, 2005 and 2004.
Loan Portfolio Composition (dollars in thousands) December 31, ------------ 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Commercial and industrial - not secured by real estate .. $ 43,451 $ 47,885 $ 38,505 $ 39,669 $ 39,723 Commercial and industrial - secured by real estate ...... 111,844 107,531 90,298 90,186 95,965 Real estate - mortgage .................................. 124,445 108,161 97,835 107,398 105,580 Real estate - construction .............................. 104,390 138,926 117,465 121,048 63,380 Consumer loans .......................................... 14,581 16,495 13,978 19,194 21,255 -------- -------- -------- -------- -------- Loans held for investment ............................... 398,711 418,998 358,081 377,495 325,903 Less: Allowance for loan losses ....................... 9,217 4,310 4,070 3,854 3,691 -------- -------- -------- -------- -------- Net Loans ............................................... $389,494 $414,688 $354,011 $373,641 $322,212 ======== ======== ======== ======== ========
Percentage of Loans Held for Investment 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Commercial and industrial - not secured by real estate... 10.90% 11.43% 10.75% 10.51% 12.18% Commercial and industrial - secured by real estate.... 28.05% 25.66% 25.22% 23.89% 29.45% Real estate - mortgage .................................. 31.21% 25.81% 27.33% 28.45% 32.40% Real estate - construction .............................. 26.18% 33.16% 32.80% 32.07% 19.45% Consumer loans .......................................... 3.66% 3.94% 3.90% 5.08% 6.52% ------ ------ ------ ------ ------ Total .............................................. 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ======
9 The following is a presentation of an analysis of maturities of loans as of December 31, 2008:
Loan Maturity and Interest Sensitivity (dollars in thousands) Due After 1 Due in 1 Year up to Due after Type of Loans Year or less 5 years 5 years Total ------------- ------------ ------- ------- ----- Commercial and Industrial ......... $ 22,025 $ 19,332 $ 2,094 $ 43,451 Real Estate ....................... 140,733 148,820 51,126 340,679 Consumer Loans .................... 6,082 8,078 421 14,581 -------------- -------------- -------------- -------------- Total ......................... $ 168,840 $ 176,230 $ 53,641 $ 398,711 ============== ============== ============== ==============
All loans are recorded according to contractual terms, and demand loans, overdrafts, and loans having no stated repayment terms or maturity are reported as due in one year or less. At December 31, 2008, the amount of loans due after one year with predetermined interest rates totaled approximately $124,708,000, while the amount of loans due after one year with variable or floating interest rates totaled approximately $105,163,000. Non-Performing Loans and Real Estate Acquired in Settlement of Loans The following table presents information on non-performing loans and real estate acquired in settlement of loans:
December 31, ------------ (dollars in thousands) Non-performing Assets 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Non-performing loans: Non-accrual loans ............... $ 16,950 $ 7,505 $ 993 $ 1,206 $ 670 Past due 90 days or more ........ - - - 10 838 Other restructured loans ........ 477 412 421 922 - ---------- ---------- ---------- ---------- ---------- Total non-performing loans ........ 17,427 7,917 1,414 2,138 1,508 Real estate acquired in settlement of loans ............. 5,428 1,023 271 2,007 756 ---------- ---------- ---------- ---------- ---------- Total non-performing assets ....... $ 22,855 $ 8,940 $ 1,685 $ 4,145 $ 2,264 ========== ========== ========== ========== ========== Non performing assets as a percentage of loans and real estate acquired in settlement of loans ............. 5.66% 2.13% 0.47% 1.09% 0.69% Allowance for loan losses as a percentage of non- performing loans ................ 53% 54% 288% 180% 245%
In an effort to more accurately reflect the status of the Company's loan portfolio, accrual of interest is discontinued on a loan that displays certain indications of problems which might jeopardize full and timely collection of principal and/or interest. The Company's Loan Policy drives the administration of problem loans. Loans are monitored through continuing review by credit managers, monthly reviews of exception reports, and ongoing analysis of asset quality trends, economic and business factors. Credit management activities, including specific reviews of new large credits, are reviewed by the Directors' Loan Committees of each banking subsidiary, which meet monthly. With respect to the loans accounted for on a non-accrual basis and restructured loans, the gross interest income that would have been recorded if 10 the loans had been current in accordance with their original terms and outstanding throughout the period or since origination amounts to $753,000 for the year ended December 31, 2008. The interest on those loans that was included in net income for 2008 amounts to $132,000. At December 31, 2008 there was $16,950,000 of non-accruing loans. The overall increase in non-accruing loans is primarily due to deterioration in the residential real estate market. For some of these non-accruing loans, management does not currently expect any loss of principal. Where principal losses are expected, these loans have already been written down by the expected amount of the loss. Furthermore, management believes that the Company's allowance for loan losses is adequate to absorb any unidentified potential losses. 99.5% of the Company's non-accruing loans are secured by real estate. Potential Problem Loans As of December 31, 2008, there were no potential problem loans classified for regulatory purposes as doubtful, substandard or special mention that have not been disclosed above, which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources of the Company, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Impaired Loans The Company accounts for impaired loans in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan." A loan is impaired when, based on current information and events, it is probable a creditor will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. Under SFAS No. 114, a loan is also impaired when its original terms are modified in a troubled debt restructuring. SFAS No. 114, as amended by SFAS No. 118, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the market price of the loan, if available, or the underlying collateral values as defined in the pronouncement. The Company complies with the provisions of SFAS No. 114, as necessary, when determining the adequacy of the allowance for loan losses. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries on any amounts previously charged off. Impaired loans totaled approximately $16,671,000 at December 31, 2008 and $2,024,000 at December 31, 2007. See also Item 8 - Financial Statements and Supplementary Data - Note 1 - "Summary of Significant Accounting Policies and Activities - Allowance for Loan Losses." 11 PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE The purpose of the Company's allowance for loan losses is to absorb loan losses that occur in the loan portfolios of its bank subsidiaries. Management determines the adequacy of the allowance quarterly and considers a variety of factors in establishing a level of the allowance for losses and the related provision, which is charged to expense. Factors considered in determining the adequacy of the allowance for loan losses include: historical loan losses experienced by the Company, current economic conditions affecting a borrowers' ability to repay, the volume of outstanding loans, the trends in delinquent, non-accruing and potential problem loans, and the quality of collateral securing non-performing and problem loans. By considering the above factors, management attempts to determine the amount of reserves necessary to provide for inherent losses in the loan portfolios of its subsidiaries. However, the amount of reserves may change in response to changes in the financial condition of larger borrowers, changes in the Company's local economies and industry trends. The allowance for loan losses for each portfolio segment is set at an amount that reflects management's best judgment of the extent to which historical loss levels are more or less accurate indicators of current losses in the loan portfolios of its bank subsidiaries. While it is the Company's policy to charge off in the current period loans in which a loss is considered probable, there are inherent losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because the state of the economy, industry trends, and conditions affecting individual borrowers may affect the amount of such losses, management's estimate of the appropriate amount of the allowance is necessarily approximate and imprecise. The Company and its bank subsidiaries are also subject to regulatory examinations and determinations as to adequacy of the allowance for loan losses, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer companies identified by the regulatory agencies. In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, including historical charge-offs, which is undertaken both to ascertain whether there are probable losses that must be charged off and to assess the risk characteristics of the portfolio in the aggregate. The Company utilizes its credit administration department, as well as the services of an outside consultant from time to time, to perform quality reviews of its loan portfolio. The reviews consider the judgments and estimates of management and also those of bank regulatory agencies that review the loan portfolio as part of their regular examination process. The Office of the Comptroller of the Currency, as part of its routine examination process of national banks, including the Company's Banks, may require additions to the allowance for loan losses based upon the regulator's credit evaluations differing from those of management. The Company's management believes it has in place the controls and personnel to adequately monitor its loan portfolios and the adequacy of the allowance for loan losses. Management does not segregate the allowance by loan category and the entire allowance is available to absorb losses from all loan categories. At December 31, 2008, the allowance for loan losses was $9,217,000, or 2.31% of gross outstanding loans, compared to $4,310,000, or 1.03% of gross outstanding loans at December 31, 2007. During 2008, the Company experienced net charge-offs of $8,913,000, or 2.14% of average loans, compared to net charge-offs of $660,000, or 0.17% of average loans during 2007. Consumer loan net charge-offs were $63,000 in 2008 compared to net recoveries of $75,000 in 2007. Commercial loan net charge-offs were $1,318,000 in 2008 compared to net charge-offs of $290,000 in 2007. Mortgage loan net charge-offs were $7,532,000 in 2008 compared to net charge-offs of $295,000 in 2007. The Company's provision for loan losses was $13,820,000 in 2008 compared to $900,000 in 2007. 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 accelerate from the current trend, management tends to adjust the methodology for determining the allowance for loan losses, which results in increases the provision and allowance for loan losses. This typically decreases net income. 12 The following table summarizes the allowance for loan loss balances of the Company at the beginning and end of each period, changes in the allowance arising from charge-offs and recoveries by category and additions to the allowance, which have been charged to expense. Analysis of the Allowance for Loan Losses (dollars in thousands)
Year Ended December 31, ----------------------- 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Balance at beginning of year .............................. $ 4,310 $ 4,070 $ 3,854 $ 3,691 $ 3,438 Charge-offs: Commercial and industrial - not secured by real estate .... 1,360 298 118 32 212 Commercial and industrial - secured by real estate estate . 901 - 138 26 - Real estate - mortgage .................................... 45 210 528 327 169 Real estate - construction ................................ 6,659 110 150 141 - Consumer loans ............................................ 72 88 61 178 67 ------- ------- ------- ------- ------- 9,037 706 995 704 448 ------- ------- ------- ------- ------- Recoveries: Commercial and industrial - not secured by real estate. 42 8 - 1 46 Commercial and industrial - secured by real estate ..... 5 7 37 - - Real estate - mortgage .................................... - 10 165 8 60 Real estate - construction ................................ 68 8 - - - Consumer loans ............................................ 9 13 66 10 6 ------- ------- ------- ------- ------- 124 46 268 19 112 ------- ------- ------- ------- ------- Net Charge-offs ........................................... 8,913 660 727 685 336 Provision for loan losses ................................. 13,820 900 943 848 589 ------- ------- ------- ------- ------- Balance at end of year .................................... $ 9,217 $ 4,310 $ 4,070 $ 3,854 $ 3,691 ======= ======= ======= ======= =======
The following table sets forth ratios of net charge-offs or the allowance for loan losses to the items stated: Asset Quality Ratios:
Year Ended December 31, ----------------------- 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- Net charge-offs to average loans outstanding during the year .......... 2.14% 0.17% 0.20% 0.19% 0.11% Net charge-offs to total loans outstanding at end of year ........... 2.24% 0.16% 0.20% 0.18% 0.10% Allowance for loan losses to average loans ........................ 2.21% 1.12% 1.10% 1.09% 1.18% Allowance for loan losses to total loans at end of year .......... 2.31% 1.03% 1.14% 1.02% 1.13% Net charge-offs to allowance for loan losses at end of year .......... 96.70% 15.31% 17.86% 17.77% 9.10% Net charge-offs to provision for loan losses ......................... 64.49% 73.33% 77.09% 80.78% 57.05%
The allowance for loan losses is increased by direct charges to operating expense through the provision for loan losses. Losses on loans are charged against the allowance in the period in which management determines it is more likely than not that the full amounts of such loans have become uncollectible. Recoveries of previously charged-off loans are credited back to the allowance. Management considers the allowance for loan losses adequate to cover inherent losses on the loans outstanding at December 31, 2008. 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. It must be emphasized, however, that the determination of the allowance for loan losses using the Company's procedures and methods rests upon various judgments, estimates and assumptions about present and future economic conditions and other factors affecting loans. No assurance can be given that the Company will not sustain loan losses in any particular period which are sizable in relation to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. The allowance for loan losses is also subject to review and approval by various 13 regulatory agencies through their periodic examinations of the Company's subsidiaries. Such examinations could result in required changes to the allowance for loan losses. INVESTMENTS The Company invests primarily in obligations of the United States of America or obligations guaranteed as to principal and interest by the United States of America, other taxable securities and in certain obligations of states and municipalities. The Banks enter into federal funds transactions with their principal correspondent banks and usually act as net sellers of such funds. The sale of federal funds amounts to a short-term loan from the selling bank to the purchasing bank. The following table summarizes the amortized cost and market values of investment securities held by the Company at December 31, 2008 and 2007.
Securities Portfolio Composition (dollars in thousands) 2008 2007 ---- ---- Amortized Market Amortized Market Cost Value Cost Value ---- ----- ---- ----- TRADING ASSETS Other Securities ....................................... $ 47 $ 47 $ - $ - -------- -------- -------- -------- AVAILABLE FOR SALE Government Sponsored Enterprises ....................... 10,960 11,373 8,750 $ 8,974 Other Securities ....................................... 55,608 57,441 49,019 49,908 State and Political Subdivisions ....................... 27,199 27,189 25,839 25,914 -------- -------- -------- -------- Total Available for Sale ............................... 93,767 96,003 83,608 84,796 -------- -------- -------- -------- HELD TO MATURITY State and Political Subdivisions ....................... 12,651 12,666 13,102 13,113 -------- -------- -------- -------- OTHER INVESTMENTS ...................................... 3,546 3,546 4,795 4,795 -------- -------- -------- -------- Total ......................................... $110,011 $112,262 $101,505 $102,704 ======== ======== ======== ========
The Company accounts for investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investments classified as available for sale are carried at market value. Unrealized holding gains or losses are reported as a component of shareholders' equity net of deferred income taxes in comprehensive income. Securities classified as held for investment are carried at amortized cost, adjusted for the amortization of premiums and the accretion of discounts. In order to qualify as held for investment, the Company must have the ability and intent to hold the securities to maturity. Trading securities are carried at market value. Unrealized holding gains or losses are recognized in income. At December 31, 2008 the Company's total investment portfolio classified as available for sale had a book value of $93,767,000 and a market value of $96,003,000 for an unrealized net gain of $2,236,000. The changes in the market valuation of the investment portfolio were directly related to the changes in market interest rates during the year. Management believes that maintaining most of its securities in the available for sale category provides greater flexibility in the management of the overall investment portfolio. In cases where the market value is less than book value, the Company has the ability and intent to hold these securities until the value recovers or the securities mature. During the second half of 2008, the Company determined that its Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock had suffered an 14 other-than-temporary impairment as a result of the Government's decision on September 7, 2008 to place both the FHLMC and Federal National Mortgage Association ("FNMA") under conservatorship. Consequently, the Company recorded a pretax charge to earnings of $2,890,000 to write down to fair value. Subsequent to the impairment charge, management reclassified the FHLMC preferred stock as a trading account security, and in the fourth quarter the Company experienced a loss of $145,000 due to a further decline in the market value of the stock. The following table indicates the respective maturities and weighted-average yields of securities as of December 31, 2008:
Securities Maturity Schedule (dollars in thousands) Amortized Weighted Cost Average Yield** ---- --------------- TRADING ASSETS Other Securities Greater than 10 Years .................................... $ 47 0.00% ============= AVAILABLE FOR SALE Government sponsored enterprises and other securities: 1-5 Years ................................................ $ 1,764 4.65% 5-10 Years ............................................... 18,370 5.29% Greater than 10 Years .................................... 46,434 5.40% ------------- 66,568 5.38% ------------- State and political subdivisions: 1-5 Years ................................................ 457 6.08% 5-10 Years ............................................... 3,221 5.81%* Greater than 10 Years .................................... 23,521 5.84%* ------------- 27,199 5.84%* ------------- Other investments No contractual maturity ............................ 3,546 n/a ------------- Total ........................................... $ 97,313 5.51%* ============= HELD TO MATURITY State and political subdivisions: 0-1 Year ................................................. $ 1,951 4.72%* 1-5 Years ................................................ 4,623 5.23%* 5-10 Years ............................................... 4,100 5.95%* Greater than 10 Years .................................... 1,977 6.35%* ------------- Total ........................................... $ 12,651 5.65%* =============
* Yield adjusted to a fully taxable equivalent basis using a federal tax rate of 34%. ** Weighted average yields on available for sale securities are based on amortized cost. DEPOSITS The Company offers a full range of interest-bearing and noninterest-bearing deposit accounts, including commercial and retail checking accounts, negotiable orders of withdrawal ("NOW") accounts, public funds accounts, money market accounts, individual retirement accounts, including Keogh plans with stated maturities, regular interest-bearing statement savings accounts and certificates of deposit with fixed rates and a range of maturity date options. The primary sources of deposits are residents, businesses and employees of businesses within the Company's market areas obtained through the personal solicitation of the Company's officers and directors, direct mail solicitations and advertisements published in the local media. From time to time 15 the Company garners deposits from sources outside of its normal trade areas through the Internet or through brokers. These deposits are short-term in nature and are used to manage the Company's short-term liquidity position. These Internet and brokered deposits are generally more volatile than deposits acquired in the local market areas. There were no Internet deposits at December 31, 2008 or December 31, 2007. There were $77,411,000 and $28,087,000 of brokered deposits at December 31, 2008 and December 31, 2007. The majority of the growth in brokered deposits was within the Certificate of Deposit Account Registry Service ("CDARS"), which grew from $4,308,000 at December 31, 2007 to $32,953,000 at December 31, 2008. All of the Company's deposits under the CDARS program are retail in nature and originate from the Banks' customer base. The Company considers these funds to be an attractive alternative funding source available for use while it continues efforts to maintain and grow its local deposit base. The Company pays competitive interest rates on interest checking, savings, money market, time and individual retirement accounts. In addition, the Banks have implemented a service charge fee schedule competitive with other financial institutions in the Banks' market areas, covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like. The Company's average deposits in 2008 were $432,202,000 compared to $407,354,000 the prior year, an increase of $24,848,000 or 6.1%. In 2008 the average noninterest-bearing deposits decreased approximately $4,982,000 or 9.6%, average interest-bearing checking accounts increased $6,032,000 or 10.4%, average savings accounts increased $270,000 or 3.1%, average money market accounts increased $3,813,000 or 14.9%, average certificates of deposit increased $19,331,000 or 8.3%, and individual retirement accounts increased $384,000 or 1.3%. Competition for deposit accounts is primarily based on the interest rates paid, service charge structure, location convenience and other services offered. The following table presents, for the years ended December 31, 2008, 2007 and 2006, the average amount of, and average rate paid on, each of the following deposit categories:
Deposit Category Average Amount Average Rate Paid -------------- ----------------- (dollars in thousands) 2008 2007 2006 2008 2007 2006 ---- ---- ---- ---- ---- ---- Noninterest-bearing Deposits ............. $ 46,778 $ 51,760 $ 55,660 - - - Interest-bearing Deposits Interest Checking .................... 64,239 58,207 54,712 1.18% 1.27% 0.58% Savings Deposits ..................... 9,119 8,849 10,560 0.44% 0.44% 0.36% Money Market ......................... 29,421 25,608 36,367 2.48% 2.37% 1.94% Certificates of Deposit .............. 252,641 233,310 206,728 4.08% 4.94% 4.10% Individual Retirement Accounts ....... 30,044 29,620 28,786 4.28% 4.68% 4.06%
The Company's core deposit base consists of consumer time deposits less than $100,000, savings accounts, NOW accounts, money market accounts and checking accounts. Although such core deposits are becoming increasingly interest-sensitive for both the Company and the industry as a whole, such core deposits still continue to provide the Company with a large and stable source of funds. Core deposits as a percentage of average total deposits averaged approximately 78% in 2008 and 77% in 2007. The Company closely monitors its reliance on certificates of deposits greater than $100,000, which are generally considered less stable and less reliable than core deposits. The following table indicates amounts outstanding of time certificates of deposit of $100,000 or more and respective maturities as of December 31, 2008: Time Certificates of Deposit ---------------------------- (dollars in thousands) 3 months or less .................... $ 29,500 4-6 months .......................... 21,601 7-12 months ......................... 30,251 Over 12 months ...................... 5,028 ------------------- Total ...................... $ 86,380 =================== 16 RETURN ON EQUITY AND ASSETS Returns on average consolidated assets and average consolidated equity for the years ended December 31, 2008 and 2007 are as follows: 2008 2007 ----- ----- Return on average assets ..................... -1.51% 0.84% Return on average equity ..................... -17.83% 9.03% Average equity to average assets ratio ....... 8.48% 9.27% Dividend payout ratio (1) .................... -12.66% 31.04% (1) Includes cash-in-lieu of fractional shares paid on 5% stock dividends. SHORT-TERM BORROWINGS The following table summarizes the Company's short-term borrowings for the years ended December 31, 2008 and 2007. These borrowings consist of federal funds purchased and securities sold under agreements to repurchase, which generally mature on a one-business-day basis.
Weighted Maximum Weighted Average Outstanding Annual Average Interest at any Average Interest Year End Rate at Year Ended December 31, Month End Balance Rate Balance Year End ----------------------- --------- ------- ---- ------- -------- (dollars in thousands) 2008: Federal funds purchased .......................... $ 4,197 $ 649 2.44% $ 1,028 1.26% Securities sold under repurchase agreements ...... $ 25,557 $ 20,832 1.56% $ 22,181 0.70% Advances from Federal Home Loan Bank ............. $ 71,700 $ 47,646 3.37% $ 34,600 0.46% 2007: Federal funds purchased .......................... $ 2,960 $ 1,137 5.21% $ 429 4.76% Securities sold under repurchase agreements ...... $ 23,229 $ 20,648 1.92% $ 19,824 1.82% Advances from Federal Home Loan Bank ............. $ 65,100 $ 33,249 5.59% $ 65,100 4.40%
MARKET RISK - INTEREST RATE SENSITIVITY Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. The Company's primary type of market risk is interest-rate risk. The primary objective of Asset/Liability Management at the Company is to manage interest-rate risk and achieve reasonable stability in net interest income throughout interest-rate cycles in order to maintain adequate liquidity. The Company seeks to achieve this objective by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive liabilities. The relationship of rate-sensitive earning assets to rate-sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and rate-sensitive liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the first year. 17 Each of the Company's banking subsidiaries has established an Asset/Liability Management Committee. These committees use a variety of tools to analyze interest-rate sensitivity, including a static gap presentation and a simulation model. A static gap presentation reflects the difference between total interest-sensitive assets and liabilities within certain time periods. While the static gap is a widely used measure of interest rate sensitivity, it is not, in management's opinion, the best indicator of a company's true sensitivity position. Accordingly, the Company's banking subsidiaries also use an earnings simulation model that estimates the variations in interest income under different interest-rate environments to measure and manage the bank's short-term interest-rate risk. According to the model, as of December 31, 2008 the Company was positioned so that net interest income would increase by approximately $557,000 in the next twelve months if market interest rates were to gradually rise by 100 basis points over the same period. Conversely, net interest income would decline by approximately $652,000 in the next twelve months if interest rates were to gradually decline by 100 basis points. Computation of prospective effects of hypothetical interest-rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate all of the actions the Company and its customers could undertake in response to changes in interest rates. Additionally, each of the Company's banking subsidiaries measures anticipated changes in its economic value of equity in order to ascertain its long-term interest rate risk. This is done by calculating the difference between the theoretical market value of the bank's assets and liabilities and subjecting the balance sheet to different interest-rate environments to measure and manage long-term interest rate risk. It is the responsibility of the Asset/Liability Committees to establish parameters for various interest risk measures, to set strategies to control interest rate risk within those parameters, to maintain adequate and stable net interest income, and to direct the implementation of tactics to facilitate achieving their objectives. LIQUIDITY Liquidity management involves meeting the cash flow requirements of the Company. The Company's liquidity position is primarily dependent upon its need to respond to short-term demand for funds caused by withdrawals from deposit accounts and upon the liquidity of its assets. The Company's primary liquidity sources include cash and due from banks, federal funds sold and "securities available for sale." In addition, the Company (through the Banks) has the ability, on a short-term basis, to borrow funds from the Federal Reserve System and to purchase federal funds from other financial institutions. At December 31, 2008 the Banks in aggregate had unused federal funds lines of credit totaling $35,972,000 with various correspondent banks. The Banks are also members of the Federal Home Loan Bank System and have the ability to borrow both short- and long-term funds on a secured basis. At December 31, 2008 the Banks in the aggregate had no long-term borrowings, $34,600,000 in short-term borrowings, and $45,751,000 in unused borrowing capacity from the Federal Home Loan Bank of Atlanta. The Federal Home Loan Bank requires that investment securities, qualifying mortgage loans, and stock of the Federal Home Loan Bank owned by the Banks be pledged to secure any advances from them. The unused borrowing capacity currently available assumes that the Banks' $2,585,000 investment in Federal Home Loan Bank stock as well as certain securities and qualifying mortgages would be pledged to secure future borrowings. Management believes that it could obtain additional borrowing capacity from the Federal Home Loan Bank by identifying additional qualifying collateral that could be pledged. Peoples Bancorporation, Inc., the parent holding company, has limited liquidity needs outside of those of its subsidiaries. Peoples Bancorporation requires liquidity to pay limited operating expenses and cash dividends. The parent company's liquidity needs are fulfilled through management fees assessed at each subsidiary bank. In 2008, the Company obtained a $15,000,000 line of credit from a correspondent bank to enable it to inject additional capital into the Banks. The Company subsequently drew on this line of credit and injected a total of $11,500,000 into its three banks. At December 31, 2008 the line of credit, which matures September 28, 2010, had an outstanding balance of $11,000,000. The line of credit agreement contains certain covenants to which the Company is obligated in order to retain the line of credit. At December 31, 2008, the Company's non-performing assets to total assets ratio of 4.08% exceeds 18 the required non-performing assets to total assets ratio of 3.50%, for which a waiver was obtained through March 31, 2009. Management believes the Company will be back in compliance with the covenant requirements at March 31, 2009. The Company plans to meet its future cash needs through the liquidation of temporary investments, maturities or sales of loans and investment securities, generation of deposits, and Federal Home Loan Bank advances. Company management believes its liquidity sources are adequate to meet its operating needs and does not know of any trends that may result in the Company's liquidity materially increasing or decreasing. OFF-BALANCE SHEET ARRANGEMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company, through the operations of the Banks, makes contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to customers of the Banks at predetermined interest rates for a specified period of time. At December 31, 2008 the Banks had issued commitments to extend credit of $77,530,000 through various types of arrangements, described further in the table below. The commitments generally expire in one year. Past experience indicates that many of these commitments to extend credit will expire not fully used. However, as described under LIQUIDITY, the Company believes that it has adequate sources of liquidity to fund commitments that are drawn upon by the borrowers. December 31, 2008 ----------------- (dollars in thousands) Unused Commitments Lines of credit secured by residential properties .. $ 44,800 Lines of credit secured by commercial properties ... 12,660 Other unused commitments ........................... 20,070 ------------------- Total ........................................... $ 77,530 =================== In addition to commitments to extend credit, the Banks also issue letters of credit. A letter of credit is an assurance to a third party that it will not suffer a loss if the Bank's customer fails to meet its contractual obligation to the third party. At December 31, 2008, $2,845,000 was committed under letters of credit. Past experience indicates that many of these letters of credit will expire unused. However, through its various sources of liquidity, the Company believes that it will have the necessary resources to meet these obligations should the need arise. Various types of collateral secure most of the letters of credit. The Company believes that the risk of loss associated with letters of credit is comparable to the risk of loss associated with its loan portfolio. Moreover, the fair value associated with any letters of credit issued by the Company is immaterial to the Company. Neither the Company nor its subsidiaries are involved in any other off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments or significantly impact earnings. The Company did not maintain any obligations under non-cancelable operating lease agreements at December 31, 2008. Refer to Note 11 and Note 12 of the Company's consolidated financial statements for a discussion of commitments and contingencies and financial instruments with off-balance sheet risk. CAPITAL ADEQUACY AND RESOURCES The capital needs of the Company have been met through the retention of earnings and from the proceeds of prior public stock offerings. For publicly held bank holding companies, such as the Company, capital adequacy is evaluated on a consolidated basis. The Company's banking subsidiaries must separately meet additional regulatory capital requirements. 19 Generally, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") expects bank holding companies to operate above minimum capital levels. The Office of the Comptroller of the Currency's ("Comptroller") regulations establish the minimum leverage capital ratio requirement for national banks at 3% in the case of a national bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other national banks are expected to maintain a ratio of at least 1% to 2% above the stated minimum. Furthermore, the Comptroller reserves the right to require higher capital ratios in individual banks on a case-by-case basis when, in its judgment, additional capital is warranted by a deterioration of financial condition or when high levels of risk otherwise exist. On October 15, 2008, one the Company's bank subsidiaries, entered into a formal agreement with the Comptroller for the bank to take various actions with respect to the operation of the bank (for further discussion of this matter see Item 8 - Financial Statements and Supplementary Data- "NOTE 18 - REGULATORY MATTERS"). The Company's and Banks' capital ratios are presented as follows: December 31, 2008 2007 ----- ----- Peoples Bancorporation, Inc. Risk-based capital ratio ................... 10.77% 12.02% Tier 1 capital (to risk weighted assets) ... 9.49% 11.06% Tier 1 capital (to average assets) ......... 7.33% 8.80% Peoples National Bank Risk-based capital ratio ................... 12.44% 10.64% Tier 1 capital (to risk weighted assets) ... 11.15% 9.69% Tier 1 capital (to average assets) ......... 9.06% 8.52% Bank of Anderson (1) Risk-based capital ratio ................... 15.27% 13.25% Tier 1 capital (to risk weighted assets) ... 14.02% 12.11% Tier 1 capital (to average assets) ......... 9.58% 8.34% Seneca National Bank Risk-based capital ratio ................... 14.44% 11.47% Tier 1 capital (to risk weighted assets) ... 13.19% 10.55% Tier 1 capital (to average assets) ......... 9.76% 7.82% (1) On October 23, 2008 Bank of Anderson, N.A. was notified by the Comptroller that it must maintain the following minimum capital ratios: Tier-1 capital of at least 8% of adjusted total assets, Tier-1 capital of at least 10% of risk-weighted assets, and total risk-based capital of at least 12% of risk-weighted assets. As a result of the reductions in capital caused by operating losses at the Banks in 2008, the Company made capital injections into the Banks as follows: $9,000,000 at The Peoples National Bank, $2,000,000 at Bank of Anderson, N.A., and $1,500,000 at Seneca National Bank. The primary source of these capital injections was a loan from a correspondent bank. During the fourth quarter of 2008 the Company applied to sell preferred stock to the U. S. Department of the Treasury under its Capital Purchase Program. The Company has recently received preliminary approval to sell up to $12,644,000 of preferred stock to the Treasury. The Company is reviewing the costs and benefits of making such a sale but has not yet made a final decision. The Federal Reserve Board has adopted a risk-based capital rule that requires bank holding companies to have qualifying capital to risk-weighted assets of at least 8%, with at least 4% being "Tier 1" capital. Tier 1 capital consists principally of common shareholders' equity, non-cumulative preferred stock, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain intangible assets. "Tier 2" (or supplementary) capital consists of general loan loss reserves (subject to certain limitations), certain types of preferred stock and subordinated debt, and certain hybrid capital instruments and other debt 20 securities such as equity commitment notes. A bank holding company's qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital components, provided that the maximum amount of Tier 2 capital that may be treated as qualifying capital is limited to 100% of Tier 1 capital. The Comptroller imposes a similar standard on national banks. The regulatory agencies expect national banks and bank holding companies to operate above minimum risk-based capital levels. See Item 8 - Financial Statements and Supplementary Data, Note 18, for more information about regulatory capital ratios. PAYMENT OF DIVIDENDS Payment of dividends by the Company is within the discretion of its Board of Directors subject to certain regulatory requirements. Payment of cash dividends by the Company is also subject to a restriction in a loan agreement which requires the Company to obtain the consent of the lender if payment of a dividend would cause the Company to be less than well capitalized. The Company's primary sources of funds with which to pay dividends to shareholders are the dividends it receives from its subsidiary banks. In 2008 The Peoples National Bank paid dividends of $707,000 and Bank of Anderson, N.A. paid $353,000 to the Company, which in turn paid those dividends to its shareholders. In 2007, The Peoples National Bank paid dividends of $1,343,000 to the Company, which in turn paid those dividends to its shareholders. Bank of Anderson and Seneca National Bank paid no dividends to the Company in 2007. Payment of dividends by the Banks is subject to regulatory restrictions. If a national bank's surplus fund equals the amount of its capital stock, the directors may declare quarterly, semi-annual or annual dividends out of the bank's net profits, after deduction of losses and bad debts. If the surplus fund does not equal the amount of capital stock, a dividend may not be paid until one-tenth of the bank's net profits of the preceding half year, in the case of quarterly or semi-annual dividends, or the preceding two years, in the case of an annual dividend, are transferred to the surplus fund. The approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year will exceed the total of its retained net profits of that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The Comptroller's regulations provide that provisions for possible credit losses cannot be added back to net income and charge-offs cannot be deducted from net income in calculating the level of net profits available for the payment of dividends. The payment of dividends by the Banks may also be affected or limited by other factors, such as the requirements to maintain adequate capital above regulatory guidelines. If, in the opinion of the Comptroller, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the Comptroller may require, after notice and hearing, that such bank cease and desist from such practice. The Comptroller has indicated that paying dividends that deplete a national bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the Comptroller and the FDIC have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. MONETARY POLICIES AND EFFECT OF INFLATION The earnings of bank holding companies are affected by the policies of regulatory authorities, including the Federal Reserve Board, in connection with its regulation of the money supply. Various methods employed by the Federal Reserve Board include open market operations in U. S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. 21 The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike companies in most other industries, virtually all of the assets and liabilities of financial institutions are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution's performance than does the effect of inflation. Interest rates do not necessarily change in the same magnitude as do the prices of goods and services. While the effect of inflation on banks is normally not as significant as is its influence on those businesses that have large investments in plant and inventories, it does have some effect. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above-average growth in assets, loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses. Inflation that affects the Banks' customers may also have an indirect effect on the Banks. CORRESPONDENT BANKING Correspondent banking involves the provision of services by one bank to another bank, which cannot provide that service for itself, or chooses not to, from an economic, regulatory or practical standpoint. The Banks purchase correspondent services offered by larger banks, including check collections, the sale and purchase of federal funds, security safekeeping, investment services, over-line and liquidity loan participations and sales of loans to or participations with correspondent banks. The Banks have the option to sell loan participations to correspondent banks with respect to loans that exceed the Banks' lending limits. Management of the Banks has established correspondent banking relationships with Silverton Bank, Atlanta, Georgia; Community Bankers Bank, Midlothian, Virginia; SCBT, N.A., Columbia, South Carolina; and Wachovia Bank, N. A., Charlotte, North Carolina. As compensation for services provided by correspondents, the Banks may maintain certain balances with such correspondents in non-interest bearing accounts. DATA PROCESSING The Company has a data-processing department, which performs a full range of data-processing services for the Banks. Such services include an automated general ledger, deposit accounting, loan accounting and data processing. SUPERVISION AND REGULATION The Company and the Banks operate in a highly regulated environment, and their business activities are governed by statute, regulation and administrative policies. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to such statutes and regulations. Any change in applicable law or regulation may have a material effect on the business of the Company and the Banks. General The business activities of the Company and Banks are closely supervised by a number of federal regulatory agencies, including the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), the Comptroller and the Federal Deposit Insurance Corporation (the "FDIC"). As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report of its operations at the end of each fiscal year and such additional information as the Federal Reserve Board may require pursuant to the 22 Bank Holding Company Act. The Federal Reserve Board may also make examinations of the Company and any subsidiaries. The Company is regulated by the Federal Reserve Board under the Federal Bank Holding Company Act of 1956, as amended (the "BHCA"). Under the BHCA, a bank holding company is generally prohibited from acquiring control of any company that is not a bank and from engaging in any business other than the business of banking or managing and controlling banks. However, there are certain activities which have been identified by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto, and are thus permissible for bank holding companies, including the following activities: acting as an investment or financial advisor to subsidiaries and certain outside companies; leasing personal and real property or acting as a broker with respect thereto; providing management consulting advice to nonaffiliated banks and non-bank depository institutions; operating collection agencies and credit bureaus; acting as a futures commission merchant; providing data processing and data transmission services; acting as an insurance agent or underwriter with respect to limited types of insurance; performing real estate appraisals; arranging commercial real estate equity financing; providing securities brokerage services; and underwriting and dealing in obligations of the United States of America, the states and their political subdivisions. The BHCA also requires every bank holding company to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of the voting shares of any bank or all or substantially all of the assets of a bank, and before merging or consolidating with another bank holding company. As discussed below under the caption "Gramm-Leach-Bliley Act," Congress has adopted extensive changes in the laws governing the financial services industry. Among the changes adopted are creation of the financial holding company, a new type of bank holding company with powers that greatly exceed those of standard holding companies, and creation of the financial subsidiary, a subsidiary that can be used by national banks to engage in many, though not all, of the same activities in which a financial holding company may engage. Although the Company elected to become a financial holding company as of June 23, 2000, neither the Company nor the Banks used any of the additional powers, and, in 2008 the Company changed its status back to that of a bank holding company. Accordingly, the following discussion relates to the supervisory and regulatory provisions that apply to the Company and the Banks as they currently operate. The Company also is subject to limited regulation by the South Carolina State Board of Financial Institutions (the "State Board"). Consequently, the Company must give notice to, or receive the approval of, the State Board pursuant to applicable law and regulations prior to engaging in the acquisition of South Carolina banking institutions or holding companies. The Company also may be required to file with the State Board periodic reports with respect to its financial condition and operation, management and inter-company relations between the Company and its subsidiaries. Obligations of the Company to its Subsidiary Banks A number of obligations and restrictions are imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is in danger of becoming insolvent or is insolvent. For example, under the policy of the Federal Reserve, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended ("FDIA"), require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the Deposit Insurance Fund of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the Deposit Insurance Fund. The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. 23 The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision gives depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of any of the Banks. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Comptroller is authorized to require payment of the deficiency by assessment upon the bank's shareholders, pro rata, and to the extent necessary, if any such assessment is not paid by any shareholder after three months notice, to sell the stock of such shareholder to make good the deficiency. Certain Transactions by the Company with its Affiliates Federal law regulates transactions among the Company and its affiliates, including the amount of the Banks' loans to or investments in nonbank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. Further, a bank holding company and its affiliates are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Capital Adequacy Guidelines for Bank Holding Companies and National Banks Both the Company and the Banks are subject to regulatory capital requirements imposed by the Federal Reserve Board and the Comptroller (see Item 1 - Business - "CAPITAL ADEQUACY AND RESOURCES"). Failure to meet capital guidelines could subject the Banks to a variety of enforcement remedies, ranging, for example, from a prohibition on the taking of brokered deposits to the termination of deposit insurance by the FDIC and placing the Banks in receivership. A joint rule promulgated by the Federal Reserve Board, the FDIC and the Comptroller provides that the banking agencies must include in their evaluations of a bank's capital adequacy an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The agencies have issued statements that describe the process the banking agencies will use to measure and assess the exposure of a bank's net economic value to changes in interest rates. Another joint rule promulgated by the financial institution regulators further provides that the risk-based capital guidelines must take account of concentration of credit risk and the risk of non-traditional activities. The rule explicitly identifies concentration of credit risk and the risk arising from other sources, as well as an institution's overall capital adequacy. Bank regulators continue to indicate their desire to raise capital requirements applicable to banking organizations beyond their current levels. However, management of the Company is unable to predict whether and when higher capital requirements would be imposed and, if so, at what levels and on what schedule. The Company and each of the Banks exceeded all applicable capital requirements at December 31, 2008. On October 23, 2008 Bank of Anderson, N.A. was notified by the Comptroller that it must maintain the following minimum capital ratios: Tier-1 capital of at least 8% of adjusted total assets, Tier-1 capital of at least 10% of risk-weighted assets, and total risk-based capital of at least 12% of risk-weighted assets. 24 Payment of Dividends The Company is a legal entity separate and distinct from the Banks. Most of the revenues of the Company are expected to continue to result from dividends paid to the Company by the Banks. There are statutory and regulatory requirements applicable to the payment of dividends by subsidiary banks as well as by the Company to its shareholders. See "Item 1 - Business -- PAYMENT OF DIVIDENDS" above. Regulation of the Banks As national banks, the Banks are subject to supervision by the Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board. With respect to expansion, the Banks may establish branch offices anywhere within the State of South Carolina. In addition, the Banks are subject to various other state and federal laws and regulations, including state usury laws, laws relating to fiduciaries, consumer credit and laws relating to branch banking. The Banks' loan operations are subject to certain federal consumer credit laws and regulations promulgated thereunder, including, but not limited to; the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to provide certain information concerning their mortgage lending; the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting discrimination on the basis of certain prohibited factors in extending credit; and the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies. The deposit operations of the Banks are subject to the Truth in Savings Act, requiring certain disclosures about rates paid on savings accounts; the Expedited Funds Availability Act, which deals with disclosure of the availability of funds deposited in accounts and the collection and return of checks by banks; the Right to Financial Privacy Act, which imposes a duty to maintain certain confidentiality of consumer financial records and the Electronic Funds Transfer Act and regulations promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. The Banks are also subject to the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; the Bank Secrecy Act, dealing with, among other things, the reporting of certain currency transactions; and the USA Patriot Act, dealing with, among other things, requiring the establishment of anti-money laundering programs including standards for verifying customer information at account opening. The Banks are also subject to the requirements of the Community Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution's actual performance in meeting community credit needs is evaluated as part of the examination process, and also is considered in evaluating mergers, acquisitions and applications to open a branch or facility. Loans and extensions of credit by national banks are subject to legal lending limitations. Under federal law, a national bank may grant unsecured loans and extensions of credit in an amount up to 15% of its unimpaired capital, surplus and allowance for loan losses to any person or entity. In addition, a national bank may grant loans and extensions of credit to a single person up to 10% of its unimpaired capital, surplus and allowance for loan losses, provided that the transactions are fully secured by readily marketable collateral having a market value determined by reliable and continuously available price quotations. This 10% limitation is separate from, and in addition to, the 15% limitation for unsecured loans. Loans and extensions of credit may exceed the general lending limits if they qualify under one of several exceptions. Such exceptions include, among others, certain loans or extensions of credit arising from the discount of commercial or business paper, the purchase of banker's acceptances, loans secured by documents of title, loans secured by U. S. obligations and loans to or guaranteed by the federal government. As national banks, the Banks are subject to examinations and reviews by the Comptroller. These examinations are typically completed on site, and the 25 Banks are subject to off-site review as well. The Banks also submit to the FDIC quarterly reports of condition, as well as such additional reports as the national banking laws may require. FDIC Insurance Assessments The FDIC merged the Bank Insurance Fund and the Savings Association Insurance Fund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC maintains the DIF by assessing depository institutions an insurance premium. The amount each institution is assessed is based upon statutory factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund. The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the DIF. Under rules adopted by the FDIC in November 2006, beginning January 1, 2007, the FDIC placed each institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment). Since January 1, 2007, rates have ranged between 5 and 43 cents per $100 in assessable deposits. As a result of the actual and predicted impact on the DIF of bank failures in 2008 and 2009, the FDIC has altered its methodology for computing assessments, beginning with assessments due in September 2009 based on assessable deposits at June 30, 2009. Under the new methodology, assessments will range between 7 and 77.5 cents per $100 in assessable deposits. The FDIC has also proposed to make an additional "emergency assessment" of 20 cents per $100 of assessable deposits held on June 30, 2009, which may be payable in September 2009. Legislation enacted in 1996 also required that insured deposits pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation ("FICO"). The FICO assessment is adjusted quarterly to reflect changes in the assessment bases of the respective funds based on quarterly Call Report and Thrift Financial Report submissions. The Federal Deposit Insurance Reform Act of 2005 allows "eligible insured depository institutions" to share a one-time assessment credit pool of approximately $4.7 billion. To be eligible, an institution must have been in existence on December 31, 1996, and have paid a deposit insurance assessment prior to that date. Of the Company's three banks, only The Peoples National Bank had a one-time assessment credit, which amounted to approximately $112,000. This credit was exhausted during the first quarter of 2008. Other Safety and Soundness Regulations Prompt Corrective Action. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." A bank that is "undercapitalized" becomes subject to provisions of the FDIA: restricting payment of capital distributions and management fees; requiring the FDIC to monitor the condition of the bank; prohibiting the acceptance of employee benefit plan deposits; requiring submission by the bank of a capital restoration plan; restricting the growth of the bank's assets and requiring prior approval of certain expansion proposals. A bank that is "significantly undercapitalized" is also subject to restrictions on compensation paid to senior management of the bank, and a bank that is "critically undercapitalized" is further subject to restrictions on the activities of the bank and restrictions on payments of subordinated debt of the bank. The purpose of these provisions is to require banks with less than adequate capital to act quickly to restore their capital and to have the FDIC move promptly to take over banks that are unwilling or unable to take such steps. Brokered Deposits. Under current FDIC regulations, "well capitalized" banks may accept brokered deposits without restriction, "adequately capitalized" banks may accept brokered deposits with a waiver from the FDIC (subject to certain restrictions on payment of rates), while "undercapitalized" banks may not accept brokered deposits. The regulations provide that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" are the same as the definitions adopted by the agencies to implement the prompt corrective action provisions described in the previous paragraph. Pursuant to a formal 26 agreement with the Comptroller, Bank of Anderson, N. A. may not accept brokered deposits without the prior written advice of no supervisory objection from the Assistant Deputy Comptroller. Interstate Banking Under the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994, the Company, and any other adequately capitalized bank holding company located in South Carolina can acquire a bank located in any other state, and a bank holding company located outside South Carolina can acquire any South Carolina-based bank, in either case subject to certain deposit percentages and other restrictions. The legislation also provides that in any state that has not previously elected to prohibit out-of-state banks from operating interstate branches within its territory, adequately capitalized and managed bank holding companies can consolidate their multi-state bank operations into a single bank subsidiary and branch interstate through acquisitions. De novo branching by an out-of-state bank is permitted only if the laws of the host state expressly permit it. The authority of a bank to establish, and operate branches within a state continue to be subject to applicable state branching laws. South Carolina permits such interstate branching, but not de novo branching by an out-of-state bank. The Riegel-Neal Act, together with legislation adopted in South Carolina, resulted in a number of South Carolina banks being acquired by large out-of-state bank holding companies. Size gives the larger banks certain advantages in competing for business from larger customers. These advantages include higher lending limits and the ability to offer services in other areas of South Carolina and the region. As a result, the Company does not generally attempt to compete for the banking relationships of large corporations and businesses, but concentrates its efforts on small to medium-sized businesses and on individuals. The Company believes it has competed effectively in this market segment by offering quality, personal service. Gramm-Leach-Bliley Act The Gramm-Leach-Bliley Act (the "Act"), makes it easier for affiliations between banks, securities firms and insurance companies to take place, removes Depression-era barriers that had separated banks and securities firms, and seeks to protect the privacy of consumers' financial information. Under provisions of the legislation and regulations adopted by the appropriate regulators, banks, securities firms and insurance companies are able to structure new affiliations through a holding company structure or through a financial subsidiary. The legislation created a new type of bank holding company called a "financial holding company" which has powers much more extensive than those of standard holding companies. These expanded powers include authority to engage in "financial activities," which are activities that are (1) financial in nature; (2) incidental to activities that are financial in nature; or (3) complementary to a financial activity and that do not impose a safety and soundness risk. Significantly, the permitted financial activities for financial holding companies include authority to engage in merchant banking and insurance activities, including insurance portfolio investing. A bank holding company can qualify as a financial holding company and expand the services it offers only if all of its subsidiary depository institutions are well managed, well capitalized and have received a rating of "satisfactory" on their last Community Reinvestment Act examination. The legislation also created another new type of entity called a "financial subsidiary." A financial subsidiary may be used by a national bank or a group of national banks to engage in many of the same activities permitted for a financial holding company, though several of these activities, including real estate development or investment, insurance or annuity underwriting, insurance portfolio investing and merchant banking, are reserved for financial holding companies. A bank's investment in a financial subsidiary affects the way in which the bank calculates its regulatory capital, and the assets and liabilities of financial subsidiaries may not be consolidated with those of the bank. The bank must also be certain that its risk management procedures are adequate to protect it from financial and operational risks created both by itself and by any financial subsidiary. Further, the bank must establish policies to maintain the separate corporate identities of the bank and its financial subsidiary and to prevent each from becoming liable for the obligations of the other. 27 The Act also established the concept of "functional supervision," meaning that similar activities should be regulated by the same regulator. Accordingly, the Act spells out the regulatory authority of the bank regulatory agencies, the Securities and Exchange Commission and state insurance regulators so that each type of activity is supervised by a regulator with corresponding expertise. The Federal Reserve Board is intended to be an umbrella supervisor with the authority to require a bank holding company or financial holding company or any subsidiary of either to file reports as to its financial condition, risk management systems, transactions with depository institution subsidiaries and affiliates, and compliance with any federal law that it has authority to enforce. Although the Act reaffirmed that states are the regulators for insurance activities of all persons, including federally chartered banks, the Act prohibits states from preventing depository institutions and their affiliates from conducting insurance activities. The Act also established a minimum federal standard of privacy to protect the confidentiality of a consumer's personal financial information and gives the consumer the power to choose how financial institutions may use personal financial information. The privacy provisions of the Act have been implemented by regulations of various federal agencies. The Act and the regulations adopted pursuant to the Act create opportunities for the Company to offer expanded services to customers in the future. The Company elected to become a financial holding company effective June 23, 2000, but it had not yet used that status to engage in any activities that are not also permissible for bank holding companies, and changed its status back to that of a bank holding company in 2008. The Act has increased competition from larger financial institutions that are currently more capable than the Company of taking advantage of the opportunity to provide a broader range of services. However, the Company continues to believe that its commitment to providing high quality, personalized service to customers will permit it to remain competitive in its market area. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act was signed into law on July 30, 2002, and mandated extensive reforms and requirements for public companies. The SEC has adopted extensive related regulations pursuant to the requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the SEC's related regulations have increased the Company's cost of doing business, particularly its fees for internal and external audit services and legal services, and the law and regulations are expected to continue to do so. However, the Company does not believe that it will be affected by the Sarbanes-Oxley Act and the related SEC regulations in ways that are materially different or more onerous than those of other public companies of similar size and in similar businesses. Governmental Response to 2008 Financial Crisis During the fourth quarter of 2008 and continuing into the first quarter of 2009 the FDIC, the Federal Reserve, the Department of the Treasury and Congress took a number of actions designed to alleviate or correct mounting problems in the financial services industry. A number of these initiatives were directly applicable to community banks. Congress enacted the Emergency Economic Stabilization Act of 2008 which, among other things, temporarily increased the maximum amount of FDIC deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief Program ("TARP") administered by Treasury. In October, 2008, Treasury announced a Capital Purchase Program ("CPP") under TARP to increase the capital of healthy banks. Under the CPP, Treasury would purchase preferred stock with warrants from qualified banks and bank holding companies in an amount up to 3% of the seller's risk-weighed assets as of September 30, 2008. Institutions wishing to participate in the CPP were required to file an application with their principal federal regulators. The Company has filed such an application and received preliminary approval to sell preferred stock to the Treasury, but has not yet decided whether to do so. 28 The FDIC also implemented in October, 2008 a Temporary Liquidity Guarantee Program consisting of a deposit insurance component pursuant to which it undertook to provide deposit insurance in an unlimited amount for non-interest bearing transaction accounts, and a debt guarantee component pursuant to which it undertook to fully guarantee senior, unsecured debt issued by banks or bank holding companies. Coverage of both components was automatic until December 5, 2008, at which time covered institutions could opt out of one or both of the components. Institutions not opting out would be charged fees for their participation in the components. The Bank did not opt out of either component. An unfortunate consequence of the difficulties that have beset the banking industry in the last year has been a large increase in bank failures, which has led to substantial claims being made against the DIF. In order to increase the amount in the DIF to reflect the increased risk of additional bank failures and insurance claims, the FDIC has raised its assessments on banks for 2009 and has also proposed a special one-time assessment of 20 cents per $100 of assessable deposits, to be paid in September, 2009 based on deposits at June 30, 2009. There appears, however, to be a possibility that the assessment will be reduced if Congress authorizes the FDIC to borrow sufficient funds. Assuming that the special assessment is imposed as proposed and without reduction, the additional cost to the Banks in 2009 would be approximately $900,000. Additional governmental efforts to ameliorate the problems afflicting the banking industry have been adopted or proposed, or are being considered by Congress and various governmental entities. The Company is presently unable to predict the impact of any such changes, although it appears that they are likely to increase operating expenses in the near term without creating completely offsetting benefits. Legislative Proposals Proposed legislation that could significantly affect the business of banking is introduced in Congress and the General Assembly of South Carolina from time to time. For example, numerous bills are pending in Congress and the South Carolina Legislature to provide various forms of relief to homeowners from foreclosure of mortgages as a result of publicity surrounding economic problems resulting from subprime mortgage lending and the economic adjustments in national real estate markets. Broader problems in the financial sector of the economy which became apparent in 2008 have led to numerous calls for legislative restructuring of the regulation of the sector. Management of the Company cannot predict the future course of such legislative proposals or their impact on the Company and the Banks should they be adopted. EMPLOYEES The Company and the Banks employed 123 full-time and 14 part-time persons as of December 31, 2008. Management believes that its employee relations are good. EXECUTIVE OFFICERS The executive officers of the Company are R. Riggie Ridgeway, Chief Executive Officer; L. Andrew Westbrook, III, President and Chief Operating Officer; William B. West, Executive Vice President and Treasurer; Robert E. Dye, Jr., Senior Vice President, Chief Financial Officer and Secretary. Information about all of the executive officers is set forth in Item 10, Part III of this report on Form 10-K. 29 AVAILABLE INFORMATION The Company electronically files with the Securities and Exchange Commission ("SEC") its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its periodic reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act"), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company also makes its filings available, free of charge, upon written request to Ms. Patricia A. Jensen, Senior Vice President, Peoples Bancorporation, Inc., P.O. Box 1989, Easley, South Carolina 29641. 30 ITEM 1 A. RISK FACTORS Risks Related to Our Business There can be no assurance that recent government actions will help stabilize the U.S. financial system. In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, various branches and agencies of the U.S. government have put in place laws, regulations and programs to address capital and liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that such laws, regulations and programs will have on the financial markets, including the extreme levels of volatility, liquidity and confidence issues, and limited credit availability currently being experienced. The failure of such laws, regulations and programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock. Current levels of market volatility are unprecedented. The volatility and disruption of financial and credit markets has reached unprecedented levels for recent times. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations. The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers, dealers, commercial banks, investment banks, and government sponsored enterprises. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or other obligation due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings. Current market developments may adversely affect our industry, business and results of operations. Dramatic declines in the housing market during the prior year, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely, directly or indirectly, affect our business, financial condition and results of operations. 31 We depend on the services of a number of key personnel, and a loss of any of those personnel could disrupt our operations and result in reduced revenues. The success of our business depends to a great extent on our customer relationships. Our growth and development to date have depended in large part on the efforts of our senior management team. A number of these senior officers have primary contact with our customers and are extremely important in maintaining personalized relationships with our customer base, a key aspect of our business strategy, and in increasing our market presence. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly. We may be unable to successfully manage our sustained growth. Our future profitability will depend in part on our ability to manage growth successfully. Our ability to manage growth successfully will depend on our ability to maintain cost controls and asset quality while attracting additional loans and deposits, as well as on factors beyond our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to control costs and maintain asset quality, growth could materially adversely affect our financial performance. Our continued pace of growth or regulatory requirements may require us to raise additional capital in the future, but that capital may not be available when it is needed or be available on favorable terms. We anticipate that our current capital resources will satisfy our capital requirements for the foreseeable future. Nevertheless, we may need to raise additional capital to support additional growth or to meet regulatory requirements. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited. If our loan customers do not pay us as they have contracted to, we may experience losses. Our principal revenue producing business is making loans. If the loans are not repaid, we will suffer losses. Even though we maintain an allowance for loan losses, the amount of the allowance may not be adequate to cover the losses we experience. We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless, there is risk that our credit evaluations will prove to be inaccurate due to changed circumstances or otherwise. Our business is concentrated in the Upstate area of South Carolina, and a downturn in the economy of the area, a decline in area real estate values or other events in our market area may adversely affect our business. Substantially all of our business is located in the Upstate area of South Carolina. As a result, our financial condition and results of operations may be affected by changes in the Upstate economy. A prolonged period of economic recession, a continuing decline in real estate values in our market area or other adverse economic conditions in the Upstate and South Carolina may result in decreases in demand for our services, increases in nonpayment of loans and decreases in the value of collateral securing loans, which could have a material adverse effect on our business, future prospects, financial condition or results of operations. 32 We face strong competition from larger, more established competitors, which may adversely affect our ability to operate profitably. We encounter strong competition from financial institutions operating in the Upstate area of South Carolina. In the conduct of our business, we also compete with credit unions, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation as we are. Many of these competitors have substantially greater resources and lending abilities than we have and offer services, such as investment banking, trust and international banking services that we do not provide. We believe that we have competed, and will continue to be able to compete, effectively with these institutions because of our experienced bankers and personalized service, as well as through loan participations and other strategies and techniques. However, we cannot promise that we are correct in our belief. If we are wrong, our ability to operate profitably may be negatively affected. Technological changes affect our business, and we may have fewer resources than many of our competitors to invest in technological improvements. The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services. In addition to enabling financial institutions to serve clients better, the effective use of technology may increase efficiency and may enable financial institutions to reduce costs. Our future success may depend, in part, upon our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. We may need to make significant additional capital investments in technology in the future, and we may not be able to effectively implement new technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological improvements. Our profitability and liquidity may be affected by changes in interest rates and economic conditions. Our profitability depends upon our net interest income, which is the difference between interest earned on our earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments, or, conversely, if the interest earned on loans and investments decreases faster than the interest we pay on deposits and borrowings. Interest rates, and consequently our results of operations, are affected by general economic conditions (domestic and foreign) and fiscal and monetary policies. Monetary and fiscal policies may materially affect the level and direction of interest rates. Beginning in June 2004 through June 2006, the Federal Reserve raised short-term interest rates seventeen times for a total increase of 4.25%. Increases in interest rates generally decrease the market values of interest earning investments and loans held and therefore may adversely affect our liquidity and earnings. Increased interest rates also generally affect the volume of mortgage loan originations, the resale value of mortgage loans originated for resale, and the ability of borrowers to perform under existing loans of all types. Since September 18, 2007, the Federal Reserve has decreased interest rates significantly. Decreases in interest rates generally have the opposite effect on market values of interest-bearing assets, the volume of mortgage loan originations, the resale value of mortgage loans originated for resale, and the ability of borrowers to perform under existing loans of all types from the effect of increases in interests rates. Failure of one of our subsidiary banks to comply with the terms of a Formal Agreement with the Comptroller could result in penalties and more stringent enforcement action against that bank. One of our banks, Bank of Anderson, N. A., has entered into a Formal Agreement with the Comptroller to take various actions required by the Comptroller. Failure of the bank to fully comply with all of the terms of the Formal Agreement could result in the Comptroller's taking more stringent enforcement actions against the bank, including the imposition of civil money penalties, the imposition of a cease and desist order or, in an extreme case, 33 the appointment of a receiver or revocation of the bank's charter. Such action by the Comptroller could have a material adverse effect on our financial condition or results of operation. Risks Related to Our Common Stock Our common stock has a limited trading market, which may make the prompt execution of sale transactions difficult. Our common stock is not traded on any exchange. Although our common stock is traded over-the-counter and quotations of bid and ask information are provided by the National Association of Securities Dealers, Inc.'s Over-The-Counter Bulletin Board, no active trading market has developed and none is expected to develop in the foreseeable future. Accordingly, if you wish to sell shares you may experience a delay or have to sell them at a lower price in order to sell them promptly, if at all. We may issue additional securities, which could affect the market price of our common stock and dilute your ownership. We may issue additional securities to raise additional capital to support growth, offset losses, or to make acquisitions. Sales of a substantial number of shares of our preferred stock or our common stock, or the perception by the market that those sales could occur, could cause the market price of our common stock to decline or could make it more difficult for us to raise capital through the sale of common stock or to use our common stock in future acquisitions. There is no guarantee we will continue to pay cash dividends in the future at the same or any level. Declaration and payment of dividends are within the discretion of our board of directors. Our banks are currently our only source of funds with which to pay cash dividends. Our banks' declaration and payment of future dividends to us are within the discretion of the banks' boards of directors, and are dependent upon their earnings, financial condition, their need to retain earnings for use in the business and any other pertinent factors. The banks' payment of dividends is also subject to various regulatory requirements and the ability of the banks' regulators to forbid or limit their payment of dividends. Provisions in our articles of incorporation and South Carolina law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price for our stock. Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore of making the removal of incumbent management difficult. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions. In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock. Our common stock is not insured, so you could lose your total investment. Our common stock is not a deposit, savings account or obligation of our banks and is not insured by the Federal Deposit Insurance Corporation or any other government agency. Should our business fail you could lose your total investment. 34 Risks Related to Our Industry We are subject to governmental regulation, which could change and increase our cost of doing business or have an adverse effect on our business. We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Most of this regulation is designed to protect our depositors and other customers, not our shareholders. Our compliance with the requirements of these agencies is costly and may limit our growth and restrict certain of our activities, including, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and locations of offices. We are also subject to capitalization guidelines established by federal authorities and our failure to meet those guidelines could result in limitations being imposed on our activities or, in an extreme case, in one or more of our banks being placed in receivership. We have also recently been subjected to the extensive and expensive requirements imposed on public companies by the Sarbanes-Oxley Act of 2002 and related regulations. Various laws, including the Federal Deposit Insurance Act and the Emergency Economic Stability Act of 2008 ("EESA"), and related regulations are structured to spread the governmental costs of problems in the financial industry broadly over the financial industry in order to prevent the taxpayers from having to pay such costs. As a result, assessments by the FDIC to pay for deposit insurance are proposed to increase substantially and the total our banks will be required to pay could increase enough to materially affect our income and our ability to operate profitably. Additionally, EESA contains a provision for the financial industry to be required to absorb, in an as yet undetermined fashion, any losses suffered by the government on account of its acquiring troubled assets under the Troubled Assets Relief Program of EESA. The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the impact of these changes on our business or profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, our cost of compliance could adversely affect our ability to operate profitably. We are susceptible to changes in monetary policy and other economic factors, which may adversely affect our ability to operate profitably. Changes in governmental, economic and monetary policies may affect the ability of our banks to attract deposits and make loans. The rates of interest payable on deposits and chargeable on loans are affected by governmental regulation and fiscal policy as well as by national, state and local economic conditions. All of these matters are outside of our control and affect our ability to operate profitably. ITEM 1 B. UNRESOLVED STAFF COMMENTS The Company is not an accelerated filer or a large accelerated filer and has not received any comments from the Securities and Exchange Commission regarding its current or periodic reports in the 180 days prior to December 31, 2008. 35 ITEM 2. PROPERTIES The Company's corporate office is located at 1818 East Main Street in Easley, South Carolina. The property consists of a three-story brick building containing approximately 10,670 square feet on 0.665 acres of land owned by The Peoples National Bank. This building houses some of the Company's support functions, including administration, accounting, financial reporting, human resources, marketing, risk management, internal audit, compliance, facilities management, security, and purchasing. The Company also utilizes an adjacent office building located at 1814 East Main Street in Easley, South Carolina. The property consists of a two-story brick building containing approximately 6,624 square feet on 0.566 acres of land owned by The Peoples National Bank. This building houses some of the Company's support functions including operations, data processing, and information technology. The Peoples National Bank also owns an adjacent office building located at 1824 East Main Street in Easley, South Carolina. The property consists of approximately 6,600 square feet of office space located in a one-story brick building containing approximately 9,000 square feet on 0.704 acres of land. Peoples National Bank is using portions of this facility as office space and file storage, and a portion is currently being leased to a tenant. The main office of The Peoples National Bank is located at 1800 East Main Street in Easley, South Carolina, adjacent to the Company's corporate office. The property consists of a two-story brick building of approximately 10,412 square feet, which is constructed on 1.75 acres of land owned by The Peoples National Bank. Improvements include a three-lane drive-through teller installation, vault, night depository, safe-deposit facilities, and a drive-through automated teller machine. The Peoples National Bank owns and operates five branch facilities: one in Powdersville, South Carolina located at 4 Hood Road approximately seven miles east of the Bank's main office containing approximately 3,158 square feet in a one-story brick building situated on 0.812 acres of land; a second branch office in Pickens, South Carolina located at 424 Hampton Avenue approximately ten miles west of the Bank's main office containing approximately 6,688 square feet in a two-story building on 0.925 acres of land; a third branch office in Easley located at 1053 Pendleton Street approximately 2 miles west of the Bank's main office containing approximately 3,523 square feet in a one and one-half story building situated on l.077 acres of land; a fourth branch office in Greenville, South Carolina located at 300 Mills Avenue approximately ten miles east of the Bank's main office containing approximately 1,600 square feet in a one-story brick building situated on 0.574 acres of land; and a fifth branch office in Greenville, South Carolina located at 45 East Antrim Drive approximately thirteen miles east of the Bank's main office containing approximately 7,000 square feet in a two-story brick building situated on 1.321 acres of land. All branch facilities have improvements including drive-through teller installations, drive-through automated teller machines, vault, night depository, and safe deposit facilities. The main office of Bank of Anderson, National Association is located at 201 East Greenville Street in Anderson, South Carolina. The property consists of a two-story brick building with approximately 11,696 square feet, which is constructed on 1.935 acres of land owned by Bank of Anderson. Improvements include a three-lane drive-through teller installation, vault, night depository, safe-deposit facilities, and a drive-through automated teller machine. Bank of Anderson owns and operates one branch facility in Anderson County, South Carolina located at 1434 Pearman Dairy Road approximately five miles northwest of the Bank's main office containing approximately 3,036 square feet in a one-story brick building situated on 0.86 acres of land. The branch facility has improvements including a drive-through teller installation, drive-through automated teller machine, vault, night depository, and safe deposit box facilities. Seneca National Bank, located at 201 By-Pass 123, Seneca, South Carolina, operates out of a two-story brick building containing approximately 6,688 square feet situated on 1.097 acres of land in Seneca, South Carolina, which is owned by Seneca National Bank. 36 All locations of the Company and the Banks are considered suitable and adequate for their intended purposes. Management believes that insurance coverage on the foregoing properties is adequate. ITEM 3. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management based on consultation with external legal counsel, the outcome of any currently pending litigation is not expected to materially affect the Company's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Special meeting of Shareholders On January 9, 2009, the Company held a special shareholders meeting to vote on an amendment to the Company's Articles of Incorporation to authorize the issuance of 15 million shares of preferred stock with such preferences, limitations and relative rights, within legal limits, of the class, or one or more series within the class, as are set by the Board of Directors. The following are the results of this special meeting with 5,225,713 shares voted, representing 73.9% of the total shares entitled to vote: For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 5,096,496 124,453 4,764 0 37 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of the Company is traded over the counter. Quotations of bid and ask information are provided electronically by the National Association of Securities Dealers, Inc.'s Over-The-Counter Bulletin Board under the symbol "PBCE.OB." The reported high and low bid prices for each quarter of 2008 and 2007 are shown in the following table. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. There is not an active trading market for our common stock. Quarter Ended Low High ------------- --- ---- March 31, 2008 $ 7.40 $ 9.25 June 30, 2008 $ 6.00 $ 8.00 September 30, 2008 $ 4.75 $ 7.50 December 31, 2008 $ 1.50 $ 6.00 March 31, 2007 $ 10.15 $ 11.00 June 30, 2007 $ 9.75 $ 12.95 September 30, 2007 $ 10.00 $ 11.50 December 31, 2007 $ 8.00 $ 10.25 As of March 13, 2008, the number of holders of record of the Company's common stock was 976 and the number of issued and outstanding shares was 7,070,139. During 2008 the Company paid three cash dividends totaling $0.15 per common share and during 2007 the Company paid four quarterly cash dividends totaling $0.20. In addition, on each of July 13, 1992, July 12, 1993, December 12, 1994, November 30, 1995, November 8, 1996, October 31, 1997, December 7, 1998, January 14, 2000, January 5, 2001, January 4, 2002, November 18, 2002, November 17, 2003, January 4, 2005, December 30, 2005, January 5, 2007 and January 4, 2008 the Company paid 5% stock dividends to shareholders (2007 prices in the table above have been adjusted for the stock dividends declared in 2007). It is the policy of the Board of Directors of the Company to reinvest earnings for such periods of time as is necessary to the successful operations of the Company and of the Banks. Future dividends will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors of the Company. Payment of dividends is also subject to regulatory restrictions (see Item 1 -- Business, "PAYMENT OF DIVIDENDS") and a contractual agreement not to pay cash dividends without the prior consent of a lender if the payment would cause the Company to fail to be well capitalized. The information required by Item 201(d) of Regulation S-K is set forth under Item 12 of this Form 10-K. Unregistered Sales of Equity Securities and Use of Proceeds. The Company did not sell any equity securities during the years ended December 31, 2008 and 2007 that were not registered under the Securities Act of 1933. 38 Purchases of Equity Securities by the Company and Affiliated Purchasers Neither the Company nor any "affiliated purchaser" as defined in 17 C.F.R. 240.10b-18(a)(3) purchased any shares or units of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act during the fourth quarter of 2008. Accordingly, no disclosure is required pursuant to 17 C.F.R. ss.229.703. ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY (All amounts, except per share data, in thousands) 2008 2007 2006 2005 2004 ---- ---- ---- ---- ---- INCOME STATEMENT DATA Net interest income ............. $ 16,634 $ 18,924 $ 19,337 $ 17,357 $ 14,622 Provision for loan losses ....... 13,820 900 943 848 589 Other operating income .......... 732 3,842 3,648 3,609 4,996 Other operating expenses ........ 17,106 15,966 15,621 14,338 13,847 Net income (loss) ............... (8,376) 4,343 4,486 4,128 3,528 PER SHARE DATA (1) Net income (loss) per common share - Basic ........................ $ (1.19) $ 0.59 $ 0.65 $ 0.60 $ 0.52 Diluted ...................... $ (1.19) $ 0.59 $ 0.64 $ 0.59 $ 0.50 Cash dividends declared ......... $ 0.15 $ 0.20 $ 0.20 $ 0.20 $ 0.26 BALANCE SHEET DATA Total Assets .................... $ 559,875 $ 558,443 $ 503,814 $ 487,977 $ 429,796 Total Deposits .................. 445,369 417,621 385,045 390,349 346,145 Total Loans (Net) ............... 389,494 414,688 354,011 373,641 322,212 Investment Securities ........... 112,247 102,693 99,469 78,061 71,247 Total Earning Assets ............ 520,908 523,597 470,172 456,456 400,809 Shareholders' Equity ............ 41,512 50,241 46,064 41,171 38,240 OTHER DATA Return on average assets ........ -1.51% 0.84% 0.91% 0.88% 0.82% Return on average equity ........ -17.83% 9.03% 10.29% 10.20% 9.45%
(1) Per share data has been restated to reflect 5% stock dividends in 2003, 2004, 2005, 2006 and 2007, and the 3-for-2 stock split issued in October 2004. 39 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion is intended to assist in understanding the financial condition and results of operations of the Company and should be read in conjunction with the consolidated financial statements of the Company set forth in Item 8--Financial Statements and Supplementary Data, and the description of the Company's business set forth in Item 1--Business, of this Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's consolidated financial statements. The significant accounting policies of the Company are described in Note 1 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates and could have a material impact on the carrying values of assets and liabilities and the results of operations of the Company. Of these significant accounting policies, the Company considers its policies regarding the allowance for loan losses (the "Allowance") to be its most critical accounting policy due to the significant degree of management judgment involved in determining the amount of the Allowance. The Company has developed policies and procedures for assessing the adequacy of the Allowance, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements. Refer to the discussion under Item 1--Business-- "PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE" for a detailed description of the Company's estimation process and methodology related to the allowance for loan losses. With the declines in value of many debt and equity securities during 2008 due to economic conditions, the Company has focused more attention on the process of determining if such declines in its equity securities are "other-than-temporarily impaired." The process of evaluating other-than-temporary impairment is inherently judgmental, involving the weighing of positive and negative factors and evidence that may be objective or subjective. DISCUSSION OF CHANGES IN FINANCIAL CONDITION Total assets increased $1,432,000 or 0.3% to $559,875,000 at December 31, 2008 from $558,443,000 at December 31, 2007. The Company experienced a decline in loan activity during 2008 as the total outstanding loans, the largest single category of Company assets, decreased $20,287,000 or 4.8% from $418,998,000 at December 31, 2007 to $398,711,000 at December 31, 2008, as a result of lower loan demand at the Company's three bank subsidiaries. The Company's securities portfolio collectively, at amortized cost, increased $8,506,000 or 8.4% from $101,505,000 at December 31, 2007 to $110,011,000 at December 31, 2008. The increase is part of a strategy that was designed to replace a portion of maturing loans with securities, thus 40 maintaining the Company's overall investment in earning assets. The sale of Government sponsored enterprise securities and mortgage-backed securities in the available for sale portfolio in 2008 amounted to approximately $4,845,000, resulting in realized loss of $48,000 in 2008. There were no sales in 2007. Maturities, calls, and principal pay-downs on all securities amounted to $11,040,000 in 2008 compared to $12,175,000 in 2007. During 2008, the Company made purchases of $28,289,000 in available for sale securities and $444,000 in securities held to maturity compared to $14,091,000 in available-for-sale securities and no purchases in securities held to maturity in 2007. The Company's mortgage-backed securities are not backed by subprime mortgages and their value has not been diminished by the "subprime crisis." The Company does not engage in, and does not expect to engage in, hedging activities. During the second half of 2008, the Company determined that its Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock had suffered an other-than-temporary impairment as a result of the Government's decision on September 7, 2008 to place both the FHLMC and Federal National Mortgage Association ("FNMA") under conservatorship. Consequently, the Company recorded a pretax charge to earnings of $2,890,000 to write down to fair value. Subsequent to the impairment charge, management reclassified the FHLMC preferred stock as a trading account security, and in the fourth quarter the Company experienced a loss of $145,000 due to a further decline in the market value of the stock. Cash and due from banks balances decreased $744,000 or 8.6% from $8,618,000 at December 31, 2007 to $7,874,000 at December 31, 2008. The Company had $9,185,000 in federal funds sold as of December 31, 2008, compared to $1,263,000 in federal funds sold at December 31, 2007. The swings in the levels of cash and federal funds sold are due to fluctuations in the Banks' needs and sources for immediate and short-term liquidity. Cash surrender value of life insurance increased $465,000 or 4.1% from $11,350,000 at December 31, 2007 to $11,815,000 at December 31, 2008 due to the normal appreciation in the cash surrender value associated with the ownership of these assets. Earnings from the ownership of these policies are informally used to partially offset the cost of certain employee-related benefits. Other assets, comprised largely of prepaid expenses, other real estate owned, tax benefit and deferred income taxes, increased $10,500,000 or 497.6% to $12,610,000 at December 31, 2008 from $2,110,000 at December 31, 2007. This increase is largely attributable to an increase of $4,405,000 or 430.6% in other real estate owned to $5,428,000 at December 31, 2008 from $1,023,000 at December 31, 2007. Net deferred tax assets increased by $2,677,000 or 239.2% to $3,796,000 at December 31, 2008 from $1,119,000 at December 31, 2007. Total liabilities increased $10,161,000 or 2.00% from $508,202,000 at December 31, 2007 to $518,363,000 at December 31, 2008. Total deposits increased $27,748,000 or 6.6% to $445,369,000 at December 31, 2008 from $417,621,000 at December 31, 2007, with a $30,607,000 increase in interest-bearing deposits in 2008. Securities sold under repurchase agreements increased $2,357,000 or 11.9% from $19,824,000 at December 31, 2007 to $22,181,000 at December 31, 2008. These increases were made possible by effective rate pricing, and they were used to repay Federal Home Loan Bank borrowings at the Company's banks. There was $1,028,000 in federal funds purchased at December 31, 2008, compared to $429,000 in federal funds purchased as of December 31, 2007, an increase of $599,000 or 139.6%. Federal Home Loan Bank advances decreased by $30,500,000 or 46.9% from $65,100,000 at December 31, 2007 to $34,600,000 at December 31, 2008. Federal Home Loan Bank advances are used primarily for the liquidity needs of the Company. In 2008, the Company obtained a $15,000,000 line of credit, which matures September 28, 2010, from a correspondent bank to enable it to inject additional capital into the Banks. The Company subsequently drew on this line of credit and injected a total of $11,500,000 into its three banks. At December 31, 2008 the line of credit had an outstanding balance of $11,000,000. The line of credit agreement contains certain covenants to which the Company is obligated in order to retain the line of credit. At December 31, 2008, the Company's non-performing assets to total assets ratio of 4.08% exceeded the required 41 non-performing assets to total assets ratio of 3.50%, for which a waiver was obtained through March 31, 2009. Management believes the Company will be back in compliance with the covenant requirements at March 31, 2009. Shareholders' equity decreased $8,729,000 or 17.4% from $50,241,000 at December 31, 2007 to $41,512,000 at December 31, 2008. This decrease is primarily a result of a net loss for the period of $8,376,000 and the declaration and payment of $1,060,000 in cash dividends during 2008. 42 EARNINGS PERFORMANCE 2008 Compared to 2007 Overview The Company's consolidated operations for the twelve months ended December 31, 2008 resulted in a net loss of $(8,376,000) or $(1.19) per basic and diluted share, compared to net earnings of $4,343,000 or $0.59 per basic and diluted share for the twelve months ended December 31, 2007. Interest Income, Interest Expense and Net Interest Income The Company's net interest income decreased $2,290,000 or 12.1% to $16,634,000 for the year ended December 31, 2008 compared to $18,924,000 for the year ended December 31, 2007. The Company's total interest income decreased $3,745,000 or 10.5% to $31,801,000 in 2008 compared to $35,546,000 for 2007. This decrease is largely attributable to a decrease in interest income and fees on loans of $3,771,000 resulting from lower market interest rates and an increase in foregone interest income on non-accrual loans, and it was partially offset by higher average loan balances. There was a $13,000 increase in interest on taxable securities due to higher rates. There was also an increase of $80,000 in interest on tax-exempt securities primarily due to higher average balances. There was a $67,000 decrease in interest on federal funds sold largely due to lower market rates and lower average balances. Total interest expense decreased $1,455,000 or 8.8% to $15,167,000 in 2008 compared to $16,622,000 for 2007. The amount of interest paid on deposits decreased $1,195,000 resulting from lower market interest rates, partially offset by higher average balances. The interest paid on notes payable to the Federal Home Loan Bank decreased $253,000 and interest expense on federal funds purchased and securities sold under repurchase agreements decreased $112,000 during 2008. The decrease in interest expense among the various types of interest-bearing liabilities is largely attributable to lower market interest rates paid by the Company's bank subsidiaries during 2008 as compared to 2007. The Company had $105,000 interest expense on a note from a correspondent bank that was used to inject capital into the Banks during the fourth quarter of 2008. Provision and Allowance for Loan Losses The Company's provision for loan losses was $13,820,000 in 2008 compared to $900,000 for 2007, a $12,920,000 or 1,435.6% increase. During 2008 the Company experienced net charge-offs of $8,913,000, or 2.14% of average outstanding loans, compared to net charge-offs of $660,000, or 0.17% of average outstanding loans in 2007. At December 31, 2008 the allowance for loan losses was 2.31% as a percentage of outstanding loans compared to 1.03% at December 31, 2007. At December 31, 2008 the Company had $16,950,000 in non-accrual loans, $477,000 in restructured loans, no loans past due 90 days or more but still accruing interest, and $5,428,000 in real estate acquired in settlement of loans, compared to $7,505,000 in non-accrual loans, $421,000 in restructured loans, no loans past due 90 days or more but still accruing interest, and $1,023,000 in real estate acquired in settlement of loans at December 31, 2007. Non-performing assets as a percentage of all loans and other real estate owned were 5.66% and 2.13% at December 31, 2008 and 2007, respectively. The substantial increase in non-accruing loans is related to deterioration of the credit-worthiness of certain borrowers and is affected by the current economic recession. Non-accrual loans included approximately $676,000 of owner occupied one-to-four- family residential mortgage loans. The Company does not actively pursue sub-prime loans for retention in its loan portfolio, nor does it purchase sub-prime assets for its investment portfolio. 43 In the cases of non-performing loans, management of the Company has reviewed the carrying value of any underlying collateral. In those cases where the collateral value may be less than the carrying value of the loan the Company has taken specific write-downs to the loan. Management of the Company does not believe it has any non-accrual loan that individually could materially impact the allowance for loan losses or long-term future operating results of the Company. The Company records real estate acquired through foreclosure at the lower of cost or estimated market value less estimated selling costs. Estimated market value is based upon the assumption of a sale in the normal course of business and not on a quick liquidation or distressed basis. Estimated market value is established by independent appraisal at the time of foreclosure. Management believes that other real estate owned at December 31, 2008 will not require significant write-downs in future accounting periods, and therefore will not have a significant effect on the Company's future operations. Noninterest Income Total consolidated noninterest income, including securities transactions, decreased $3,110,000 or 80.9% from $3,842,000 in 2007 to $732,000 in 2008. The largest component of noninterest income, the other-than temporary write-down on FHLMC Preferred Stock, is the result of the Government's decision on September 7, 2008 to place FHLMC and FNMA under conservatorship. Consequently, the Company recorded a pretax charge to earnings of $2,890,000 to write down to fair value and a subsequent $145,000 loss in value during the fourth quarter. Service charges on deposit accounts, increased $56,000 or 3.04% to $1,900,000 for 2008 compared to $1,844,000 for 2007. Net non-sufficient funds fees increased $49,000 or 3.2% from $1,554,000 in 2007 to $1,603,000 in 2008. Bank owned life insurance income increased $56,000 or 11.8% in 2008 to $532,000 compared to $476,000 in 2007. The increase in bank owned life insurance income is attributable to higher growth rates on the cash surrender values of these policies. Mortgage banking income decreased $109,000 or 23.3% from $468,000 in 2007 to $359,000 in 2008. The change in mortgage banking income is largely due to the substantial swings in the local demand for residential mortgage loan originations that occur from time to time. Gains (losses) on the sale of assets acquired in settlement of loans decreased $57,000 or 356.2% from $16,000 in 2007 to $(41,000) in 2008. Other noninterest income decreased $118,000 or 16.6% to $591,000 in 2008 when compared to $709,000 in 2007. The Company experienced a net gain on sale of fixed assets of $178,000 in 2007 compared to a net gain of $5,000 in 2008. The substantial decrease is largely attributable to a $169,000 gain realized during the first quarter of 2007 from the sale of a portion of a parcel of land that had been acquired in 2006 for an office of The Peoples National Bank. Interchange income on the Banks' debit cards increased $108,000 or 26.0% to $524,000 in 2008 compared to $416,000 in 2007. The Company recorded a $48,000 loss on the sale of available for sale securities in 2008, compared to no realized gains or losses on the sale of available-for-sale securities in 2007. Noninterest Expenses Total consolidated noninterest expenses increased $1,140,000 or 7.1% to $17,106,000 in 2008 compared to $15,966,000 in 2007. Salaries and benefits, the largest component of non-interest expense, increased $30,000 or 0.3% to $9,415,000 in 2008 compared to $9,385,000 in 2007. The increase was primarily the result of staffing two new bank branches in late 2007. The Company imposed a reduction in work force and a freeze on salary increases in the fourth quarter of 2008 in response to deteriorating economic conditions. 44 Occupancy and furniture and equipment expenses increased $77,000 or 3.5% to $2,307,000 in 2008 compared to $2,230,000 in 2007. The increase is largely due to the opening of two new full-service banking facilities in the fourth quarter of 2007 by The Peoples National Bank. Marketing and advertising expense decreased $105,000 or 20.7% from $508,000 in 2007 to $403,000 in 2008 primarily due to efforts by management to limit expenses. Bank paid loan costs increased $613,000 or 306.5% from $200,000 in 2007 to $813,000 in 2008. Of this increase $397,000 is attributable to the write-down to its current market value of assets acquired in settlement of loans, and $154,000 is associated with the repossession of collateral for defaulted real estate loans. Legal and professional fees increased $208,000 or 47.0% to $650,000 in 2008 from $442,000 in 2007. The increase in legal and professional fees is primarily due to collection efforts on certain loans in default. ATM and interchange expense increased $28,000 or 8.2% from $341,000 in 2007 to $369,000 in 2008. The increase is due primarily to increased activity associated with the usage by the Banks' customers of ATMs and debit card charges. Director fees decreased $15,000 or 3.3% from $450,000 in 2007 to $435,000 in 2008. Regulatory assessments increased $166,000 or 62.2% from $267,000 in 2007 to $433,000 in 2008. Regulatory assessments include fees paid to the FDIC and Comptroller by the Company's three Banks. The FDIC changed its assessment process effective January 1, 2007. Eligible insured depositor institutions were granted a one-time assessment credit. Of the Company's three Banks, only The Peoples National Bank was granted a one-time credit of approximately $112,000. The credit was exhausted during the first quarter of 2008, contributing to the higher expense as compared to 2007. Other post employment benefits increased $90,000 or 34.55% from $261,000 in 2007 to $351,000 in 2008 primarily due to an increase in the cost of the CEO's retirement package. All other operating expenses were $1,476,000 in 2008 compared to $1,431,000 in 2007, an increase of $45,000 or 3.1%. Income Taxes Refer to Note 10 of the Company's consolidated financial statements included in Item 8 - Financial Statements and Supplementary Data for an analysis of income tax expense. 45 LIQUIDITY AND CAPITAL RESOURCES The sections "LIQUIDITY" and "CAPITAL ADEQUACY AND RESOURCES" included in Item 1--Business of this Annual Report on Form 10-K are incorporated herein by reference. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS The section "OFF-BALANCE SHEET ARRANGEMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS" included in Item 1--Business of this Annual Report on Form 10-K is incorporated herein by reference. 46 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The section "MARKET RISK - INTEREST RATE SENSITIVITY" included in "Business" under Item 1 of this Annual Report on Form 10-K is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed with this report: - Report of Independent Registered Public Accounting Firm. - Consolidated Balance Sheets as of December 31, 2008 and 2007. - Consolidated Statements of Income for the years ended December 31, 2008 and 2007. - Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31, 2008 and 2007. - Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007. - Notes to Consolidated Financial Statements. 47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors Peoples Bancorporation, Inc. Easley, South Carolina We have audited the accompanying consolidated balance sheets of Peoples Bancorporation, Inc. and Subsidiaries (the "Company") as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Bancorporation, Inc. and Subsidiaries as of December 31, 2008 and 2007 and the results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. We were not engaged to examine management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2008 included in Management's Annual Report on Internal Control Over Financial Reporting included in the Company's Form 10-K filed with the Securities and Exchange Commission and, accordingly, we do not express an opinion thereon. s/Elliott Davis, LLC Greenville, South Carolina March 30, 2009 48 PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share information)
December 31, ------------ 2008 2007 ---- ---- ASSETS CASH AND DUE FROM BANKS ................................................................... $ 7,874 $ 8,618 INTEREST - BEARING DEPOSITS IN OTHER BANKS ................................................ 765 643 FEDERAL FUNDS SOLD ........................................................................ 9,185 1,263 --------- --------- 17,824 10,524 SECURITIES Trading assets ....................................................................... 47 - Available for sale ................................................................... 96,003 84,796 Held to maturity (fair value of $12,666 (2008) and $13,113 (2007)) .............................................................. 12,651 13,102 Other investments, at cost ........................................................... 3,546 4,795 LOANS, net of allowance for loan losses of $9,217 (2008) and $4,310 (2007) .................................................................... 389,494 414,688 PREMISES AND EQUIPMENT, net of accumulated depreciation ................................... 13,200 13,757 ACCRUED INTEREST RECEIVABLE ............................................................... 2,685 3,321 ASSETS ACQUIRED IN SETTLEMENT OF LOANS .................................................... 5,428 1,023 CASH SURRENDER VALUE OF LIFE INSURANCE .................................................... 11,815 11,350 OTHER ASSETS .............................................................................. 7,182 1,087 --------- --------- Total assets ................................................................ $ 559,875 $ 558,443 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY DEPOSITS Noninterest-bearing .................................................................. $ 51,091 $ 53,950 Interest-bearing ..................................................................... 394,278 363,671 --------- --------- Total deposits .............................................................. 445,369 417,621 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS ............................................... 22,181 19,824 FEDERAL FUNDS PURCHASED ................................................................... 1,028 429 ADVANCES FROM FEDERAL HOME LOAN BANK ...................................................... 34,600 65,100 NOTES PAYABLE - OTHER ..................................................................... 11,000 - ACCRUED INTEREST PAYABLE .................................................................. 2,636 4,465 OTHER LIABILITIES ......................................................................... 1,549 763 --------- --------- Total liabilities ........................................................... 518,363 508,202 --------- --------- COMMITMENTS AND CONTINGENCIES - Notes 11 and 12 SHAREHOLDERS' EQUITY Common stock - 15,000,000 shares authorized; $1.11 par value per share; 7,070,139 (2008) shares and 7,056,337 (2007) shares issued and outstanding ........................................................... 7,848 7,833 Additional paid-in capital ........................................................... 41,752 41,624 Retained earnings (deficit) .......................................................... (9,564) - Accumulated other comprehensive income ............................................... 1,476 784 --------- --------- Total shareholders' equity .................................................. 41,512 50,241 --------- --------- Total liabilities and shareholders' equity .................................. $ 559,875 $ 558,443 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 49 PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands except per share information)
For the years ended December 31, -------------------------------- 2008 2007 ---- ---- INTEREST INCOME Interest and fees on loans ..................................................... $ 27,188 $ 30,959 Interest on securities Taxable .................................................................... 3,050 3,037 Tax-exempt ................................................................. 1,502 1,422 Interest on federal funds sold ................................................. 61 128 ------------- ------------- Total interest income ................................................. 31,801 35,546 ------------- ------------- INTEREST EXPENSE Interest on deposits ........................................................... 13,113 14,308 Interest on federal funds purchased and securities sold under repurchase agreements ................................................ 343 455 Interest on advances from Federal Home Loan Bank ............................... 1,606 1,859 Interest on notes payable ...................................................... 105 - ------------- ------------- Total interest expense ................................................ 15,167 16,622 ------------- ------------- Net interest income ................................................... 16,634 18,924 PROVISION FOR LOAN LOSSES ........................................................... 13,820 900 ------------- ------------- Net interest income after provision for loan losses ................... 2,814 18,024 ------------- ------------- NONINTEREST INCOME Service charges on deposit accounts ............................................ 1,900 1,844 Customer service fees .......................................................... 133 124 Mortgage banking ............................................................... 359 468 Brokerage services ............................................................. 196 205 Bank owned life insurance ...................................................... 532 476 Loss on sale of securities available for sale .................................. (48) - Gain (loss) on sale of assets acquired in settlement of loans .................. (41) 16 Impairment write-down on FHLMC preferred stock ................................. (2,890) - Other noninterest income ....................................................... 591 709 ------------- ------------- Total noninterest income .............................................. 732 3,842 ------------- ------------- NONINTEREST EXPENSES Salaries and benefits .......................................................... 9,415 9,385 Occupancy ...................................................................... 956 866 Equipment ...................................................................... 1,351 1,364 Marketing and advertising ...................................................... 403 508 Communications ................................................................. 268 253 Printing and supplies .......................................................... 186 198 Bank paid loan costs ........................................................... 813 200 Directors fees ................................................................. 435 450 Other post employment benefits ................................................. 351 261 Legal and professional fees .................................................... 650 442 Other operating ................................................................ 2,278 2,039 ------------- ------------- Total noninterest expenses ............................................ 17,106 15,966 ------------- ------------- Income (loss) before income taxes ..................................... (13,560) 5,900 PROVISION (BENEFIT) FOR INCOME TAXES ................................................ (5,184) 1,557 ------------- ------------- Net income (loss) ..................................................... $ (8,376) $ 4,343 ============= ============= BASIC NET INCOME (LOSS) PER COMMON SHARE ............................................ $ (1.19) $ 0.59 ============= ============= DILUTED NET INCOME (LOSS) PER COMMON SHARE .......................................... $ (1.19) $ 0.59 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 50 PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the years ended December 31, 2008 and 2007 (Amounts in thousands except share information)
Accumu- lated other Total Common stock Additional Retained compre- share- ---------------------- paid-in earnings hensive holders' Shares Amount capital (deficit) income equity ------ ------ ------- --------- ------ ------ BALANCE, DECEMBER 31, 2006 ....................... 6,666,568 $ 7,400 $ 38,614 $ 32 $ 18 $ 46,064 ---------- Net income .................................... - - - 4,343 - 4,343 Other comprehensive income, net of tax: Unrealized holding gains on securities available for sale, net of income taxes of $396 ............... - - - - 766 766 ---------- Comprehensive income .................... 5,109 Stock dividend (5%) ........................... 335,462 373 2,654 (3,027) - - Cash in lieu of fractional shares on stock dividend ........................... - - - (5) - (5) Cash dividends ($.20 per share) ............... - - - (1,343) - (1,343) Proceeds from stock options exercised ......... 54,307 60 144 - - 204 Tax benefit of stock options exercised ........ - - 119 - - 119 Stock-based compensation ...................... - - 93 - - 93 ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2007 ....................... 7,056,337 7,833 41,624 - 784 50,241 ---------- Net loss ...................................... - - - (8,376) - (8,376) Other comprehensive income, net of tax: Unrealized holding gains on securities available for sale, net of income taxes of $1,356 ............. - - - - 2,631 2,631 Less reclassification adjustment for losses included in net income, net of income taxes of ($999) ..... - - - - (1,939) (1,939) ---------- Comprehensive income .................... (7,684) Cash dividends ($.15 per share) ............... - - - (1,060) - (1,060) Proceeds from stock options exercised ......... 13,802 15 56 - - 71 Stock-based compensation ...................... - - 72 - - 72 Cumulative effect of post retirement cost of life insurance ...................... - - - (128) - (128) ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 2008 ....................... 7,070,139 $ 7,848 $ 41,752 $ (9,564) $ 1,476 $ 41,512 ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 51 PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
For the years ended December 31, -------------------------------- 2008 2007 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ......................................................................... $ (8,376) $ 4,343 Adjustments to reconcile net income (loss) to net cash provided by operating activities Gain on sale of premises and equipment ................................................ (5) (177) Loss on sale of securities available for sale ......................................... 48 - (Gain) loss on sale of assets acquired in settlement of loans ......................... 41 (16) Loss from trading assets .............................................................. 145 - Other than temporary impairment write-down on FHLMC preferred stock ................... 2,890 - Provision for loan losses ............................................................. 13,820 900 Benefit from deferred income taxes .................................................... (3,031) (96) Depreciation .......................................................................... 1,142 1,110 Amortization and accretion (net) of premiums and discounts on securities .............. 17 51 Stock-based compensation .............................................................. 72 93 (Increase) decrease in accrued interest receivable .................................... 636 (278) (Increase) decrease in other assets ................................................... (3,462) 157 Increase (decrease) in accrued interest payable ....................................... (1,829) 1,539 Increase (decrease) in other liabilities .............................................. 786 (648) -------- -------- Net cash provided by operating activities .................................... 2,894 6,978 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities held to maturity .................................................. (444) - Purchases of securities available for sale ................................................ (28,289) (14,091) Sales (purchases) of other investments .................................................... 1,249 (512) Proceeds from principal pay downs on securities available for sale ........................ 7,419 7,575 Proceeds from the maturities and calls of securities available for sale ................... 2,750 4,600 Proceeds from the sale of securities available for sale ................................... 4,845 - Proceeds from maturity of securities held to maturity ..................................... 865 315 Investment in bank owned life insurance ................................................... (593) (416) Proceeds from sale of other real estate owned ............................................. 3,283 112 Net (increase) decrease in loans .......................................................... 3,686 (62,441) Proceeds from the sale of premises and equipment .......................................... 97 523 Purchase of premises and equipment ........................................................ (677) (4,096) -------- -------- Net cash used for investing activities ....................................... (5,809) (68,431) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits .................................................................. 27,748 32,576 Net increase in federal funds purchased ................................................... 599 429 Net increase in securities sold under repurchase agreements ............................... 2,357 1,456 Net increase (decrease) in advances from Federal Home Loan Bank ........................... (19,500) 15,100 Proceeds from the exercise of stock options ............................................... 71 204 Tax benefit of stock options exercised .................................................... - 119 Cash dividends paid ....................................................................... (1,060) (1,343) Cash in lieu of fractional shares on stock dividends ...................................... - (5) -------- -------- Net cash provided by financing activities .................................... 10,215 48,536 -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 7,300 (12,917) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................................... 10,524 23,441 -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR ......................................................... $ 17,824 $ 10,524 ======== ======== CASH PAID FOR Interest .................................................................................. $ 16,996 $ 15,083 ======== ======== Income taxes .............................................................................. $ 126 $ 1,504 ======== ======== NON-CASH TRANSACTIONS Change in unrealized gain (loss) on available for sale securities ......................... $ 1,049 $ 1,162 ======== ======== Loans transferred to other real estate .................................................... $ 7,688 $ 864 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 52 PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES Principles of consolidation and nature of operations The consolidated financial statements include the accounts of Peoples Bancorporation, Inc. (the "Company") and its wholly-owned subsidiaries, The Peoples National Bank, Bank of Anderson, N.A., and Seneca National Bank (collectively referred to as the "Banks"). All significant intercompany balances and transactions have been eliminated. The Banks operate under individual national bank charters and provide full banking services to customers. The Banks are subject to regulation by the Office of the Comptroller of the Currency. The Company is subject to regulation by the Federal Reserve Board. Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of interest and noninterest income and expenses during the reporting period. Actual results could differ from those estimates. Segments The Company, through its subsidiaries, provides a broad range of financial services to individuals and companies. These services include demand, time and savings deposits; lending and ATM processing and are substantially the same across subsidiaries. While the Company's decision-makers monitor the revenue streams of the various financial products and services by product line and by subsidiary, the operations and the allocation of resources are managed, and financial performance is evaluated, on an organization-wide basis. Accordingly, the Company's banking operation is considered by management to be one reportable operating segment. Securities The Company accounts for securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Debt securities are classified upon purchase as available for sale, held to maturity, or trading. Such assets classified as available for sale are carried at fair value. Unrealized holding gains or losses are reported as a component of shareholders' equity (accumulated other comprehensive income (loss)) net of deferred income taxes. Securities classified as held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts into interest income using a methodology which approximates a level yield of interest over the estimated remaining period until maturity. To qualify as held to maturity, the Company must have the ability and intent to hold the securities to maturity. Trading securities are carried at market value. Unrealized holding gains or losses are recognized in income. The Company had no trading securities at December 31, 2007. Gains or losses on dispositions of securities are based on the difference between the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Loans and interest on loans Loans are stated at the principal balance outstanding reduced by the allowance for loan losses. Interest income is recognized over the term of the loan based on the contractual interest rate and the principal balance outstanding. Loans generally are placed on non-accrual status when principal or interest becomes ninety days past due or when payment in full is not anticipated. Interest payments received after a loan is placed on non-accrual 53 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued status are applied as principal reductions until such time the loan is returned to accrual status. Generally, a loan is returned to accrual status when the loan is brought current and the collectibility of principal and interest is no longer in doubt. Allowance for loan losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the anticipated collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Additions to premises and equipment and major replacements or betterments are added at cost. Maintenance, repairs, and minor replacements are charged to expense when incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. 54 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued Assets acquired in settlement of loans Assets acquired in settlement of loans represents properties acquired through foreclosure and is carried at the lower of cost or fair value, adjusted for estimated selling costs. Fair values of real estate owned are reviewed regularly and writedowns are recorded when it is determined that the carrying value of real estate exceeds the fair value less estimated costs to sell. Costs relating to the development and improvement of such property are capitalized, whereas those costs relating to holding the property are charged to expense. At December 31, 2008 and 2007 real estate owned by the Company totaled $5,428,000 and $1,023,000, respectively. During 2008 and 2007, the Company transferred loans of $7,688,000 and $864,000, respectively to assets acquired in settlement of loans. Advertising and public relations expense Advertising, promotional and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent. Income taxes The provision for income taxes includes deferred taxes on temporary differences between the recognition of certain income and expense items for tax and financial statement purposes. Income taxes are computed on the liability method as described in SFAS No. 109, Accounting for Income Taxes. In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes, to clarify the accounting and disclosure for uncertainty in tax positions, as defined. FIN No. 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company implemented the provisions of FIN No. 48 as of January 1, 2007, and has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that its income tax filing positions taken or expected to be taken in an its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company's financial condition, results of operations, or cash flow. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN No. 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN No. 48 at January 1, 2007. Statements of cash flows For the purposes of reporting cash flows, the Company considers cash and cash equivalents to be those amounts included in the balance sheet captions "Cash and Due From Banks," "Interest-bearing Deposits in Other Banks" and "Federal Funds Sold." Cash and cash equivalents have an original maturity of three months or less. Risk and uncertainties In the normal course of its business the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk, and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable, the valuation of real estate held by the Company, and the valuation of loans held for sale and mortgage-backed securities available for sale. 55 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operating restrictions, resulting from the regulators' judgments based on information available to them at the time of their examination. Reclassifications Certain prior year amounts have been reclassified to conform with the current presentation. These reclassifications had no effect on previously reported net income or shareholders' equity. Stock option compensation plans The Company has an employee stock option compensation plan through which the Board of Directors may grant stock options to officers and employees to purchase common stock of the Company at prices not less than 100 percent of the fair value of the stock on the date of grant. The Company also has another employee stock option plan under which options may no longer be granted, but under which exercisable options remain outstanding. The outstanding options under both plans become exercisable in various increments beginning on the date of grant and expiring ten years from the date of grant. The Company also has a non-employee directors' stock option plan through which non-employee directors of the Company are granted options to purchase 500 shares of common stock for each year served on the board to a maximum of 5,000 options per director The option price shall not be less than 100 percent of the fair value of the stock on the grant date. The outstanding options become exercisable on the grant date and expire at the earlier of the end of the director's term or ten years from the grant date. . The Company also has another non-employee directors' stock option plan under which options may no longer be granted, but under which exercisable options remain outstanding. The Company follows the requirements of SFAS No. 123(R) to account for its stock option plans. In accordance with the provisions of this statement, the Company recorded approximately $72,000 and $93,000 of compensation expense in 2008 and 2007, respectively. Recently issued accounting standards The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 was effective for the Company on January 1, 2008. Upon adoption, the Company elected not to expand its use of fair value accounting. In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. The Company will assess the impact of SFAS No. 141(R) if and when a future acquisition occurs. 56 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued Also, in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS No. 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS No. 160 was effective for the Company on January 1, 2009. SFAS No. 160 had no impact on the Company's financial position, results of operations or cash flows. In February 2008, the FASB issued FASB Staff Position ("FSP") No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This FSP provides guidance on accounting for a transfer of a financial asset and the transferor's repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under SFAS No. 140. FSP No. 140-3 was effective for the Company on January 1, 2009. The adoption of FSP No. 140-3 had no impact on the Company's financial position, results of operations or cash flows. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 requires enhanced disclosures about an entity's derivative and hedging activities, thereby improving the transparency of financial reporting. It is intended to enhance the current disclosure framework in SFAS No. 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure is intended to convey the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS No. 161 was effective for the Company on January 1, 2009 and will result in additional disclosures if the Company enters into any material derivative or hedging activities. In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other accounting principles generally accepted in the United States of America. This FSP was effective for the Company on January 1, 2009 and had no material impact on the Company's financial position, results of operations or cash flows. In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States of America (the GAAP hierarchy). SFAS No. 162 is effective November 15, 2008. The FASB has stated that it does not 57 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 had no effect on the Company's financial position, results of operations or cash flows. The SEC's Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 ("Press Release") to provide clarifications on fair value accounting. The Press Release includes guidance on the use of management's internal assumptions and the use of "market" quotes. It also reiterates the factors in SEC Staff Accounting Bulletin ("SAB") Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value. On October 10, 2008, the FASB issued FSP No. SFAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" ("FSP SFAS 157-3"). This FSP clarifies the application of SFAS No. 157 (see Note 19) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP was effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP was effective for the quarter ended September 30, 2008. The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of December 31, 2008. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS The Banks are required to maintain average reserve balances with the Federal Reserve Bank ("FRB") based upon a percentage of deposits. The average amounts of reserve balances maintained by the Banks at December 31, 2008 and 2007 were approximately $820,000 and $1,542,000, respectively. NOTE 3 - SECURITIES Securities are summarized as follows as of December 31 (tabular amounts in thousands):
2008 ---- Unrealized Holding Amortized ------------------ Fair Cost Gains Losses Value ---- ----- ------ ----- TRADING ASSETS OTHER SECURITIES Equity security with no maturity .............................. $ 47 $ - $ - $ 47 ------- ------- ------- ------- SECURITIES AVAILABLE FOR SALE: GOVERNMENT SPONSORED ENTERPRISE SECURITIES Maturing within one year ...................................... 1,000 28 - 1,028 Maturing after one but within five years ...................... 7,990 384 - 8,374 Maturing after five years but within ten years ................ 1,970 1 - 1,971 ------- ------- ------- ------- 10,960 413 - 11,373 ------- ------- ------- -------
58 NOTE 3 - SECURITIES, Continued
2008 ---- Unrealized Holding Amortized ------------------ Fair Cost Gains Losses Value ---- ----- ------ ----- OTHER SECURITIES Maturing after one year but within five years ................. $ 764 $ 6 $ - $ 770 Maturing after five years but within ten years ................ 10,380 241 - 10,621 Maturing after ten years ...................................... 44,464 1,685 99 46,050 ------- ------- ------- ------- 55,608 1,932 99 57,441 ------- ------- ------- ------- OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS Maturing after one year but within five years ................. 457 28 - 485 Maturing after five years but within ten years ................ 3,221 107 - 3,328 Maturing after ten years ...................................... 23,521 130 275 23,376 ------- ------- ------- ------- 27,199 265 275 27,189 ------- ------- ------- ------- Total securities available for sale ....................... $93,767 $ 2,610 $ 374 $96,003 ======= ======= ======= ======= SECURITIES HELD TO MATURITY: OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS Maturing within one year ...................................... $ 1,951 $ 9 $ 2 $ 1,958 Maturing after one but within five years ...................... 4,623 76 - 4,699 Maturing after five years but within ten years ................ 4,100 46 8 4,138 Maturing after ten years ...................................... 1,977 6 112 1,871 ------- ------- ------- ------- Total securities held to maturity ......................... $12,651 $ 137 $ 122 $12,666 ======= ======= ======= =======
2007 ---- Unrealized Holding Amortized ------------------ Fair Cost Gains Losses Value ---- ----- ------ ----- SECURITIES AVAILABLE FOR SALE: GOVERNMENT SPONSORED ENTERPRISE SECURITIES Maturing within one year ...................................... $ 2,000 $ - $ 9 $ 1,991 Maturing after one year but within five years ................. 750 15 - 765 Maturing after five years but within ten years ................ 6,000 218 - 6,218 ------- ------- ------- ------- 8,750 233 9 8,974 ------- ------- ------- ------- OTHER SECURITIES Maturing within one year ...................................... 152 - 1 151 Maturing after one year but within five years ................. 897 - 5 892 Maturing after five years but within ten years ................ 8,932 63 54 8,941 Maturing after ten years ...................................... 39,038 927 41 39,924 ------- ------- ------- ------- 49,019 990 101 49,908 ------- ------- ------- ------- OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS Maturing after five years but within ten years ................ 1,966 31 1 1,996 Maturing after ten years ...................................... 23,873 88 43 23,918 ------- ------- ------- ------- 25,839 119 44 25,914 ------- ------- ------- ------- Total securities available for sale ....................... $83,608 $ 1,342 $ 154 $84,796 ======= ======= ======= =======
59 NOTE 3 - SECURITIES, Continued
2007 ---- Unrealized Holding Amortized ------------------ Fair Cost Gains Losses Value ---- ----- ------ ----- SECURITIES HELD TO MATURITY: OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS Maturing within one year ...................................... $ 866 $ 2 $ 1 $ 867 Maturing after one year but within five years ................. 5,638 19 14 5,643 Maturing after five years but within ten years ................ 4,139 24 29 4,134 Maturing after ten years ...................................... 2,459 11 1 2,469 ------- ------- ------- ------- Total securities held to maturity ......................... $13,102 $ 56 $ 45 $13,113 ======= ======= ======= =======
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2008. Securities Available for Sale (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ Government sponsored enterprise securities ............. $ - $ - $ - $ - $ - $ - Other securities ....................... 517 99 - - 517 99 State and political subdivisions ...................... 7,625 275 - - 7,625 275 ------ ------ ---------- ---------- ------ ------ Total .................................. $8,142 $ 374 $ - $ - $8,142 $ 374 ====== ====== ========== ========== ====== ======
No individual securities were in a continuous loss position for twelve months or more. Securities Held to Maturity (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ States and political subdivisions .................... $2,295 $ 122 $ - $ - $2,295 $ 122 ====== ====== =========== =========== ====== ======
No individual securities 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, 2007. Securities Available for Sale (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ Government sponsored enterprise securities ............... $ - $ - $ 2,000 $ 9 $ 2,000 $ 9 Other securities ......................... - - 7,379 101 7,379 101 State and political subdivisions ........................ 1,395 10 7,475 34 8,870 44 ------- ------- ------- ------- ------- ------- Total .................................... $ 1,395 $ 10 $16,854 $ 144 $18,249 $ 154 ======= ======= ======= ======= ======= =======
Thirty-five individual securities were in a continuous loss position for twelve months or more. 60 NOTE 3 - SECURITIES, Continued Securities Held to Maturity (tabular amounts in thousands):
Less than 12 Months 12 Months or More Total ------------------- ----------------- ----- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----- ------ ----- ------ ----- ------ States and political subdivisions ........................ $ 335 $ 2 $3,785 $ 43 $4,120 $ 45 ====== ====== ====== ====== ====== ======
Seventeen individual securities were in a continuous loss position for twelve months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The category "other securities" above is comprised of mortgage-backed securities, corporate debt securities, equity securities and investments in Silverton Bank stock. During the second half of 2008, the Company determined that our Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock suffered an other-than-temporary impairment as a result of the Government's decision on September 7, 2008 to place the FHLMC and Federal National Mortgage Association ("FNMA") under conservatorship. Consequently, the Company recorded a pretax charge to earnings of $2,890,000 to write down to fair value. As a result of the passage of the Emergency Economic Stabilization Act of 2008, the Company's ability to utilize the loss on the FHLMC preferred stock against ordinary income was considered in determining that the Company did not need to establish a valuation allowance for the deferred tax asset that was recorded related to the $2,890,000 impairment charge. Other Investments, at Cost (tabular amounts in thousands): The Banks, as member institutions, are required to own certain stock investments in the Federal Home Loan Bank of Atlanta ("FHLB") and the FRB. These investments are carried at cost and are generally pledged against any borrowings from these institutions (see Note 9). No ready market exists for these stocks and they have no quoted market values. The Company's investments in these stocks are summarized below: December 31, ------------ 2008 2007 ---- ---- FRB ............................................... $ 483 $ 453 FHLB .............................................. 2,585 3,895 Interest-bearing deposits in other banks (maturing after three months) .................... 478 447 ------ ------ $3,546 $4,795 ====== ====== Securities with carrying amounts of $43,459,000 and $45,438,000 December 31, 2008 and 2007, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are summarized as follows (tabular amounts in thousands): December 31, ------------ 2008 2007 ---- ---- Commercial and industrial - not secured by real estate ..................................... $ 43,451 $ 47,885 Commercial and industrial - secured by real estate ... 111,844 107,531 Residential real estate - mortgage ................... 124,445 108,161 Residential real estate - construction ............... 104,390 138,926 Loans to individuals for household, family and other personal expenditures ..................... 14,581 16,495 --------- --------- 398,711 418,998 Less allowance for loan losses ....................... (9,217) (4,310) --------- --------- $ 389,494 $ 414,688 ========= ========= 61 NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES, Continued The composition of gross loans by rate type is as follows (tabular amounts in thousands): December 31, ------------ 2008 2007 ---- ---- Variable rate loans ...................... $145,998 $197,344 Fixed rate loans ......................... 252,713 221,654 -------- -------- $398,711 $418,998 ======== ======== Changes in the allowance for loan losses were as follows (tabular amounts in thousands): For the years ended December 31, -------------------------------- 2008 2007 ---- ---- BALANCE, BEGINNING OF YEAR ................... $ 4,310 $ 4,070 Provision for loan losses ............... 13,820 900 Loans charged off ....................... (9,037) (706) Loans recovered ......................... 124 46 -------- -------- BALANCE, END OF YEAR ......................... $ 9,217 $ 4,310 ======== ======== The following is a summary of information pertaining to impaired loans and non-accrual loans (tabular amounts in thousands):
December 31, ------------ 2008 2007 ---- ---- Impaired loans without valuation allowance ............................................... $13,592 $ 2,024 Impaired loans with a valuation allowance ................................................ 3,079 - ------- ------- Total impaired loans ..................................................................... $16,671 $ 2,024 ======= ======= Valuation allowance related to impaired loans ............................................ $ 1,608 $ - Total non-accrual loans .................................................................. $16,950 $ 7,505 Total loans past-due ninety days or more and still accruing .............................. - - Foregone interest income on non-accrual loans ............................................ 753 137 Average investment in impaired loans ..................................................... 10,802 1,546 Interest income recognized on impaired loans ............................................. - - Interest income recognized on a cash basis on impaired loans ............................. - -
NOTE 5 - PREMISES AND EQUIPMENT The principal categories and estimated useful lives of premises and equipment are summarized in the table below (dollar amounts in thousands):
December 31, Estimated ------------ useful lives 2008 2007 ---------------- --------------- --------------- Land $ 3,873 $ 3,873 Building and improvements ............................. 15 - 40 years 9,951 9,759 Furniture, fixtures and equipment ..................... 3 - 10 years 8,879 8,561 --------------- --------------- 22,703 22,193 Less accumulated depreciation ......................... 9,503 8,436 --------------- --------------- $ 13,200 $ 13,757 =============== ===============
Depreciation expense of approximately $1,142,000 and $1,110,000 for 2008 and 2007, respectively, is included in occupancy and equipment expenses in the accompanying consolidated statements of income. 62 NOTE 6 - DEPOSITS The composition of deposits is as follows (tabular amounts in thousands): December 31, ------------ 2008 2007 ---- ---- Demand deposits, noninterest bearing ............. $ 51,091 $ 53,950 NOW and money market accounts .................... 96,160 83,870 Savings deposits ................................. 9,771 8,172 Time certificates, $100,000 or more .............. 97,769 109,457 Other time certificates .......................... 190,578 162,172 -------- -------- Total ....................................... $445,369 $417,621 ======== ======== December 31, ------------ 2008 2007 ---- ---- Time certificates maturing Within one year ............................. $265,342 $253,342 After one but within two years .............. 15,651 12,093 After two but within three years ............ 6,864 5,421 After three but within four years ........... 259 757 After four years ............................ 231 16 -------- -------- 288,347 271,629 Transaction and savings accounts ................. 157,022 145,992 -------- -------- $445,369 $417,621 ======== ======== Certificates of deposit in excess of $100,000 totaled approximately $86,380,000 and $99,060,000 at December 31, 2008 and 2007, respectively. Interest expense on certificates of deposit in excess of $100,000 was approximately, $3,907,000 in 2008 and $4,636,000 in 2007. The Banks had brokered time certificates of approximately $77,411,000 at December 31, 2008 and $28,087,000 at December 31, 2007. NOTE 7 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements are summarized as follows (tabular amounts in thousands):
December 31, ------------ 2008 2007 ---- ---- Government sponsored enterprise securities with an amortized cost of $28,686,000 ($29,673,000 fair value) and $27,855,000 ($28,044,000 fair value) at December 31, 2008 and 2007, respectively, collateralize the agreements. ....................... $22,181 $19,824
The Banks enter into sales of securities under agreements to repurchase. These obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets. The dollar amount of securities underlying the agreements remains in the asset accounts. The securities underlying the agreements are book entry securities maintained by a safekeeping agent. The weighted average interest rate of these agreements was 1.56 percent and 1.92 percent for 2008 and 2007, respectively. The agreements mature daily. Securities sold under agreements to repurchase averaged $20,832,000 and $20,648,000 during 2008 and 2007, respectively. The maximum amounts outstanding at any month-end were $25,557,000 and $23,229,000 during 2008 and 2007, respectively. 63 NOTE 8 - FEDERAL FUNDS PURCHASED At December 31, 2008, the Banks had the ability to purchase federal funds from unrelated banks under short-term lines of credit totaling $37,000,000. These lines of credit are available on a one to seven day basis for general corporate purposes. At December 31, 2008 there was $1,028,000 outstanding under these lines of credit and $429,000 outstanding at December 31, 2007. NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK AND NOTES PAYABLE-OTHER The Banks have the ability to borrow up to 20 percent of their total assets from the FHLB subject to available qualifying collateral. Borrowings may be obtained under various FHLB lending programs with various terms. Borrowings from the FHLB require qualifying collateral (which includes certain mortgage loans, investment securities and FHLB stock) and may require purchasing additional stock in the FHLB. The Banks had advances aggregating $34,600,000 and $65,100,000 at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007 respectively, the Banks had $34,600,000 and $23,100,000 of advances at interest rates of 0.46 percent and 4.40 percent and which matured daily. At December 31, 2007 $21,000,000 of advances had an interest rate of 4.52 percent that matured in February 2008 and $21,000,000 of advances at an interest rate of 4.68 percent that matured in November 2008. At December 31, 2008 and 2007, the advances were collateralized by qualifying mortgage loans aggregating approximately $67,201,000 and $66,963,000, respectively, and by FHLB stock owned by all three Banks. The Banks also had advances collateralized by investment securities owned by the Banks in the amount of $13,149,000 and $9,620,000 at December 31, 2008 and 2007, respectively. As of December 31, 2008, the Banks had the ability to borrow an additional $45,751,000 in the aggregate from the FHLB. In 2008, the Company obtained a $15,000,000 line of credit from a correspondent bank to enable it to inject additional capital into the banks. The Company subsequently drew on this line of credit and injected a total of $11,500,000 into its three Banks. At December 31, 2008 the line of credit, which matures September 28, 2010, had an outstanding balance of $11,000,000. The line of credit agreement contains certain covenants to which the Company is obligated in order to retain the line of credit. At December 31, 2008, the Company's non-performing assets to total assets ratio of 4.08% exceeded the required non-performing assets to total assets ratio of 3.50%, for which a waiver was obtained through March 31, 2009. Management believes the Company will be back in compliance with the covenant requirements at March 31, 2009. NOTE 10 - INCOME TAXES Provision for income taxes consists of the following (tabular amounts in thousands): For the years ended December 31, -------------------------------- 2008 2007 ---- ---- Current tax provision Federal ......................... $ (2,153) $ 1,452 State ........................... - 201 --------------- --------------- Total current taxes ......... (2,153) 1,653 Deferred tax benefit ................. (3,031) (96) --------------- --------------- $ (5,184) $ 1,557 =============== =============== 64 NOTE 10 - INCOME TAXES, Continued Income taxes differ from the tax expense computed by applying the statutory federal income tax rate of 34 percent to income (loss) before income taxes. The reasons for these differences are as follows (tabular amounts in thousands): For the years ended December 31, ------------ 2008 2007 ---- ---- Tax (benefit) expense at statutory rate .............. $(4,610) $ 2,006 Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit ...... - 133 Tax-exempt interest income ...................... (511) (483) Investment in life insurance .................... (150) (62) Other ........................................... 87 (37) ------- ------- Provision for income taxes (benefit) ........ $(5,184) $ 1,557 ======= ======= Deferred tax assets (liabilities) result from temporary differences in the recognition of revenue and expenses for tax and financial statement purposes. Management believes realization of the deferred tax assets is more likely than not and accordingly has not recorded a valuation allowance. The sources and the cumulative tax effect of temporary differences are as follows (tabular amounts in thousands): December 31, ------------ 2008 2007 ---- ---- Deferred tax assets Allowance for loan losses ....................... $ 3,134 $ 1,471 Deferred compensation ........................... 254 156 Other than temporary impairment ................. 1,033 - Other ........................................... 417 97 ------- ------- 4,838 1,724 ------- ------- Deferred tax liabilities Depreciation .................................... (104) (108) Prepaid expenses ................................ (180) (93) Unrealized holding gains on securities available for sale ................. (758) (404) ------- ------- (1,042) (605) ------- ------- Net deferred tax assets included in other assets ..... $ 3,796 $ 1,119 ======= ======= The Company has analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with FIN No. 48. NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheets. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. 65 NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK, Continued Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. At December 31, 2008, unfunded commitments to extend credit were $77,530,000, of which $72,359,000 were at variable rates and $5,171,000 were at fixed rates. These commitments included $11,405,000 of unfunded amounts of construction loans, $44,531,000 of undisbursed amounts of home equity lines of credit, $13,602,000 of unfunded amounts under commercial lines of credit, and $7,992,000 other commitments to extend credit. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. At December 31, 2008, there was $2,845,000 committed under letters of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral varies but may include accounts receivable, inventory, equipment, marketable securities and property. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. The Company has not recorded a liability for the current carrying amount of the obligation to perform as a guarantor, and no contingent liability was considered necessary, as such amounts were not considered material. NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company is, from time to time, a party to various lawsuits and claims arising from the ordinary conduct of its business. Management does not expect such matters to have any material adverse effect on the financial position or results of operations of the Company. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks. The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in the upstate region of South Carolina. The Company's loan portfolio is not concentrated in loans to any single borrower or to a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions. However, a substantial portion of the Company's loans are secured by real estate. In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk that could arise from potential concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan's life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. The Company's investment portfolio consists principally of obligations of the United States of America, its agencies or its corporations and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant. 66 NOTE 13 - RELATED PARTY TRANSACTIONS At December 31, 2008 and 2007, certain officers, directors, employees, related parties and companies in which they have 10 percent or more beneficial ownership, were indebted to the Banks in the aggregate amount of $21,691,000 and $14,886,000, respectively. During 2008, $9,900,000 of new loans were made to this group and repayments of $3,095,000 were received. This same group had deposits in the Banks of $5,839,000 and $7,033,000 at December 31, 2008 and 2007, respectively. NOTE 14 - COMMON STOCK AND EARNINGS PER SHARE SFAS No. 128, Earnings per Share, requires that the Company present basic and diluted net income (loss) per common share. The assumed conversion of stock options creates the difference between basic and diluted net income (loss) per common share. Income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for each period presented. The weighted average number of common shares outstanding for basic net income (loss) per common share was 7,062,218 and 7,401,032 in 2008 and 2007, respectively. The weighted average number of common shares outstanding for diluted net income (loss) per common share was 7,062,218 and 7,403,021 in 2008 and 2007, respectively. Due to the net loss in 2008, basic and diluted loss per share were the same. The Company declared a five percent common stock dividend in 2007, payable in 2008. Net income (loss) and dividends per common share and the weighted average number of common shares outstanding for basic and diluted net income (loss) per common share have been restated for 2007 to reflect this transaction. NOTE 15 - RESTRICTIONS ON DIVIDENDS The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Banks. Federal banking regulations restrict the amount of dividends that can be paid and such dividends are payable only from the retained earnings of the Banks. At December 31, 2008 the Banks had aggregate retained earnings of $23,135,000. A loan agreement also prohibits the Company from paying cash dividends without the prior consent of the lender if the payment would cause the Company to fail to be well capitalized. NOTE 16 - STOCK OPTION COMPENSATION PLANS The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for grants in 2008 and 2007: dividend yields of $0.20 per share, expected volatility from 22 to 23 percent, risk-free interest rates from 3.49 to 3.87 percent and expected life of 10 years. The weighted average fair market value of options granted approximated $1.82 in 2008 and $3.49 in 2007. A summary of the status of the plans as of December 31, 2008 and 2007, and changes during the years ending on those dates is presented below (all shares and exercise prices have been adjusted for stock dividends and the stock split):
Options outstanding ------------------- Weighted Weighted average average Aggregate Number exercise contractual intrinsic of shares price term (years) value --------- ----- ------------ ----- Outstanding at December 31, 2006 208,989 $ 8.46 Granted 25,323 10.46 Exercised (61,566) 4.04 $ 243,511 Forfeited or expired (3,997) 11.68 -------- Outstanding at December 31, 2007 168,749 10.29
67 NOTE 16 - STOCK OPTION COMPENSATION PLANS, Continued
Options outstanding Weighted Weighted average average Aggregate Number exercise contractual intrinsic of shares price term (years) value --------- ----- ------------ ----- Granted ............................................... 16,000 7.62 Exercised ............................................. (14,615) 5.34 $ 13,624 Forfeited or expired .................................. (23,871) 9.89 ------- Outstanding at December 31, 2008 ...................... 146,263 10.56 6.62 $ - ======= Options exercisable at year-end ....................... 116,966 10.56 6.45 $ - ======= Shares available for grant ............................ 376,650 =======
Number Weighted average of shares grant date fair value --------- --------------------- Non-vested options at December 31, 2007 ................................ 38,615 $11.56 Granted ................................................................ 16,000 7.62 Vested ................................................................. (8,124) 8.35 Forfeited or expired ................................................... (17,194) 9.72 ------- Non-vested options at December 31, 2008 ................................ 29,297 $11.38 ====== ======
As of December 31, 2008, we have unrecognized compensation cost of $127,085 related to unvested stock options.
Options outstanding Options exercisable ------------------- ------------------- Weighted average Weighted Weighted Number remaining average Number average of shares contractual exercise of shares exercise outstanding life (years) price exercisable price ----------- ------------ ----- ----------- ----- 3,480 0.2 $ 6.47 3,480 $ 6.47 7,721 1.2 8.16 7,721 8.16 5,826 2.0 8.53 5,826 8.53 6,318 2.3 7.60 6,318 7.60 8,016 3.3 8.86 8,016 8.86 10,461 3.5 9.34 10,461 9.34 5,730 4.3 10.47 5,730 10.47 24,831 5.3 12.89 21,927 12.89 1,823 5.6 13.71 1,550 13.71 4,046 6.3 15.66 4,046 15.66 1,158 6.5 14.77 811 14.77 2,316 6.6 14.90 1,622 14.90 5,788 6.7 14.90 4,052 14.90 1,736 6.8 14.08 1,215 14.08 1,102 7.1 12.02 606 12.02
68 NOTE 16 - STOCK OPTION COMPENSATION PLANS, Continued
Options outstanding Options exercisable ------------------- ------------------- Weighted average Weighted Weighted Number remaining average Number average of shares contractual exercise of shares exercise outstanding life (years) price exercisable price -------------------- ------------------- -------------------- -------------------- ------------------- 1,102 7.2 11.89 606 11.89 6,063 7.3 10.25 3,335 10.25 6,613 7.3 11.42 5,373 11.42 1,102 7.5 10.44 606 10.44 4,280 7.7 10.43 2,354 10.43 2,204 7.8 10.21 1,212 10.21 6,422 8.0 10.48 2,569 10.48 1,050 8.2 9.95 420 9.95 3,675 8.3 9.52 1,470 9.52 6,300 8.3 11.19 6,300 11.19 1,050 8.5 11.42 420 11.42 1,050 8.9 9.57 420 9.57 1,500 9.0 8.05 375 8.05 3,500 9.3 7.75 875 7.75 1,000 9.3 7.50 250 7.50 7,000 9.4 7.60 7,000 7.60 500 9.5 5.35 - - 1,500 9.7 7.50 - - ------- ------- 146,263 116,966 ======= =======
The plans are administered by the Board of Directors or by a committee designated by the Board. The plans provide that if the shares of common stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of common stock as a stock dividend on its outstanding common stock, the number of shares of common stock deliverable upon the exercise of options shall be increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. NOTE 17 - EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) retirement plan for all eligible employees. Upon ongoing approval of the Board of Directors, the Company matches employee contributions equal to one-hundred percent of the first three percent of such contributions, plus fifty percent of the next two percent of such contributions, subject to certain adjustments and limitations. Contributions to the plan of $240,441 and $206,971, were charged to operations during 2008 and 2007, respectively. Supplemental benefits have been approved by the Board of Directors for certain executive officers of the Company. These benefits are not qualified under the Internal Revenue Code and they are not funded. However, certain funding is provided informally and indirectly by life insurance policies. The Company recorded expense related to these benefits of $260,746 and $201,356 in 2008 and 2007, respectively. 69 NOTE 18 - REGULATORY MATTERS The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weighting, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2008, that the Banks meet all capital adequacy requirements to which they are subject. On October 15, 2008, Bank of Anderson, N.A., the assets of which represent approximately 25% of the Company's total consolidated assets, entered into a formal agreement with the Office of the Comptroller of the Currency (the "OCC") for the bank to take various actions with respect to the operation of the bank. The actions include: a. creation of a committee of the bank's board of directors to monitor compliance with the agreement and make monthly reports to the board of directors and the OCC; b. development, implementation and adherence to a program to improve the bank's loan portfolio management; c. adoption, implantation and adherence to written policies and procedures for maintaining an adequate allowance for loan and lease losses in accordance with generally accepted accounting principles and regulatory guidance; d. protection of its interest in its criticized assets (those assets classified as "loss," "doubtful," "substandard," or "special mention" by internal or external loan review or examination), and adoption, implementation and adherence to a written program designed to eliminate the basis of the criticism, as well as restricting further extensions of credit to borrowers whose loans are subject to criticism; e. development, implementation and adherence to a written program to improve its construction loans underwriting standards; f. adoption, implantation and adherence to a written asset diversification program that appropriately identifies and manages concentration of credit risk; g. adoption, implementation and adherence to a strategic plan, a capital program and a profit plan; h. ensuring that the level of liquidity at the bank is sufficient to sustain the bank's current operations and meet anticipated or extraordinary demand; and i. obtaining a determination of no supervisory objection from the OCC before accepting brokered deposits. Additionally, the bank is required by the agreement to submit numerous periodic reports to the OCC regarding various aspects of the foregoing actions. The agreement resulted from the OCC's examination of the bank that commenced in the second quarter of 2008. Since the later part of 2006 the bank has experienced an increase in criticized assets as the economy in the bank's primary lending areas has come under increasing downward pressure. The substantive actions called for by the agreement should strengthen the bank and make it more efficient in the long-term. Implementation of the agreement will increase the bank's administrative costs somewhat in the near-term, but the amount of such increase is not expected to be material to the Company. 70 NOTE 18 - REGULATORY MATTERS, Continued As of December 31, 2008, the most recent notification from the Office of the Comptroller of the Currency categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Banks' categories. The Banks' actual capital amounts and ratios and minimum regulatory amounts and ratios are presented as follows:
To be well capitalized under For capital prompt corrective adequacy purposes action provisions ----------------- ----------------- Actual Minimum Minimum ------ ------- ------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (dollar amounts in thousands) Peoples Bancorporation, Inc.: As of December 31, 2008 Total Capital (to risk-weighted assets) ....... $45,435 10.77% $33,749 8.00% N/A N/A Tier 1 Capital (to risk-weighted assets) ...... 40,040 9.49 16,877 4.00 N/A N/A Tier 1 Capital (to average assets) ............ 40,040 7.33 21,850 4.00 N/A N/A As of December 31, 2007 Total Capital (to risk-weighted assets) ....... 53,766 12.02 35,784 8.00 N/A N/A Tier 1 Capital (to risk-weighted assets) ...... 49,456 11.06 17,886 4.00 N/A N/A Tier 1 Capital (to average assets) ............ 49,446 8.80 22,480 4.00 N/A N/A The Peoples National Bank: As of December 31, 2008 Total Capital (to risk-weighted assets) ....... 34,922 12.44 22,458 8.00 $28,072 10.00% Tier 1 Capital (to risk-weighted assets) ...... 31,297 11.15 11,228 4.00 16,841 6.00 Tier 1 Capital (to average assets) ............ 31,297 9.06 13,818 4.00 17,272 5.00 As of December 31, 2007 Total Capital (to risk-weighted assets) ....... 31,146 10.64 23,418 8.00 29,273 10.00 Tier 1 Capital (to risk-weighted assets) ...... 28,371 9.69 11,711 4.00 17,567 6.00 Tier 1 Capital (to average assets) ............ 28,371 8.52 13,320 4.00 16,650 5.00 Bank of Anderson, N.A.: As of December 31, 2008 (1) Total Capital (to risk-weighted assets) ....... 13,922 15.27 10,941 12.00 N/A N/A Tier 1 Capital (to risk-weighted assets) ...... 12,777 14.02 9,113 10.00 N/A N/A Tier 1 Capital (to average assets) ............ 12,777 9.58 10,670 8.00 N/A N/A As of December 31, 2007 Total Capital (to risk-weighted assets) ....... 14,013 13.25 8,461 8.00 10,576 10.00 Tier 1 Capital (to risk-weighted assets) ...... 12,808 12.11 4,231 4.00 6,346 6.00 Tier 1 Capital (to average assets) ............ 12,808 8.34 6,143 4.00 7,679 5.00 Seneca National Bank: As of December 31, 2008 Total Capital (to risk-weighted assets) ....... 7,198 14.44 3,988 8.00 4,985 10.00 Tier 1 Capital (to risk-weighted assets) ...... 6,574 13.19 1,994 4.00 2,990 6.00 Tier 1 Capital (to average assets) ............ 6,574 9.76 2,695 4.00 3,368 5.00 As of December 31, 2007 Total Capital (to risk-weighted assets) ....... 5,840 11.47 4,073 8.00 5,092 10.00 Tier 1 Capital (to risk-weighted assets) ...... 5,373 10.55 2,037 4.00 3,056 6.00 Tier 1 Capital (to average assets) ............ 5,373 7.82 2,748 4.00 3,435 5.00
(1) Minimum ratios have been revised to reflect minimum required regulatory ratios for this bank as required by the Comptroller. 71 NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information, whether or not recognized in the balance sheets, when it is practical to estimate the fair value. SFAS No. 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock, premises and equipment and other assets and liabilities. Fair value approximates carrying value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, interest-bearing deposits in other banks and federal funds sold and purchased. Securities are valued using quoted fair market prices. Other investments are valued at par value. Fair value for variable rate loans that reprice frequently, loans held for sale, and for loans that mature in less than three months is based on the carrying value. Fair value for fixed rate mortgage loans, personal loans, and all other loans (primarily commercial) maturing after three months is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality. Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying value. Certificate of deposit accounts and securities sold under repurchase agreements maturing within one year are valued at their carrying value. The fair value of certificate of deposit accounts and securities sold under repurchase agreements maturing after one year are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Fair value for long-term FHLB advances is based on discounted cash flows using the Company's current incremental borrowing rate. Discount rates used in these computations approximate rates currently offered for similar borrowings of comparable terms and credit quality. Fair value of off-balance sheet instruments is based on fees currently charged to enter into similar arrangements, taking into account the remaining terms of the agreement and the counterparties' credit standing. The Company has used management's best estimate of fair value based on the above assumptions. Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses which would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented. The estimated fair values of the Company's financial instruments are as follows (amounts in thousands):
December 31, ------------ 2008 2007 ---- ---- Carrying Fair Carrying Fair amount value amount value ------ ----- ------ ----- Financial assets: Cash and due from banks ........................................... $ 7,874 $ 7,874 $ 8,618 $ 8,618 Interest-bearing deposits in other banks .......................... 765 765 643 643 Federal funds sold ................................................ 9,185 9,185 1,263 1,263 Trading assets .................................................... 47 47 - - Securities available for sale ..................................... 96,003 96,003 84,796 84,796 Securities held to maturity ....................................... 12,651 12,666 13,102 13,113 Other investments ................................................. 3,546 3,546 4,795 4,795 Loans (gross) ..................................................... 398,711 395,447 418,998 412,240
72 NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
2008 2007 ---- ---- Carrying Fair Carrying Fair amount value amount value ------ ----- ------ ----- Cash surrender value life insurance ................................ 11,815 11,815 11,350 11,350 Financial liabilities: Deposits ...................................................... 445,369 442,221 417,621 418,273 Securities sold under repurchase agreements ................... 22,181 22,181 19,824 19,824 Federal funds purchased ....................................... 1,028 1,028 429 429 Advances from Federal Home Loan Bank .......................... 34,600 34,600 65,100 65,055 Notes Payable - Other ......................................... 11,000 11,000 - -
As noted in Note 1, effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which provides a framework for measuring and disclosing fair value under accounting principles generally accepted in the United States of America. SFAS No. 157 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). SFAS No. 157 defines fair value 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. SFAS No. 157 also 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, other U.S. Government and agency mortgage-backed debt 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 certain derivative contracts and impaired loans. 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. 73 NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2008:
Quoted market Significant Significant price in active other observable unobservable markets inputs inputs (Level 1) (Level 2) (Level 3) ------------------- ------------------ ------------------ Available for sale securities ............... $ 95,585,000 $ 418,000 $ - Trading Assets .............................. 47,000 - Impaired loans .............................. - 16,671,000 - ------------------- ------------------ ------------------ $ 95,632,000 $ 17,089,000 $ - =================== ================== ==================
The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at December 31, 2008 was $16,671,000. FSP FAS 157-2 delays the implementation of SFAS No. 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis. 74 NOTE 20 - CONDENSED FINANCIAL INFORMATION Following is condensed financial information of Peoples Bancorporation, Inc. (parent company only) (tabular amounts in thousands): CONDENSED BALANCE SHEETS
December 31, ------------ 2008 2007 ---- ---- ASSETS Cash ................................................................ $ 373 $ 2,173 Investment in bank subsidiaries ..................................... 52,123 47,347 Other assets ........................................................ 287 1,306 ------------- --------------- $ 52,783 $ 50,826 ============= =============== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable ....................................................... $ 11,000 $ - Other liabilities ................................................... 271 585 Shareholders' equity ................................................ 41,512 50,241 ------------- --------------- $ 52,783 $ 50,826 ============= ===============
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, -------------------------------- 2008 2007 ---- ---- INCOME Fees and dividends from subsidiaries ................................. $ 6,724 $ 6,582 -------------- --------------- EXPENSES Interest expense ..................................................... 104 - Salaries and benefits ................................................ 3,751 3,814 Occupancy ............................................................ 9 8 Equipment ............................................................ 457 436 Other operating ...................................................... 1,394 1,129 ------------- --------------- 5,715 5,387 ------------- --------------- EQUITY IN UNDISTRIBUTED NET INCOME (LOSS) OF BANK SUBSIDIARIES ............ (9,481) 3,121 -------------- --------------- Income (loss) before income taxes ................................ (8,472) 4,316 INCOME TAX BENEFIT ........................................................ (96) (27) ------------- --------------- Net income (loss) ................................................ $ (8,376) $ 4,343 ============= ===============
75 NOTE 20 - CONDENSED FINANCIAL INFORMATION, Continued CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, -------------------------------- 2008 2007 ---- ---- OPERATING ACTIVITIES Net income (loss) ......................................................................... $ (8,376) $ 4,343 Adjustments to reconcile net income (loss) to net cash provided by operating activities Equity in undistributed net (income) loss of bank subsidiaries ................... 9,481 (3,121) Cumulative effect of post retirement cost of life insurance ...................... 72 93 (Increase) decrease in other assets .............................................. 1,026 (172) Decrease in other liabilities .................................................... (314) (295) -------- -------- Net cash provided by operating activities .................................... 1,889 848 -------- -------- FINANCING ACTIVITIES Payments for investments in bank subsidiaries ............................................. (12,500) - Net change in borrowings .................................................................. 11,000 - Proceeds from the exercise of stock options ............................................... 71 204 Cash dividends ............................................................................ (1,060) (1,343) Cash in lieu of fractional share on stock dividends and splits ............................ - (5) Proceeds (repayment) of advances from subsidiaries ........................................ (1,200) 321 -------- -------- Net cash used for financing activities ....................................... (3,689) (823) -------- -------- Net increase (decrease) in cash .............................................. (1,800) 25 CASH, BEGINNING OF YEAR ........................................................................ 2,173 2,148 -------- -------- CASH, END OF YEAR .............................................................................. $ 373 $ 2,173 ======== ========
76 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no occurrence requiring a response to this item. ITEM 9A(T). CONTROLS AND PROCEDURES Disclosure Controls and Procedures Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or 240.15d-15(b) of the Company's disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e))), the Company's chief executive officer and chief financial officer concluded that such controls and procedures, as of the end of the year covered by this annual report, were effective. Management's Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, the Company's management has evaluated the effectiveness of its internal control over financial reporting as of December 31, 2008 based on the criteria established in a report entitled "Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission" and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, the Company's management has evaluated and concluded that the Company's internal control over financial reporting was effective as of December 31, 2008. This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding internal control over financial reporting because management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report. Changes in Internal Control over Financial Reporting There has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9 B. OTHER INFORMATION The Company was not required to disclose any information in a Form 8-K during the fourth quarter of 2008 that was not so disclosed. 77 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors Directors Whose Terms Expire in 2009 Timothy J. Reed, age 51, worked for 20 years in the frozen food industry for Modern Storage, Co, Inc. as their Vice President in charge of marketing. Mr. Reed left that position in 2001, and was a real estate broker for Prudential, C. Dan Joyner, in Seneca, from 2007 to 2008. Since 2005, Mr. Reed has been a partner in Margin Holdings, Greenville, South Carolina. Mr. Reed is a past Chair of the Board of the United Way in Greenville, South Carolina, and a past Chair of the Clemson University Board of Visitors. Mr. Reed also serves as a Trustee of Columbia Theological Seminary, and on the Boards of the Metropolitan Arts Council, the Greenville Chamber of Commerce, and SC Launch. Mr. Reed has been a director of The Peoples National Bank, and a director of our Company since March 2007. Robert E. Dye, Jr., age 41, has served as our Senior Vice President, Chief Financial Officer and Secretary since April 2004. Prior to that time, Mr. Dye served as Director of Corporate Activities for our Banks and our Company from August 2002 through April 2004 and served as Director of Expansion and Development from November 1997 through July 2002. Prior to joining our Company, Mr. Dye was Vice President at Britt, Peters & Associates, Inc., an engineering firm in Greenville, South Carolina. Prior to that, Mr. Dye served as an engineer for the South Carolina operations of Vulcan Materials Company. Mr. Dye is a trustee and the treasurer of Baptist Healthcare System of South Carolina. Mr. Dye has been a director of The Peoples National Bank since 1997 and a director of our Company since 1997. W. Rutledge Galloway, age 65, has been Chief Executive Officer of Galloway-Bell, Inc., a residential, industrial and commercial insulation contractor, since 1972. Mr. Galloway is a member of the Board of Trustees of Presbyterian College, and has previously served as a director of the Greenville, South Carolina Home Builders Association. Mr. Galloway has been a director of The Peoples National Bank since its formation in 1986, and a director of our Company since 1992. E. Smyth McKissick, III, age 52, has been President of Alice Manufacturing Company, a textile manufacturing company, since 1988. Mr. McKissick is a past Chairman of the National Council of Textile Organizations and past Chairman of the South Carolina Manufacturers Alliance. In addition, Mr. McKissick serves on the Board of Trustees of Clemson University, the Institute of Textile Technology, and serves on the Board of Trustees of Christ Church Episcopal School in Greenville, South Carolina. Mr. McKissick has been a director of The Peoples National Bank since 1992, and a director of our Company since 1993. 78 William B. West, age 59, has served as our Executive Vice President and Treasurer since April 2004. Prior to that time, he served as our Senior Vice President and Chief Financial Officer from July 1998 until April 2004. Mr. West was Senior Vice President, Chief Financial Officer, Secretary, Treasurer and Director of First United Bancorporation, Executive Vice President and Cashier and a director of Anderson National Bank, Cashier of Spartanburg National Bank, Cashier and a director of Community Bank of Greenville, N.A., and Treasurer and a director of Quick Credit Corporation until the merger of First United Bancorporation into Regions Financial Corporation in June of 1998. Mr. West, who has 37 years of banking experience, began his career with the Office of the Comptroller of the Currency as a National Bank Examiner in 1972. Mr. West has been a director of our Company since 2000. Directors Whose Terms Expire in 2011 Charles E. Dalton, age 66, has been President and Chief Executive Officer of Blue Ridge Electric Cooperative, located in Pickens, South Carolina, since 1982. Mr. Dalton is past president of the Association of Electric Cooperatives of South Carolina. Mr. Dalton has been a director of The Peoples National Bank since 1992, a director of our Company since 1992, and a director of Bank of Anderson, N. A. since January 2006. George Weston Nalley, age 44, has been President of Nalley Construction Company, Inc., in Easley, South Carolina since 2000. Mr. Nalley currently serves on the Board of Visitors for Presbyterian College. Mr. Nalley has been a director of The Peoples National Bank since March 2005, and a director of our Company since June 2005. Mr. Nalley is the son of George B. Nalley, Jr. R. Riggie Ridgeway, age 62, has served as our Chief Executive Officer since April 2004. He was also our President from April 2004 through 2008. Prior to that time, Mr. Ridgeway served as our Executive Vice President. Mr. Ridgeway served as President and Chief Executive Officer of The Peoples National Bank from 1996 until April 2005. From 1986 until 1996, Mr. Ridgeway served as Executive Vice President and senior loan officer of The Peoples National Bank. Mr. Ridgeway, who has over 40 years of banking experience, began his banking career with South Carolina National Bank in 1969. In 1973, he accepted a job at Southern Bank and Trust Company (now Wachovia) in Greenville and served there in various capacities for over 10 years. In 1983, he began the commercial banking function at American Federal Savings Bank, also in Greenville, and remained there until 1986 when The Peoples National Bank was organized. Mr. Ridgeway has been a director of The Peoples National Bank since 1986, and a director of our Company since its formation in 1992. William R. Rowan, III, age 62, retired in 2005 following a 37-year career in banking. Mr. Rowan served as Regional President of BB&T with management responsibility for upstate South Carolina from 1990 until his retirement. Mr. Rowan had been with BB&T since 1987 when it acquired Community Bank of Greenville, South Carolina, where Mr. Rowan had been a banker since 1977. Mr. Rowan serves on the Board of Directors of First Nonprofit Insurance 79 Company, Chicago, Illinois. Mr. Rowan's past community activities include serving on the Boards of the Greenville County Redevelopment Authority, the Greenville Area Development Corporation, the Greenville Chamber of Commerce, St. Francis Bon Secours Hospital Foundation, the Greenville United Way and the Boys' Home of the South. Mr. Rowan has been a director of our Company since January 2006, a director of Peoples National Bank since October 2005, and a director of Bank of Anderson, N. A. since January 2006. D. Gray Suggs, age 48, has been a partner with Suggs Johnson, LLC, Certified Public Accountants and Consultants since 2006. Prior to 2006, Mr. Suggs was a shareholder with Elliott Davis, LLC in Anderson for eight years. He currently serves as a Board Member for Foothills Community Foundation, the Salvation Army, Young Life and Real Champions, and is a member of the Board of Visitors of Clemson University. Mr. Suggs has been a director of Bank of Anderson, N.A. since May 2006, and a director of our Company since March 2007. L. Andrew Westbrook, III, age 46, has served as the President and Chief Operating Officer of our Company since January 2009, and served as Executive Vice President of our Company from December 2006 through 2008. Mr. Westbrook has served as President and Chief Executive Officer of The Peoples National Bank since April 2005, and he also served as President and Chief Executive Officer of Bank of Anderson, N.A. from January 2006 to August 2008. Prior to that time, Mr. Westbrook served as Senior Vice President and City/Area Executive of Branch Bank & Trust in Greenville, South Carolina, from 2002 to 2005, and Senior Vice President and City/Area Executive of BB&T in Spartanburg, South Carolina from 1993 to 2002. Mr. Westbrook serves on the boards of the Blue Ridge Council of the Boy Scouts of America, Spartanburg Methodist College, and the University Center of Greenville. Mr. Westbrook has been a director of The Peoples National Bank since April 2005 and a director of our Company since July 2007. Directors Whose Terms Expire in 2010 Paul C. Aughtry, III, age 59, is a director and founder of Windsor/Aughtry Company, Inc., a real estate development and brokerage firm based in Greenville, South Carolina. Mr. Aughtry has served in these positions since 1988. Mr. Aughtry is also a principal of AHG Hotels, LLC, which is an owner and developer of hotels in the Southeast, and a director and principal of Hospitality America, Inc. of Nashville, Tennessee, a hotel management firm. Mr. Aughtry is currently chairman of Hilton Hotel Corporation's Hampton Inn Advisory Council, and is on Furman University's Advisory Board. Mr. Aughtry also serves on the Boards of the Upstate March of Dimes, the Greenville United Way, and as Chairman of the South Carolina Department of Health and Environmental Control. Mr. Aughtry is a director of The Peoples National Bank, and has been a director of our Company since March 2007. R. David Land, age 55, has been President and Chief Executive Officer of Bountyland Enterprises, Bountyland Petroleum, Inc., and Bountyland Food 80 Services, Inc., since 1978. In addition, Mr. Land is also the owner of EZ4U, LLC and a partner in Woods at Lake Keowee, Shaddowood, LLC, Ruffin Development, LLC and Litchfield Ventures, LLC, all of which are real estate companies. Mr. Land was a founding board member of Seneca National Bank in 1998, and is currently serving as its Chairman of the Board. Mr. Land has been a director of our Company since 2006. Eugene W. Merritt, Jr., age 65, has been co-owner and President of Merritt Brothers, Inc., a commercial landscape company, since 1971. In addition, Mr. Merritt is a co-owner of Merritt Brothers Tree Farm located in Easley, South Carolina. Mr. Merritt is currently serving as a member of the Board of Directors of the AgFirst Farm Credit Bank in Columbia, South Carolina. Mr. Merritt has been a director of The Peoples National Bank since 1992, and a director of our Company since 1993. George B. Nalley, Jr., age 70, has been Managing Partner of Nalley Commercial Properties since 1964, and is also Chairman of Nalley Construction Company, Inc., and Town `N Country Realty of Easley, Inc., each of which is located in Easley, South Carolina. Mr. Nalley has been a director of The Peoples National Bank since 1986, and a director of our Company since 1992. Mr. Nalley is the father of George Weston Nalley. A. J. Thompson, Jr., M.D., age 61, has practiced ophthalmology in Easley, South Carolina since 1981. Dr. Thompson is currently serving as President of Keowee - Toxaway Co., LLC. Dr. Thompson has served on the Board of Visitors of Clemson University, the Boards of the South Carolina Society of Ophthalmology, the Rutland Center for Ethics of Clemson University, the Storm Eye Institute of the Medical University of South Carolina, Birchwood Center for Arts and Folk Life and the Blue Ridge Council of Boy Scouts of America. Dr. Thompson has been a director of The Peoples National Bank since its formation in 1986, and a director of our Company since 1992. Executive Officers R. Riggie Ridgeway is our Chief Executive Officer, L. Andrew Westbrook, III is our President and Chief Operating Officer, and President and Chief Executive Officer of the Peoples National Bank, William B. West is our Executive Vice President and Treasurer, and Robert E. Dye, Jr. is our Senior Vice President, Chief Financial Officer and Secretary. Information about Messrs. Ridgeway, Westbrook, West and Dye, is provided above under "Election of Directors and Directors Whose Terms Will Continue After the 2009 Annual Meeting." 81 Section 16(A) Beneficial Ownership Reporting Compliance As required by Section 16(a) of the Securities Exchange Act of 1934, our directors, executive officers and certain individuals are required to report periodically their ownership of our common stock and any changes in ownership to the Securities and Exchange Commission. Based on a review of Section 16(a) reports available to us and written representations of persons subject to Section 16(a), it appears that all such reports for these persons were filed in a timely fashion during 2008. Code of Ethics The Company has adopted a code of ethics that applies to the Company's principal executive officer, principal financial officer, principal accounting officer, controller, or persons serving in equivalent positions regardless of whether they are designated executive officers. The Company will provide a copy of the Code of Ethics to any person, without charge, upon written request to the Corporate Secretary, Peoples Bancorporation, Inc., 1818 East Main Street, Easley, South Carolina 29640. Audit Committee Financial Expert The Company's board of directors has determined that the Company does not have an "audit committee financial expert," as that term is defined by Item 407(d)(5) of Regulation S-K promulgated by the Securities and Exchange Commission, serving on its audit committee. The Company's audit committee is a committee of directors who are elected by the shareholders and who are independent of the Company and its management. After reviewing the experience and training of all of the Company's independent directors, the board of directors has concluded that no independent director meets the SEC's very demanding definition. Therefore, it would be necessary to find a qualified individual willing to serve as both a director and member of the audit committee and have that person elected by the shareholders in order to have an "audit committee financial expert" serving on the Company's audit committee. The Company's audit committee is, however, authorized to use consultants to provide financial accounting expertise in any instance where members of the committee believe such assistance would be useful. Accordingly, the Company does not believe that it needs to have an "audit committee financial expert" on its audit committee. ITEM 11. EXECUTIVE COMPENSATION Overview of Executive Compensation Our Compensation Committee has developed and implemented a formalized salary administration program for all our personnel, including our executive officers. Elements of compensation for executive officers include a base salary, insurance and other related benefits, pension benefits, and, if performance goals are met, may include incentive cash awards, bonuses, and stock options. The Committee's objectives in setting, and reasons for paying, each element of executive compensation are: 82 o to attract, motivate and retain our key employees; o to maintain a base salary structure that is competitive in our marketplace; o to link annual incentive cash awards with specific profitability and performance goals; and o to provide long-term incentive awards in the form of stock options that couple management ownership with shareholder value. The Compensation Committee's philosophy is designed to reward our individual executive officers both for their personal performance and for performance of our Company with respect to growth in assets and earnings, expansion and increases in shareholder value. The Committee makes its decisions about allocations between long-term and current compensation, allocations between cash and non-cash compensation, and allocations among various forms of compensation, in its discretion based on the Committee's subjective assessment of how these allocations will best meet the Company's overall compensation goals outlined above. Each element of compensation has a specific purpose related to the Company's overall compensation objectives. For instance, base salaries are primarily designed to be competitive in the marketplace and to attract and retain key employees. Cash incentive awards are designed to align the employee's annual incentive compensation with the current stated financial objectives of the Company. Stock options provide very long-term incentives, in that they only have value to the employee if the Company's stock value increases over time. Vesting schedules and certain other elements of compensation, such as salary continuation plans for executive officers, are designed to provide incentives for our officers to remain in the employ of the Company. Certainly compensation issues have come to the forefront during the recent financial crises and economic downturn and created significant stress to any compensation structure. With limited visibility going forward, the Compensation Committee is committed to being responsive to the rapidly changing compensation arena as it reveals itself. The Committee's guiding principle will remain the creation of a Compensation Plan that will continue to attract and retain and properly reward exceptional talent based on their individual and collective performance as it directly relates to shareholder value. 83 Summary of Executive Officer Compensation The following table provides summary information for the years ended December 31, 2008 and 2007 concerning compensation awarded to, earned by, paid to or on behalf of, our Chief Executive Officer, and our two next most highly compensated executive officers whose total compensation in 2008 exceeded $100,000. Summary Compensation Table
Name Year Salary Bonus Option Non- Nonquali- All Total and ($)(1) (2) Awards Equity fied Other ($) Principal ($)(3) Incentive Deferred Compen- Position Plan Compensa- sation Compen- tion ($) sation Earnings (4) ($) ------------------ ---- -------- ------ ------- ------- --------- ---------- -------- R. Riggie Ridgeway 2008 $294,789 $ 0 $ 0 $ 0 $ 0 $76,490(5) $371,279 Chief Executive Officer 2007 $294,668 $ 0 $ 0 $25,638 $ 0 $54,026 $374,332 William B. West 2008 $192,318 $ 0 $ 0 $ 0 $ 0 $34,285(6) $226,603 Executive Vice President 2007 $187,917 $ 0 $ 0 $16,095 $ 0 $18,257 $222,269 L. Andrew Westbrook, III 2008 $241,750 $ 0 $ 8,181 $ 0 $ 0 $47,955(7) $297,886 President and Chief 2007 $220,250 $ 0 $10,347 $18,444 $ 0 $31,002 $280,043 Operating Officer
(1) Includes amounts deferred and contributed to the 401(k) Plan by the named officer. (2) No cash bonuses were paid in 2008 or 2007. (3) Options become exercisable at the time designated in the agreement under which they are granted, and are exercisable for a term not to exceed ten years after the date granted. Options are fully vested after five years from the date granted. The assumptions made in valuation of stock option awards are set forth in Note 16 to our audited financial statements for the year ended December 31, 2008, which are included in our Form 10-K for the year ended December 31, 2008 and in our 2008 Annual Report to Shareholders. The amounts shown in this column are the dollar amounts recognized for financial statement reporting purposes with respect to the fiscal year in accordance with Financial Accounting Standard 123R, and do not represent dollar amounts paid to the executives. (4) Payments under incentive cash compensation plan approved by the Compensation Committee and the Board of Directors based on the partial attainment of 2007 profitability goals at the Company level. In 2007, all officers, including the chief executive officer and all other executive officers of the Company and its subsidiaries, participated in the plan, which awarded at 8.7 percent of each executive officer's 2007 starting base salary level. No incentive cash awards were made in 2008. (5) Includes director fees of $14,900; our contributions to the 401(k) Plan of $9,200; medical and dental insurance premiums of $5,227; and imputed income from term life insurance of $41,439. Also includes fees paid for country/eating clubs, costs paid for spouse attending conventions, the use of a Company-owned vehicle, and cellular phone service, which did not exceed $10,000 in the aggregate. (6) Includes director fees of $3,500; our contributions to the 401(k) Plan of $8,339; medical and dental insurance premiums of $5,227; and imputed income from term life insurance of $11,905. Also includes fees paid for country/eating clubs, costs paid for spouse attending conventions, the use of a Company-owned vehicle, and cellular phone service, which did not exceed $10,000 in the aggregate. (7) Includes director fees of $18,900; our contributions to the 401(k) Plan of $9,200; medical and dental insurance premiums of $5,227; and imputed income from term life insurance of $4,618. Also includes fees paid for country/eating clubs, costs paid for spouse attending conventions, the use of a Company-owned vehicle, and cellular phone service, which did not exceed $10,000 in the aggregate. 84 Outstanding Equity Awards at 2008 Fiscal Year-End The following table provides information about stock options held by our executive officers at the end of 2008. We have not made any other equity-based awards to our executives. Option Awards Name Number Number Option Option of of Exercise Expiration Securities Securities Price Date Underlying Underlying ($) Unexercised Unexercised Options Options (#) (#) Exercisable Unexercisable ------------------ ----------- ------------ ------- -------- R. Riggie Ridgeway 0 0 0 N/A William B. West 0 0 0 N/A L. Andrew 3,032 2,480 $10.25 04/01/16 Westbrook, III (1) 2,354 1,926 $10.43 09/29/16 2,569 3,853 $10.48 01/02/17 (1) Mr. Westbrook's options were granted on April 1, 2006, September 29, 2006 and January 2, 2007. The options vest over a five year period: 25% vest upon grant and an additional 15% vest on the anniversary of the grant each year thereafter. Six months must elapse between the date of grant and the date of sale of common stock acquired on exercise of the options. The options are exercisable for a period of ten years. Noncompetition, Severance and Employment Agreements On February 23, 2005, we entered into Noncompetition, Severance and Employment Agreements with each of Messrs. Ridgeway and West, and on April 8, 2005, we entered into a Noncompetition, Severance and Employment Agreement with Mr. Westbrook. The term of each of the agreements was a rolling three-year period commencing on the date of each agreement, extending each day for an additional day, unless notice were given providing that the agreement would cease to extend automatically. Upon such notice, the term of the agreement would be three years from the date of the notice, unless the executive's employment were earlier terminated pursuant to the terms of the agreement. On August 1, 2008, the Board of Directors provided the required notice to each of Messrs. Ridgeway, West, and Westbrook that each of their agreements would, as of that date, cease automatically to extend, and, accordingly, each agreement would terminate on August 2, 2011. The Board of Directors also offered to replace each of the existing agreements with another agreement that provided for a one-year term that could be extended each year for an additional year at the discretion of the Board, and provided somewhat different benefits from those provided by the original agreements. Mr. Ridgeway declined the offer of a substitute agreement, and accordingly he remains subject to his existing agreement, which will terminate August 2, 2011, unless his employment is otherwise terminated earlier pursuant to the terms of the agreement. 85 Messrs. West and Westbrook accepted the offer of substitute employment agreements, and on September 2, 2008, we entered into a substitute agreement with Mr. West, and The Peoples National Bank entered into a substitute agreement with Mr. Westbrook, and each of their Noncompetition, Severance and Employment Agreements, dated as of February 23, 2005, and April 8, 2005, respectively, was terminated. Agreement with Mr. Ridgeway Mr. Ridgeway's agreement provides for a base salary of $275,000 per year, which may be adjusted by the Compensation Committee of our Board of Directors from time to time in its discretion, payment of annual incentive bonuses determined in accordance with the terms of any incentive plans adopted by the Board, stock options, an automobile, country club dues, and any other employee benefits we generally provide to our most highly ranking executives for so long as we provide such benefits. We may terminate Mr. Ridgeway's employment under the agreement for cause or as a result of disability, in which cases we will have no further obligations to make payments under the agreement. "Cause" is defined to include: (a) willful and continued failure to implement or follow the directives, policies or procedures of the Board, willful violation of any state or federal law or regulation to which we are subject, gross malfeasance of duty, conduct grossly inappropriate to Mr. Ridgeway's office, or willful violation of the agreement which is demonstrably likely to lead to material injury to us; (b) any act that resulted or was intended to result in direct or indirect gain to or personal enrichment of Mr. Ridgeway at our direct or indirect expense; (c) any act that constitutes fraud, dishonesty, moral turpitude, gross negligence, or intentional damage to our property or business; (d) conviction (from which no appeal may be or is timely taken) of a felony; or (e) suspension or removal from office by federal or state banking regulatory authorities acting under lawful authority pursuant to provisions of federal or state law or regulation which may be in effect from time to time. In the case of clauses (a) and (b) above, however, such conduct shall not constitute cause unless we have given Mr. Ridgeway written notice specifically setting forth the reasons the Board believes Mr. Ridgeway's conduct meets the criteria, provided him the opportunity to be heard in person by the Board, and after such hearing, two-thirds of the Board (excluding Mr. Ridgeway) adopts a resolution in good faith evidencing the termination. Additionally, such conduct also will not constitute cause if Mr. Ridgeway in good faith believed the conduct was in, or not opposed to, the interests of the Company, and was not intended to, and did not, result in his direct or indirect gain or personal enrichment. 86 The agreement also provides that we may terminate Mr. Ridgeway other than for cause or for disability, but we must make payments to him under the agreement if we do so. If we terminate Mr. Ridgeway other than for cause or for disability and there has been a change in control, we must pay him immediately upon termination the full amount of compensation and benefits that would otherwise be payable under the agreement over the three years following the termination. If we terminate Mr. Ridgeway other than for cause or for disability in the absence of a change of control, we must pay him, as if he were still employed by us, the compensation and benefits that would otherwise be payable under the agreement for the remaining term of the agreement. The agreement defines "change of control" as any of the following: (a) an acquisition (other than directly from us) of any of our voting securities by any person immediately after which the person has beneficial ownership of 50% or more of the combined voting power of our then outstanding voting securities (however, such an acquisition by us or by certain entities controlled by us, or an acquisition in connection with a merger or similar transaction subsequent to which the persons who were our shareholders immediately prior to the transaction still own more than 50% of the voting power of the surviving entity in substantially the same proportion as their ownership immediately prior to the transaction and subsequent to which the persons who were members of our Board of Directors immediately prior to the transaction continue to constitute at least two-thirds of our Board after the transaction, will not be deemed to be a change of control); (b) the individuals who were members of our Board of Directors as of the date of the agreement, or persons subsequently elected by a vote of at least two-thirds of those directors, cease for any reason to constitute at least two-thirds of our Board; (c) approval by our shareholders of a merger, consolidation or reorganization, unless the persons who were our shareholders immediately prior to the transaction still own more than 50% of the voting power of the surviving entity after the transaction in substantially the same proportion as their ownership immediately prior to the transaction and the persons who were members of our Board of Directors immediately prior to the transaction continue to constitute at least two-thirds of our Board after the transaction; (d) approval by our shareholders of a complete liquidation or dissolution of our Company; (e) approval by our shareholders of an agreement for the sale or other disposition of all or substantially all of our assets (other than to one of our subsidiaries); or (f) the occurrence of any other event or circumstance that our Board determines affects our control. The agreement further provides that, if Mr. Ridgeway's employment is terminated prior to a change of control and he reasonably demonstrates that termination was at the request of a third party who indicated an intention or took steps reasonably calculated to effect a change of control and who actually effectuated a change of control, or that termination otherwise occurred in connection with, or in anticipation of, a change of control that actually occurred, then the date of the change of control with respect to the executive will mean the date immediately prior to the date of termination of his employment. Under the agreement, Mr. Ridgeway also has the right to terminate his employment after a change of control and we would be required to make payments to him. If he terminates his employment and such termination constitutes an involuntary termination, we must pay him immediately upon termination the full amount of compensation and benefits that would otherwise be payable under the agreement over the three years following the termination. If he terminates his employment and such termination constitutes a voluntary termination, we must pay him immediately upon termination the full amount of compensation and benefits that would otherwise be payable under the agreement for one year following the date of his voluntary termination. If he terminates his employment and the termination does not constitute an involuntary termination or a voluntary termination, we will have no further obligations to make payments under the agreement. 87 Under the agreement, "involuntary termination" means the termination of employment by Mr. Ridgeway within one year following a change in control which is due to: (i) a material change of his responsibilities, position, office, title, reporting relationships or working conditions, authority or duties; (ii) a material change in the terms (including the rolling three-year termination date) of the agreement; (iii) a material reduction in his compensation or benefits; (iv) a forced relocation outside the Anderson/Easley/Greenville/Spartanburg metropolitan area; (v) a significant increase in his travel requirements; (vi) our insolvency; or (vii) our breach of any material provision of the agreement. We have 30 days after written notice is given to us to remedy any of these circumstances, and if we do so, no involuntary termination will be deemed to have occurred. Furthermore, if Mr. Ridgeway consents in writing to any of the events listed in (i) through (vii) above, or if he has not objected in writing to any of such events within three months after occurrence, such event or events will not constitute the basis for treating any termination of his employment as an involuntary termination. Under the agreements, "voluntary termination" means the termination by Mr. Ridgeway of his employment within one year following a change in control which is not the result of any of the events that would be deemed an involuntary termination. If Mr. Ridgeway dies while employed by us, we will have no further obligations to make payments under the agreement. If we are required to make severance payments under the agreement, (i) the amount of annual salary will be deemed to be the annualized salary being paid immediately prior to the termination, (ii) the annual amount of unfixed compensation (such as a bonus) will be deemed to be equal to the average of such compensation over the three year period immediately prior to the termination, and (iii) the annual amount of benefits will be deemed to be the sum of our cost of providing the benefits to Mr. Ridgeway for the twelve month period ending immediately prior to the termination. If we terminate Mr. Ridgeway other than for cause, or in the event of a voluntary or involuntary termination as described above, or in the event of his death while in our employment, all of his rights to awards of share grants or unexpired options will be deemed to have vested and become immediately exercisable, and will be released from all conditions and restrictions on transfer, except for restrictions on transfer pursuant to the Securities Act of 1933, as amended. If any payment provided for in the agreement would, if paid, constitute a "golden parachute payment" as defined in 12 C.F.R. ss. 359.1(f) as in effect on the date of the agreement, our obligation to make such payment will be subject to an additional condition that the circumstances which cause the payment to be a "golden parachute payment" shall have ceased to exist, but such payment will become payable in full at such time as the condition is met, together with interest at the prime rate, compounded annually, from the date such payment would have been due had it not been a "golden parachute payment" until paid. 88 If we determine, on the date of a change in control, that the payments provided for in the agreement would constitute "excess parachute payments," under Section 280G of the Internal Revenue Code of 1986, as amended, then the compensation we would be required to pay under the agreement will be reduced to the point at which such compensation will not qualify as an "excess parachute payment." Other provisions of the agreement require Mr. Ridgeway to maintain the confidentiality of information obtained from us during employment with us and for a period of 24 months after termination of his employment with us. The agreement also prohibits Mr. Ridgeway from competing with us or soliciting our customers or employees for a period of one year after termination of employment by us for cause or by him in the absence of a change of control. There are no limitations on competition or solicitation of customers or employees if Mr. Ridgeway's employment is terminated following a change in control, at the request of a third party in anticipation of a change of control that actually occurs, or otherwise with or in anticipation of, a change of control that actually occurs. Agreements with Messrs. West and Westbrook The employment agreements with Messrs. West and Westbrook terminate December 31, 2009, but provide for our Board of Directors (with respect to Mr. West) or our Bank (with respect to Mr. Westbrook) to meet annually in May of each year (beginning in 2009) to determine whether to extend the agreement for an additional year. Mr. West's annual base salary of $193,800 and Mr. Westbrook's annual base salary of $248,000, as provided under their respective employment agreements, are subject to potential annual increases at the discretion of the respective boards of directors. Messrs. West and Westbrook are also eligible for annual performance based cash compensation and stock-based awards as determined by the respective boards of directors or pursuant to applicable incentive or benefit plans adopted by us. Additionally, they will each be provided with an automobile and country club dues not to exceed $400 monthly, and will be eligible to receive any other employee benefits generally provided by us or our Bank to our respective most highly ranking executives. Messrs. West and Westbrook are also eligible to receive a separate Salary Continuation Agreement that provides nonqualified deferred compensation benefits. Under their respective employment agreements, Messrs. West and Westbrook may be terminated for cause or as a result of disability for a period of 180 days, in which cases we will have no further obligations to make payments past the date of such termination, except that in the case of a termination as a result of disability, we must additionally pay the executive a bonus equal to a pro rata portion of his previous year's bonus. "Cause" is defined to include: (a) the commission of a willful or grossly negligent act or omission which is intended to cause, actually causes, or is reasonably likely to cause us material harm; (b) indictment for the commission or perpetration of any felony or any crime involving dishonesty, moral turpitude or fraud; (c) material breach of this agreement; (d) the receipt by us of notice that a regulatory agency intends to institute regulatory action of any kind against the executive or us, provided that it is determined by the respective boards of directors in good faith that the executive's actions contributed to the initiation of such regulatory action or that the termination of the executive would materially assist us in complying 89 with the action or in avoiding adverse effects from such action; (e) the exhibition of behavior within the scope of employment that is materially disruptive to our business operations; or (f) failure to devote full business time and attention to employment duties. We may also terminate Messrs. West's and Westbrook's employment without cause, but we must make payments to them if we do so. In the case of a termination without cause of either Mr. West or Mr. Westbrook, the terminated executive will be entitled to receive severance compensation for 24 months in an amount equal to 100% of his then current monthly base salary, together with a bonus equal to a pro rata portion of his previous year's bonus. If either executive dies while employed by us, we will be obligated to pay his estate any sums due and owing through the end of the month during which the death occurred. Additionally, we must pay the executive's estate a bonus equal to a pro rata portion of the executive's previous year's bonus. Under the agreements, Messrs. West and Westbrook also have the right to terminate their employment at any time upon written notice to us. In such event, we will only be obligated to pay any amounts due and owing up to and including the date of such termination. The employment agreements with Messrs. West and Westbrook also provide for change in control benefits, regardless of whether the executive remains employed by us or our successor following a change in control. In the event of a change in control (as defined by Treasury Regulation Section 1.409A-3(i)(5), the executive will be entitled to cash compensation equal to three times his then current annual base salary as well as a bonus equal to a pro rata portion of his previous year's bonus. Additionally, any outstanding incentive awards or stock options shall become fully vested. At the time of any termination of employment for any reason, we will enter into a Severance Agreement and Release with the terminated executive acknowledging any remaining obligations. This agreement will also discharge both us and the executive from any claims or obligations arising out of or in connection with the executive's employment, including the circumstances surrounding the termination. If the executive is suspended or temporarily prohibited from conducting our affairs by any action by any applicable regulatory or other legal authority and is not terminated from employment with us, our obligations under the applicable employment agreement will be suspended as of the earlier of the date of such suspension or the date on which the executive was provided with notice of any suspension action. If the charges underlying any suspension action are thereafter dismissed, we will reinstate any obligations to the executive which were suspended and will be obligated to pay the executive all compensation withheld during the period of suspension. If we determine that any payments provided for in the agreement would constitute "excess parachute payments" under Section 280G of the Internal Revenue Code of 1986, as amended, then the compensation we would be required to pay under the agreement will be reduced to an amount the value of which is $1.00 90 less than the maximum amount that could be paid to the executive without the compensation being treated as an "excess parachute payment." Other provisions of the agreements with Messrs. West and Westbrook require them to maintain the confidentiality of information obtained from us during employment with us (including trade secrets) and for a period of 24 months after termination of their employment with us. The agreements also prohibit the executives from competing with us or soliciting our customers or employees for a period of 24 months after termination of employment with us. In the event that we terminate either executive without cause, the terminated executive will have the option to reduce the noncompetition and nonsolicitation provisions in the agreement to any period not less than 12 months, but will be required to accept a pro rata reduction in any severance benefits payable by us for each month the restrictive period is decreased. The foregoing is merely a summary of certain provisions of the employment agreements, and is qualified in its entirety by reference to such agreements, which have been filed with the Securities and Exchange Commission. This summary does not create any rights in any person. Retirement Benefits Salary Continuation Agreements We have entered into Salary Continuation Agreements with Messrs. Ridgeway, West, Westbrook, and Dye. The agreements provide for payments of benefits to Messrs. Ridgeway, West, Westbrook and Dye commencing at their retirements at age 65, or earlier to the respective executive's beneficiary in the event of the executive's death. We have purchased universal life insurance policies on the lives of Messrs. Ridgeway, West, Westbrook and Dye, which are reflected in our balance sheet as other assets. Although we plan to use these policies to fund our obligations under the agreements, our obligations are independent of the policies. Agreement with Mr. Ridgeway The agreement with Mr. Ridgeway provides that if his employment is terminated at or after he reaches age 65, we will pay him an annual retirement benefit of 35% of his final salary. This benefit is payable in monthly installments beginning in the month after his retirement and continuing for the greater of his life or 239 months. This amount is currently estimated to be $116,019 per year at Mr. Ridgeway's projected normal retirement date. In the event that Mr. Ridgeway's employment with us is terminated prior to his retirement for any reason other than death or disability or for cause, the agreement provides that he will be paid a retirement benefit beginning at age 65 of $103,141. In the event that Mr. Ridgeway's employment with us is terminated prior to age 65 due to disability, in lieu of the benefits set forth above, he will be paid an annual benefit after he reaches age 65 of $116,019. 91 In the event that Mr. Ridgeway dies while he is employed by us, his agreement provides that his beneficiary shall receive an amount of $609,439. This amount would be paid in a lump sum. Agreements with Messrs. West and Westbrook The agreements with each of Messrs. West and Westbrook provide that if their employment with us is terminated at the later of age 65 or upon "separation of service" (as defined in Sections 414(b) and 414(c) the Internal Revenue Code), we will pay them an annual benefit of 15% of their final pay. The agreements define "final pay" as the executive's highest annualized base salary (before reduction for compensation deferred pursuant to all qualified, non-qualified, and Internal Revenue Code Section 125 plans) from the three years prior to separation from service, including the year separation from service occurs. This benefit is to be distributed in 12 equal monthly installments for a period of 15 years, commencing on the first day of the month following retirement. We refer to this benefit as the "normal retirement benefit." These annual amounts are currently estimated to be $38,254 and $78,375 for Messrs. West and Westbrook, respectively, at each of their projected normal retirement dates. The agreements with each of Messrs. West and Westbrook provide that if their employment with us is terminated prior to age 65, except following a change of control or due to death, disability or termination for cause, we are required to pay them the vested percentage, determined as of the end of the plan year preceding separation from service, of the normal retirement benefit referred to in the paragraph above pursuant to a vesting schedule. For Mr. West, the vesting schedule ranges from 3.98% for the plan year ending September 30, 2008 to 100% at or after January 31, 2015. For Mr. Westbrook, the vesting schedule ranges from 2.29% for the plan year ending September 30, 2008 to 100% at or after May 27, 2027. This benefit is to be distributed in 12 equal monthly installments for a period of 15 years, commencing on the first day of the month following the executive's reaching age 65. The agreements with each of Messrs. West and Westbrook provide that if their employment with us is terminated prior to age 65 due to disability, we are required to pay them the vested percentage, determined as of the end of the plan year preceding separation from service, of the normal retirement benefit pursuant to a vesting schedule. For Mr. West, the vesting schedule ranges from 19.91% for the plan year ending September 30, 2008 to 100% at or after January 31, 2015. For Mr. Westbrook, the vesting schedule ranges from 11.43% for the plan year ending September 30, 2008 to 100% at or after May 27, 2027. This benefit is to be distributed in 12 equal monthly installments for a period of 15 years, commencing on the first day of the month following the executive's reaching age 65. The agreements with each of Messrs. West and Westbrook provide that if there is a separation of service following a change in control, we are required to pay them 100% of 15% of final pay (as defined above) increased by 4% annually until they reach age 65. This benefit is to be distributed in 12 equal monthly installments for a period of 15 years, commencing on the first day of the month following the executive's reaching age 65. 92 The agreements define "change of control" as the occurrence of a "change in ownership" or a "change in effective control" of our Company or any affiliated corporation, as described in Treasury Regulations Section 1.409A-3(g)(5) (we refer to these terms collectively as "change in control events"). To qualify as a change in control, the occurrence of the change in control event must be objectively determinable. To constitute a change in control, the change in control event must relate to (i) the corporation for which the executive is performing services at the time of the change in control; (ii) the corporation that is liable for the payment of the deferred compensation; or (iii) a corporation that is a majority shareholder of a corporation identified in subparagraph (i) or (ii) above, or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in subparagraph (i) or (ii) above. A "change in ownership" of a corporation occurs on the date that any one person, or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. However, if any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in ownership of the corporation or to cause a change in the effective control of the corporation. Even if a corporation has not undergone a change in ownership, a "change in effective control" of a corporation occurs on the date that either: (i) any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing 35 percent or more of the total voting power of the stock of such corporation; or (ii) a majority of members of the corporation's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation's board of directors prior to the date of the appointment or election. The agreements provide that commencement of payments will be deferred for six months if failure to do so would cause a violation of Internal Revenue Code Section 409A. In such event, any distribution which would otherwise be paid to the executive within the first six months following the separation from service will be accumulated and paid to the executive in a lump sum the first day of the seventh month following the separation from service. All subsequent distributions will be paid in the manner specified. The agreements provide that, if either of Messrs. West or Westbrook dies while in active service to us, we are required to pay his designated beneficiary 15% of final pay (as defined above) increased by 4% annually until they reach age 65. This payment is to be made as a lump sum present value of the 93 projected stream of payments at normal retirement within 60 days after we receive a copy of the death certificate. If the executive dies after any benefit distributions have commenced under the agreement, but before receiving all such distributions, we are required to pay his beneficiary the remaining benefits at the same time and in the same amounts that would have been distributed to the executive had the executive survived. If the executive is entitled to benefit distributions under the agreement, but dies prior to the commencement of benefit distributions, we are required to pay his beneficiary the same benefits that the executive was entitled to prior to death except that the benefit distributions will commence within 30 days following our receipt of the death certificate. We are not required to make any payments to Messrs. West or Westbrook if we terminate their employment for cause or if they are subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act. The agreements also provide that Messrs. West and Westbrook will forfeit their payments under the agreements if, while they are employed by us or while they are receiving payments under the agreements, they, directly or indirectly, own, manage, operate, control, are employed by, consult with, participate in, or are connected in any manner with the ownership, employment, management, operation, consulting or control of any financial services institution that competes with us. The foregoing is merely a summary of certain provisions of the Salary Continuation Agreements and is qualified in its entirety by reference to the agreements, which have been filed with the Securities and Exchange Commission. Death Benefits - Split Dollar Life Insurance We provide Mr. Ridgeway with a life insurance policy and have entered into a Split Dollar Agreement with him relating thereto. We are the owner of the policy and pay all of the premiums on the policy. Upon Mr. Ridgeway's death, the agreement requires payment to us of proceeds equal to the greater of (a) the cash surrender value of the policy, or (b) the aggregate premiums we have paid on the policy, less any indebtedness to the insurer. Any remaining amount of proceeds is required to be paid to Mr. Ridgeway's designated beneficiary or any assignee, but only if he was employed by us at normal retirement age. The agreement defines "normal retirement age" as the earliest of Mr. Ridgeway's 65th birthday, the date of termination of his employment as a result of disability, or the date of a change of control. The agreement defines "change of control" as any of the following: (a) direct or indirect acquisition by any person within any 12 month period of securities representing an aggregate of 20% percent or more of the combined voting power of our outstanding securities; (b) during any period of two consecutive years, individuals who at the beginning of such period constitute our Board, cease for any reason to constitute at least a majority of our Board, 94 unless the election of each new director was approved in advance by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; (c) consummation of (i) a merger, consolidation or other business combination of our Company unless our outstanding common stock immediately prior to the transaction would continue to represent at least 67% of the outstanding common stock of the surviving entity immediately following such transaction; or (ii) a plan of complete liquidation of our Company or an agreement for our sale or disposition of all or substantially all of our assets; or (d) the occurrence of any other event or circumstance which is not covered by (a) through (c) above which the Board of Directors of the Company determines affects control of our Company and, in order to implement the purposes of the Split-Dollar Agreement, adopts a resolution that such event or circumstances constitutes a change of control for the purposes of the agreement. We may not sell, surrender or terminate the policy unless we first offer Mr. Ridgeway the right to purchase it for an amount equal to the cash surrender value. After termination of Mr. Ridgeway's employment at normal retirement age, we are required to maintain the policy in full force and effect unless we replace it with comparable coverage. We impute income to Mr. Ridgeway in an amount equal to the current term rate for his age multiplied by the aggregate death benefit payable to his beneficiary. The "current term rate" is defined as the minimum amount required to be imputed under Revenue Rulings 64-328 and 66-110, or any subsequent applicable authority. The foregoing is merely a summary of the Split Dollar Agreement, and is qualified in its entirety by reference to the agreement itself, which is filed with the Securities and Exchange Commission. This summary does not create any rights in any person. 1993 Incentive Stock Option Plan The 1993 Peoples Bancorporation, Inc. Incentive Stock Option Plan (the "1993 Plan") reserved 890,968 shares (as adjusted for stock dividends and stock splits since inception of the plan) for issuance upon exercise of options under the plan, and provided for the grant of options at the discretion of our Board of Directors or a committee designated by the Board to administer the 1993 Plan. The option exercise price was required be at least 100% of the fair market value of the stock on the date the option was granted (or 110% in the case of an option granted to a person who owns more than 10% of the total combined voting power of all classes of stock of the Company), and the options are exercisable by the holder thereof prior to their expiration in accordance with the terms of the holder's Stock Option Agreement and the 1993 Plan. Stock options granted pursuant to the 1993 Plan expire no later than ten years from the date on which they are granted, except in the case of options granted to ten percent shareholders, which expire not later than five years from the date on which they are granted. The 1993 Plan had a ten-year term and has, therefore, terminated. Although options may still be exercised under the 1993 Plan, no further options may be granted under the 1993 Plan. 95 2004 Stock Option Plan The 2004 Stock Option Plan (the "2004 Plan") reserved 355,535 shares (as adjusted for stock splits and stock dividends since inception of the plan) for issuance pursuant to the exercise of options under the 2004 Plan. The plan is administered by our Board of Directors or a committee appointed by the Board. Options awarded under the plan may be "incentive stock options" within the meaning of the Internal Revenue Code or non-qualified options. Options may be granted pursuant to the 2004 Plan to persons who are directors, officers or key employees of the Company or any subsidiary (including officers who are employees) at the time of grant. Our Board of Directors or the committee selects the persons to receive grants under the 2004 Plan and determines the number of shares covered by options granted under the plan. All stock options will have such exercise prices as may be determined by the Board of Directors or the committee at the time of grant, but such prices may not be less than the fair market value of our common stock (as determined in accordance with the plan) at the date of grant. The Board of Directors or the committee may set other terms for the exercise of the options but may not grant to any one holder more than $100,000 of incentive stock options (based on the fair market value of the optioned shares on the date of the grant of the option) which first become exercisable in any calendar year. No options may be exercised after ten years from the date of grant, and options may not be transferred except by will or the laws of descent and distribution. Incentive stock options may be exercised only while the optionee is an employee of our Company, within three months after the date of termination of employment, or within twelve months of death or disability, but only to the extent the option has not expired. The number of shares reserved for issuance under the 2004 Plan, the number of shares covered by outstanding options and the exercise price of options will be adjusted in the event of changes in the number of outstanding shares of common stock effected without our receipt of consideration. All outstanding options will become immediately exercisable in the event of a change of control, or imminent change of control, of our Company (both as defined in the plan). In the event of an extraordinary corporate action (as described in the plan), subject to any required shareholder approval, the Board of Directors or the committee, in its sole discretion, may also cancel and pay for outstanding options. The Board or committee also has the power to accelerate the exercise date of outstanding options at any time. The Board of Directors may alter, suspend or discontinue the plan, but may not increase (except as discussed above) the maximum number of shares reserved for issuance under the plan, materially increase benefits to participants under the plan, or materially modify the eligibility requirements under the 2004 Plan without shareholder approval or ratification. The 2004 Stock Option Plan will terminate on April 6, 2014, and no options will be granted thereunder after that date. The foregoing summaries of the 1993 Stock Option Plan and the 2004 Stock Option Plan are qualified in their entirety by reference to the plans, which have been filed with the Securities and Exchange Commission as exhibits to registration statements on Forms S-8 in 2004. 96 Compensation of Directors Directors' Fees We paid director fees of $500 per quarterly board meeting in 2008, with the Chairman of the Board receiving an additional $500 per quarterly Board meeting. We also paid committee fees of $250 per meeting in 2008. We paid the chair of each committee an additional $100 for each meeting. Most of our directors also served as a director of one of our Banks in 2008. The Peoples National Bank paid director fees of $950 per meeting in 2008, with the Chairman receiving an additional $475 per meeting; Bank of Anderson, N. A. paid director fees of $500 per meeting in 2008, with the Chairman receiving an extra $250 per meeting; and Seneca National Bank paid director fees of $300 per meeting in 2008 with the Chairman receiving an extra $200 per meeting in 2008. The Peoples National Bank paid committee fees of $200 per meeting in 2008; Bank of Anderson, N. A. paid committee fees of $150 per meeting in 2008; and Seneca National Bank paid committee fees of $100 per meeting in 2008. The chairs of the Banks' committees each receive an additional $100 per committee meeting. Payment of director fees is not contingent upon attendance at regularly scheduled board meetings, but attendance is required for payment in connection with special called board meetings. 97 Information about fees paid to each director in 2008 is set forth in the "Director Compensation" table below. 1997 Non-Employee Director Stock Option Plan The 1997 Non-Employee Director Stock Option Plan (the "1997 Plan") initially reserved 410,479 shares (as adjusted for stock splits and stock dividends since inception of the plan) for issuance upon exercise of options under the 1997 Plan, and provided for the granting to our non-employee directors of options under a non-discretionary formula set forth in the 1997 Plan. The option exercise price of each option was required to be not be less than 100% of the fair market value of the shares of our common stock on the date of grant, and the options are exercisable by the holder thereof prior to their expiration in accordance with the terms of the holder's stock option agreement and the 1997 Plan. Stock options granted pursuant to the 1997 Plan expire no later than ten years from the effective date of the 1997 Plan. The 1997 Plan terminated on April 14, 2007, and no further options may be granted under the plan (though outstanding options may still be exercised until their expiration dates). 2007 Non-Employee Director Stock Option Plan The 2007 Non-Employee Director Stock Option Plan (the "2007 Plan") was approved by our shareholders at the 2007 Annual Meeting. The provisions of the 2007 Plan are substantially the same as the provisions of the 1997 Plan and the plan is, in essence, an extension of the 1997 Plan. The 1997 Plan expired with 88,715 shares (as adjusted for stock dividends since inception of the plan) shares still reserved for grant that could no longer be granted because of expiration of that plan. Accordingly, the Board adopted, and shareholders approved, the new 2007 Plan reserving 88,715 shares (as adjusted for stock dividends since inception of the plan) for issuance upon exercise of options granted under the 2007 Plan. The 2007 Plan is also a formula plan that provides for an annual grant after each annual meeting of shareholders of 500 shares to each person who has served as a non-employee director of the Company or its bank subsidiaries during the preceding year, with a maximum grant to any director of 5,000 shares in the aggregate under the 1997 and 2007 Plans. Options granted under the 2007 Plan are exercisable immediately upon grant. The option exercise price of each option must not be less than 100% of the fair market value of the shares of our common stock on the date of grant, and the options are exercisable by the holder thereof prior to their expiration in accordance with the terms of the holder's stock option agreement and the 2007 Plan. Stock options granted pursuant to the 2007 Plan expire no later than ten years from the effective date of the 2007 Plan. Information about individual grants under the plan in 2008 is provided in the table below. 98 2008 Director Compensation The table below provides information about the compensation we paid to each of our non-employee directors in 2008. Information about compensation we paid to our executive officers who are also directors, including compensation paid to them in their capacity as directors, is provided in the Summary Compensation Table above.
Name Fees Stock Option Non-Equity Nonqualified All Other Total Earned Awards Awards Incentive Plan Deferred Compensation ($) or ($) (2) Compensation Compensation Paid in ($) Earnings Cash (1) -------------------- ------- ------- ------ ------------- ------------- ------------- ------- Paul C. Aughtry, III $16,800 0 $920 0 0 0 $17,720 Charles E. Dalton $27,400 0 0 0 0 0 $27,400 W. Rutledge Galloway $24,750 0 0 0 0 0 $24,750 R. David Land $13,950 0 $920 0 0 0 $14,870 E. Smyth McKissick, III $14,400 0 0 0 0 0 $14,400 Eugene W. Merritt, Jr. $15,150 0 0 0 0 0 $15,150 George B. Nalley, Jr. $24,450 0 0 0 0 0 $24,450 George Weston Nalley $20,050 0 $920 0 0 0 $20,970 Timothy J. Reed $17,400 0 $920 0 0 0 $18,320 William R. Rowan, III $32,800 0 $920 0 0 0 $33,720 D. Gray Suggs $13,550 0 $920 0 0 0 $14,470 A. J. Thompson, Jr., M.D. $11,600 0 0 0 0 0 $11,600
(1) Includes payment of directors' fees for service on the board of the Company, fees for service as chairman of the board, and fees for service on the boards of our subsidiary banks. Also includes the payment of fees for attendance at meetings of committees of the boards that the director serves on as well as fees for service as chairman of a board committee (2) The assumptions made in valuation of option awards are set forth in Note 16 to the Company's audited financial statements for the year ended December 31, 2008, which are included in our Form 10-K for the year ended December 31, 2008 and in our 2008 Annual Report to Shareholders. The amounts shown in these columns are the dollar amounts recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS 123(R), and do not represent dollar amounts paid to the directors. Mr. Aughtry, Mr. Land, Mr. G. W. Nalley, Mr. Reed, Mr. Rowan and Mr. Suggs were granted options to purchase 500 shares each on May 15, 2008 with a fair value at the time of grant of $1.84 per share, computed in accordance with FAS 123(R). These options granted in 2008 vested immediately. The aggregate number of stock options outstanding at fiscal year-end 2008 for each director is as follows: Mr. Aughtry, 500 shares; Mr. Dalton, 4,318 shares; Mr. Land, 7,177 shares; Mr. McKissick, 4,318 shares; Mr. Merritt, 4,318 shares; Mr. G. W. Nalley, 1,576 shares; Mr. Reed, 500 shares; Mr. Rowan, 1,025 shares; Mr. Suggs, 1,025 shares. 99 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS Security Ownership of Certain Beneficial Owners and Management Five Percent Beneficial Owners The following table shows information as of December 31, 2008 about persons who are known to us to own beneficially more than five percent of our outstanding common stock.
Amount and Nature of Percent of Name and Address Beneficial Ownership Class ---------------- -------------------- ----- Robert E. Dye, Jr. (1) 480,220 6.79% P. O. Box 1989 Easley, South Carolina 29641 Alexander C. Dye (2) 458,832 6.49% P. O. Box 1989 Easley, South Carolina 29641
(1) Includes 221,732 shares owned by Mr. Dye's wife and 21,364 shares held as custodian for Mr. Dye's minor children. (2) Includes 193,486 shares owned by Mr. Dye's wife, 34,483 shares owned jointly with Mr. Dye's wife, and 24,891 shares held as custodian for Mr. Dye's minor children. 100 Beneficial Ownership of Management The following table shows information as of March 24, 2009, about shares of our common stock owned by (i) each of our directors, (ii) each director nominee, (iii) each of our executive officers named in the Summary Compensation Table, and (iv) all of our directors and executive officers as a group.
Amount and Nature Name (and address of 5% of Beneficial Exercisable Percent Beneficial Owner) Ownership Stock Options(1) Of Class(2) -------------------------------------------- -------------------------- ---------------------- ---------------- Paul C. Aughtry, III (3) 58,909 500 0.83% Charles E. Dalton (4) 38,553 4,318 0.54% Robert E. Dye, Jr. (5) 480,220 5,883 6.79% P. O. Box 1989 Easley, South Carolina 29641 W. Rutledge Galloway (6) 172,035 0 2.43% R. David Land 20,942 7,177 0.30% E. Smyth McKissick, III 163,629 4,318 2.31% Eugene W. Merritt, Jr. (7) 54,097 4,318 0.76% George B. Nalley, Jr. (8) 171,811 0 2.43% George Weston Nalley 29,365 1,576 0.42% Timothy J. Reed 5,750 500 0.08% R. Riggie Ridgeway (9) 115,383 0 1.63% William R. Rowan, III 9,747 1,025 0.14% D. Gray Suggs 3,128 1,025 0.04% A. J. Thompson, Jr., M.D. (10) 188,254 0 2.66% William B. West (11) 37,102 0 0.52% L. Andrew Westbrook, III (12) 19,318 7,955 0.27% All Directors and Executive Officers as a 1,568,243 38,595 22.06% Group (16 persons)
Unless otherwise indicated, the named individuals have sole voting and investment power with respect to all shares. (1) Shares represented by these options are also included in the column showing the number of shares of common stock beneficially owned. (2) Pursuant to the rules of the Securities and Exchange Commission, shares of the Company's Common Stock that a beneficial owner has the right to acquire within 60 days pursuant to the exercise of stock options are deemed to be outstanding for purposes of computing the percentage of ownership of the option holder, but not for the purpose of computing the percentage of ownership of any other person. Unless otherwise indicated, the named individual or entity has sole voting and investment power with respect to all shares. 101 (3) Includes 472 shares owned by Mr. Aughtry's wife. (4) Includes 3,657 shares owned jointly with Mr. Dalton's wife. (5) Includes 221,732 shares held by Mr. Dye's wife and 21,364 shares held as custodian for Mr. Dye's minor children. (6) Includes 77,343 shares owned jointly with Mr. Galloway's wife. (7) Includes 14,675 shares owned jointly with Mr. Merritt's wife and 6,869 shares held by Mr. Merritt's wife. (8) Includes 29,452 shares owned by Mr. Nalley's wife and an aggregate of 57,878 shares held in two trusts administered by Mr. Nalley. (9) Includes 22,380 shares held jointly with Mr. Ridgeway's wife. (10) Includes 41,308 shares held by Dr. Thompson's wife and 25,558 shares held by Dr. Thompson's son. (11) Includes 17,364 shares owned jointly with Mr. West's wife. (12) Includes 210 shares owned by Mr. Westbrook's wife and 525 shares hold as custodian for Mr. Westbrook's minor children. Equity Compensation Plan Information The following table sets forth aggregated information as of December 31, 2008 about all of the Company's compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance:
Plan category Number of securities Weighted-average Number of securities to be issued upon exercise price of remaining available for exercise of outstanding options, future issuance outstanding options, warrants and rights under equity compensation warrants and rights plans (excluding securities reflected in column (a)) (a) (b) (c) -------------------- -------------------- ------------------ --------------------- Equity compensation Plans approved by Security holders 146,263 $ 10.56 376,650 Equity compensation Plans not approved By security holders - - - ------- ------- ------- Total 146,263 $ 10.56 376,650 ======= ======= =======
For further information about the Company's plans as set forth in the above table, see Note 16 of the consolidated financial statements set forth in Item 8 of this Form 10-K. 102 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Relationships and Related Transactions Our Banks, in the ordinary course of their business, make loans to, accept deposits from, and provide other banking services to certain of our directors and executive officers, their associates and members of their immediate families. Loans are made on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with persons not affiliated with the Banks, and do not involve more than the normal risk of collectibility or present other unfavorable features. Rates paid on deposit accounts and fees charged for other banking services, and other terms of these transactions, are also the same as those prevailing at the time for comparable transactions with other persons. The Banks expect to continue to enter into transactions in the ordinary course of business on similar terms with directors, officers, principal stockholders, their associates, and members of their immediate families. The aggregate dollar amount of loans outstanding at each of December 31, 2008 and 2007 was $12,231,000 and $11,043,000 respectively. During 2008, $4,331,000 in new loans were made and repayments totaled $3,143,000. None of such loans have been on non-accrual status, 90 days or more past due, or restructured at any time. From time to time, we may also enter into other types of business transactions or arrangements for services with our directors, officers, principal shareholders, or their associates and members of their immediate families. These types of transactions or services might include, among others, construction-related services, legal services, real estate brokerage services, and public relations services. We only enter into such arrangements if we determine that the prices or rates offered are comparable to those available to us from unaffiliated third parties. We do not have written policies or procedures with respect to such transactions. Director Independence Our Board of Directors has determined that none of Messrs. Aughtry, Dalton, Galloway, Land, McKissick, Merritt, G. B. Nalley, G. W. Nalley, Reed, Rowan, Suggs, or Thompson has a relationship which, in the opinion of our Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, and that each such director is independent as defined in The Nasdaq Stock Market, Inc. Marketplace Rules, as modified or supplemented (the "Nasdaq Rules"). As disclosed under "Certain Relationships and Related Transactions" above, each of our independent directors and some of their affiliates have loan, deposit and other banking relationships with our Bank. These relationships are not considered by our Board to compromise their independence. Each member of our Audit, Compensation and Nominating Committees is independent as such term is defined by the Nasdaq Stock Market, Inc. Marketplace Rules. 103 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Fees Paid to Independent Auditors Set forth below is information about fees billed by Elliott Davis, LLC, our independent auditors, for audit services rendered in connection with our consolidated financial statements and reports for the years ended December 31, 2008 and 2007, and for other services rendered during such years, on our behalf, as well as all out-of-pocket expenses incurred in connection with these services, which have been billed to us. Year Ended Year Ended December 31, 2008 December 31, 2007 ----------------- ----------------- Audit Fees $ 82,050 $73,500 Audit-Related Fees 11,945 11,130 Tax Fees 15,550 14,845 All Other Fees - - - - Total $109,545 $99,475 Audit Fees Audit fees include fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim condensed consolidated financial statements included in our quarterly reports, and services that are normally provided by our independent auditor in connection with statutory and regulatory filings or engagements, and attest services, except those not required by statute or regulation. Audit-Related Fees Audit-related fees include fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and that are not reported under "Audit Fees." These services include employee benefit plan audits, attest services that are not required by statute or regulation, and consultations concerning financial accounting and reporting standards. Tax Fees Tax fees include fees for tax compliance/preparation and other tax services. Tax compliance/preparation includes fees billed for professional services related to federal and state tax compliance. Other tax services include fees billed for other miscellaneous tax consulting and planning. All Other Fees All other fees would include fees for all other services other than those reported above. In making its decision to recommend appointment of Elliott Davis, LLC as our independent auditors for the fiscal year ending December 31, 2009, our 104 Audit Committee considered whether services other than audit and audit-related services provided by that firm are compatible with maintaining the independence of Elliott Davis, LLC. Audit Committee Pre-approval of Audit and Permissible Non-Audit Services of Independent Auditors Our Audit Committee pre-approves all audit and permitted non-audit services (including the fees and terms thereof) provided by the independent auditors, subject to possible limited exceptions for non-audit services described in Section 10A of the Securities Exchange Act of 1934, which are approved by the Audit Committee prior to completion of the audit. The Committee may delegate to one or more designated members of the Committee the authority to pre-approve audit and permissible non-audit services, provided such pre-approval decision is presented to the full Committee at its next scheduled meeting. General pre-approval of certain audit, audit-related and tax services is granted by the Committee at the first quarter Committee meeting. The Committee subsequently reviews fees paid. Specific pre-approval is required for all other services. During 2008, all audit and permitted non-audit services were pre-approved by the Committee. 105 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) and (2) Financial Statements and Financial Schedules The following consolidated financial statements and report of independent registered public accounting firm of Peoples Bancorporation, Inc. and subsidiaries are included in Item 8 of this Annual Report on Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets - December 31, 2008 and 2007 Consolidated Statements of Income - Years ended December 31, 2008 and 2007 Consolidated Statements of Cash Flows - Years ended December 31, 2008 and 2007 Consolidated Statements of Shareholders' Equity and Comprehensive Income - Years ended December 31, 2008 and 2007 Notes to Consolidated Financial Statements - December 31, 2008 (a) (3) Listing of Exhibits: Exhibit No. Description of Exhibit 3.1 Articles of Incorporation, as amended (incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 2004 and Registrant's Form 8-K filed January 16, 2009). 3.2 Bylaws, as amended (incorporated by reference to exhibits to Registrant's Current Report on Form 8-K filed November 24, 2008). 4.1 Specimen Common Stock Certificate (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-4 (Number 33-46649)). 10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121158)). 10.3 Peoples Bancorporation, Inc. 1997 Non-Employee Directors Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121157)). 10.4 Peoples Bancorporation, Inc. 2004 Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121156)). 106 10.5 Peoples Bancorporation, Inc. 2007 Non-Employee Directors Stock Option Plan (incorporated by reference to Registrant's Form 10-Q for the quarter ended June 30, 2007). 10.6 Non-competition, Severance and Employment Agreement, dated February 23, 2005 between the Company and R. Riggie Ridgeway (incorporated by reference to Registrant's Form 10-K for the year ended December 31, 2004 (the "2004 10-K")). 10.7 Employment Agreement, dated September 2, 2008 between the Company and William B. West (incorporated by reference to Form 8-K filed September 4, 2008). 10.8 Non-competition, Severance and Employment Agreement, dated February 23, 2005 between the Company and C. Kyle Thomas (incorporated by reference to the 2004 10-K). 10.9 Employment Agreement, dated September 2, 2008, between The Peoples National Bank and L. Andrew Westbrook, III (incorporated by reference to Form 8-K filed September 4, 2008). 10.10 Salary Continuation Agreement between The Peoples National Bank and Ralph R. Ridgeway, dated July 7, 1998, as amended (incorporated by reference to exhibits to Registrant's Form 10-K for the year ended December 31, 2002). 10.11 Split Dollar Agreement between the Company and Ralph R. Ridgeway (incorporated by reference to exhibits to Registrant's Form 10-K for the year ended December 31, 2002). 10.12 Salary Continuation Agreement between the Company and Robert E. Dye, Jr., dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.13 Salary Continuation Agreement between the Company and Daniel B. Minnis, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.14 Salary Continuation Agreement between the Company and C. Kyle Thomas, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.15 Salary Continuation Agreement between the Company and William B. West dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.16 Salary Continuation Agreement between the Company and L. Andrew Westbrook, III, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 107 10.17 Loan Agreement, Stock Pledge Agreement, and Promissory Note, dated October 1, 2008, in connection with $15,000,000 line of credit (previously filed). 10.18 Agreement between Bank of Anderson, N. A., and the Comptroller of the Currency dated October 15, 2008 (previously filed). 21. Subsidiaries of the Registrant (incorporated by reference to exhibits to the 2004 10-K). 23. Consent of Elliott Davis, LLC 31.1 Rule 13a-14(a) / 15d-14(a) Certifications 31.2 Rule 13a-14(a) / 15d-14(a) Certifications 32 Section 1350 Certifications 108 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Amended Report to be signed on its behalf by the undersigned, thereunto duly authorized. Peoples Bancorporation, Inc. Dated: April 22, 2009 By: s/R. Riggie Ridgeway -------------- ------------------------------------ R. Riggie Ridgeway President and Chief Executive Officer Dated: April 22, 2009 By: s/Robert E. Dye, Jr. -------------- ------------------------------------ Robert E. Dye. Jr. Senior Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Amended Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Title Date Director -------------------------------------------- Paul C. Aughtry, III s/ Charles E. Dalton Director April 22, 2009 -------------------------------------------- Charles E. Dalton s/ Robert E. Dye, Jr. Senior Vice April 22, 2009 -------------------------------------------- Robert E. Dye, Jr. President, Secretary and Director s/ W. Rutledge Galloway Director April 22, 2009 -------------------------------------------- W. Rutledge Galloway s/R. David Land Director April 22, 2009 -------------------------------------------- R. David Land 109 Director -------------------------------------------- E. Smyth McKissick, III Director -------------------------------------------- Eugene W. Merritt, Jr. s/ George B. Nalley, Jr. Chairman and April 22, 2009 -------------------------------------------- Director George B. Nalley, Jr. s/ G. Weston Nalley Director April 22, 2009 -------------------------------------------- G. Weston Nalley s/ Timothy J. Reed Director April 22, 2009 -------------------------------------------- Timothy J. Reed s/ R. Riggie Ridgeway Chief Executive April 22, 2009 -------------------------------------------- Officer and R. Riggie Ridgeway Director s/ William R. Rowan, III Director April 22, 2009 -------------------------------------------- William R. Rowan, III s/D. Gray Suggs Director April 22, 2009 -------------------------------------------- D. Gray Suggs Director -------------------------------------------- A. J. Thompson, Jr., M. D. s/ William B. West Executive Vice April 22, 2009 -------------------------------------------- William B. West President, Treasurer and Director s/ L. Andrew Westbrook, III President, Chief April 22, 2009 -------------------------------------------- Operating Officer, L. Andrew Westbrook, III and Director
110 EXHIBIT INDEX Exhibit No. Description of Exhibit 3.1 Articles of Incorporation, as amended (incorporated by reference to Registrant's Form 10-Q for the quarter ended September 30, 2004 and Registrant's Form 8-K filed January 16, 2009). 3.2 Bylaws, as amended (incorporated by reference to exhibits to Registrant's Current Report on Form 8-K filed November 24, 2008). 4.1 Specimen Common Stock Certificate (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-4 (Number 33-46649)). 10.2 Peoples Bancorporation, Inc. 1993 Incentive Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121158)). 10.3 Peoples Bancorporation, Inc. 1997 Non-Employee Directors Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121157)). 10.4 Peoples Bancorporation, Inc. 2004 Stock Option Plan (incorporated by reference to exhibits to Registrant's Registration Statement on Form S-8 (Number 333-121156)). 10.5 Peoples Bancorporation, Inc. 2007 Non-Employee Directors Stock Option Plan (incorporated by reference to Registrant's Form 10-Q for the quarter ended June 30, 2007). 10.6 Non-competition, Severance and Employment Agreement, dated February 23, 2005 between the Company and R. Riggie Ridgeway (incorporated by reference to Registrant's Form 10-K for the year ended December 31, 2004 (the "2004 10-K")). 10.7 Employment Agreement, dated September 2, 2008 between the Company and William B. West (incorporated by reference to Form 8-K filed September 4, 2008). 10.8 Non-competition, Severance and Employment Agreement, dated February 23, 2005 between the Company and C. Kyle Thomas (incorporated by reference to the 2004 10-K). 111 10.9 Employment Agreement, dated September 2, 2008, between The Peoples National Bank and L. Andrew Westbrook, III (incorporated by reference to Form 8-K filed September 4, 2008). 10.10 Salary Continuation Agreement between The Peoples National Bank and Ralph R. Ridgeway, dated July 7, 1998, as amended (incorporated by reference to exhibits to Registrant's Form 10-K for the year ended December 31, 2002). 10.11 Split Dollar Agreement between the Company and Ralph R. Ridgeway (incorporated by reference to exhibits to Registrant's Form 10-K for the year ended December 31, 2002). 10.12 Salary Continuation Agreement between the Company and Robert E. Dye, Jr., dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.13 Salary Continuation Agreement between the Company and Daniel B. Minnis, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.14 Salary Continuation Agreement between the Company and C. Kyle Thomas, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.15 Salary Continuation Agreement between the Company and William B. West dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.16 Salary Continuation Agreement between the Company and L. Andrew Westbrook, III, dated October 24, 2006 (incorporated by reference to Form 8-K filed October 30, 2006). 10.17 Loan Agreement, Stock Pledge Agreement, and Promissory Note, dated October 1, 2008, in connection with $15,000,000 line of credit (previously filed). 10.18 Agreement between Bank of Anderson, N. A., and the Comptroller of the Currency dated October 15, 2008 (previously filed). 21. Subsidiaries of the Registrant (incorporated by reference to exhibits to the 2004 10-K). 23. Consent of Elliott Davis, LLC 31.1 Rule 13a-14(a) / 15d-14(a) Certifications 31.2 Rule 13a-14(a) / 15d-14(a) Certifications 32 Section 1350 Certifications 112