United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

[ ] 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

(State or other jurisdiction

of incorporation or organization)

57-0951843

(IRS Employer

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 daysYes [ 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 [ X ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X]

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant (5,079,741 shares) on June 30, 2011, the last day of the Registrant’s most recently completed second fiscal quarter, was approximately $7,670,409. The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant (5,125,706 shares) on February 23, 2012 was approximately $22,553,000. 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 February 1, 2012: 7,039,263 shares of $1.11 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

None

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:

future economic and business conditions;

lack of sustained growth in the economies of the Company's market areas;

government monetary and fiscal policies;

the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

the effect of credit rating downgrades on the value of investment securities issued or guaranteed by various government and government agencies, including the United States of America.

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services, as well as competitors that offer banking products and services by mail, telephone, computer and/or the Internet;

credit risks;

higher than anticipated levels of defaults on loans;

perceptions by depositors about the safety of their deposits;

ability to weather the current economic downturn;

the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;

the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains, revenue growth and/or expense savings from such endeavors;

changes in laws and regulations, including tax, banking and securities laws and regulations;

the effect of agreements with regulatory authorities, which restrict various activities and impose additional administrative requirements without commensurate benefits;

changes in requirements of regulatory authorities;

changes in accounting policies, rules and practices;

cost and difficulty of implementing changes in technology or products;

loss of consumer or investor confidence;

the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and

other factors and information described in this report and in any of the other reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The Company has no obligation, and does not undertake, to update, revise or correct any of the forward-looking statements after the date of this report. The Company has expressed its expectations, beliefs and projections in good faith and believes they have a reasonable basis. However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

PART I

ITEM 1. BUSINESS

The Company

Peoples Bancorporation, Inc. (the “Company”) was incorporated under South Carolina law on March 6, 1992, for the purpose of becoming a bank holding company by acquiring all of the common stock of The Peoples National Bank, Easley, South Carolina. The Company commenced operations on July 1, 1992 upon effectiveness of the acquisition of The Peoples National Bank. The Company has three wholly-owned subsidiaries: The Peoples National Bank, Easley, South Carolina, a national bank which commenced business operations in August 1986; Bank of Anderson, National Association, Anderson, South Carolina, a national bank which commenced business operations in September 1998; and, Seneca National Bank, Seneca, South Carolina, a national bank which commenced business operations in February 1999 (sometimes referred to herein as the “Banks”).

The Company engages in no significant operations other than the ownership of its three subsidiaries and the support thereof. The Company conducts its business from eight banking offices located in the Upstate Area of South Carolina.

The principal offices of the Company are located at 1818 East Main Street, Easley, South Carolina 29640. The Company’s telephone number is (864) 859-2265. The principal office of The Peoples National Bank is located at 1800 East Main Street, Easley, South Carolina 29640. The principal office of Bank of Anderson, National Association is located at 201 East Greenville Street, Anderson, South Carolina 29621, and the principal office of Seneca National Bank is located at 201 Highway 123 Bypass, Seneca, South Carolina 29678.

General Business

Some of the major services which the Company provides through its banking subsidiaries include checking accounts; NOW accounts; savings and other time deposits of various types; daily repurchase agreements; alternative investment products such as annuities, mutual funds, stocks and bonds; loans for business, agriculture, real estate, personal uses, home improvement and automobiles; residential mortgage loan origination; credit cards; letters of credit; home equity lines of credit; safe deposit boxes; wire transfer services; Internet banking and use of ATM facilities. The Banks do not have trust powers. The Company has no material concentration of deposits from any single customer or group of customers. No significant portion of its loans is concentrated within a single industry or group of related industries and the Company does not have any foreign loans. The Company does, however, have a geographic concentration of customers and borrowers because most of its customers and borrowers are located in the Upstate area of South Carolina, and most of the real estate securing mortgage loans is located in this area. There are no material seasonal factors that would have an adverse effect on the Company.

As a bank holding company, the Company is a legal entity separate and distinct from its subsidiaries. The Company coordinates the financial resources of the consolidated enterprises and maintains financial, operational and administrative systems that allow centralized evaluation of subsidiary operations and coordination of selected policies and activities. The Company’s operating revenues and net income are derived primarily from its subsidiaries through dividends and fees for services performed.

Territory Served and Competition

The Peoples National Bank serves its customers from five 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 one office in the city of Greenville, South Carolina, which is located in Greenville County. Easley, South Carolina is located approximately 10 miles west of Greenville, South Carolina. Pickens, South Carolina is located approximately 8 miles north of Easley, and Powdersville, South Carolina is located approximately 12 miles southeast of Easley.

Bank of Anderson, National Association, serves its customers from one location in the City of Anderson and another location in Anderson County, South Carolina. Anderson is located approximately 25 miles southwest of Greenville, South Carolina and approximately 25 miles south of Easley in Anderson County, South Carolina.

Seneca National Bank serves its customers from one location in the City of Seneca, South Carolina. Seneca is located approximately 30 miles northwest of Easley, South Carolina in Oconee County, South Carolina.

Each subsidiary of the Company is a separately chartered bank, and therefore each bank is responsible for developing and maintaining its own customers and accounts. Located in Easley, South Carolina, The Peoples National Bank’s customer base is primarily derived from Greenville and Pickens Counties, South Carolina and the northeast section of Anderson County, South Carolina. Bank of Anderson’s primary service area is Anderson County, South Carolina, and more particularly the City of Anderson. Seneca National Bank derives most of its customer base from the City of Seneca and surrounding Oconee County, South Carolina.

The Banks compete with several large national banks, which dominate the commercial banking industry in their service areas and in South Carolina generally. In addition, the Banks compete with other community banks, savings institutions and credit unions. In Pickens County, there are thirty-two competitor bank offices, one savings institution offices, and one credit union office. In Anderson County there are fifty-nine competitor bank offices, no savings institution offices, and four credit union offices. In Oconee County, there are twenty-one competitor bank offices, four savings institution offices, and one credit union office. In Greenville County there are one hundred fifty-seven competitor bank offices, six savings institution offices, and eight credit union offices. The Peoples National Bank had approximately 12.7% of the deposits of Federal Deposit Insurance Corporation (“FDIC”)-insured institutions in Pickens County and 0.4% in Greenville County. The Peoples National Bank and Bank of Anderson, combined, had approximately 7.9% of the deposits of FDIC-insured institutions in Anderson County. Seneca National Bank had approximately 7.8% of the deposits of FDIC-insured institutions in Oconee County. The foregoing information is as of June 30, 2011, 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 over the 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 or regulate the financial services industry cannot be fully assessed or predicted.

Recent Developments

On December 19, 2011, Peoples Bancorporation, Inc. (the "Company"), entered into an Agreement and Plan of Merger (the "Merger Agreement") with SCBT Financial Corporation ("SCBT"). The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, the Company will merge (the "Merger") with and into SCBT, with SCBT continuing as the surviving corporation (the "Surviving Corporation").

Subject to the terms and conditions set forth in the Merger Agreement, which has been approved by the board of directors of each of SCBT and the Company, at the effective time of the Merger, each outstanding share of Company common stock will be converted into the right to receive 0.1413 (the "Exchange Ratio") of a share of common stock of SCBT ("SCBT Common Stock"), subject to the payment of cash in lieu of fractional shares and further subject to certain adjustments set forth in the Merger Agreement.

The Merger Agreement contains customary representations and warranties from SCBT and the Company, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of the Company's businesses during the interim period between the execution of the Merger Agreement and the Closing, (2) the Company's obligations to facilitate its shareholders' consideration of, and voting upon, the approval of the Merger, (3) the recommendation by the board of directors of the Company in favor of the approval by its shareholders of the Merger Agreement and the transactions contemplated thereby, and (4) the Company's non-solicitation obligations relating to alternative business combination transactions.

Completion of the Merger is subject to certain customary conditions, including (1) approval of the Merger Agreement by the Company's shareholders, (2) receipt of required regulatory approvals, (3) the absence of any law or order prohibiting the consummation of the Merger, (4) approval of the listing on the NASDAQ Global Market of the SCBT Common Stock to be issued in the Merger, and (5) the effectiveness of the registration statement for the SCBT Common Stock to be issued in the Merger. Each party's obligation to complete the Merger is also subject to certain additional customary conditions, including (1) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (2) performance in all material respects by the other party of its obligations under the Merger Agreement, and (3) receipt by such party of an opinion from its counsel to the effect that the Merger will qualify as a reorganization within the meaning of the Internal Revenue Code of 1986, as amended.

The Merger Agreement provides certain termination rights for both SCBT and the Company, and further provides that, upon termination of the Merger Agreement under certain circumstances, the Company will be obligated to pay SCBT a termination fee of $1.5 million.

The forgoing description of the Merger and Merger Agreement dies not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is incorporated as Exhibit 10.20 to this Annual Report on Form 10-K.

DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS’ 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, 2011, 2010 and 2009. 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,
	2011			2010			2009
Assets
Cash and Due from Banks	$	8,808		$	9,257		$	12,344

Taxable Securities		106,979			87,071			73,088
Tax-Exempt Securities		64,609			38,029			38,242
Federal Funds Sold		9,746			13,027			5,937

Gross Loans		315,890			359,828			388,359
Less: Allowance for Loan Losses		(7,925	)		(8,214	)		(7,969	)
Net Loans		307,965			351,614			380,390

Other Assets		48,717			49,031			40,138
Total Assets	$	546,824		$	548,029		$	550,139

Liabilities and Shareholders’ Equity
Noninterest-bearing Deposits	$	51,425		$	48,881		$	46,320
Interest-bearing Deposits:
Interest Checking		72,795			63,684			62,622
Savings Deposits		11,270			10,659			10,327
Money Market		87,112			83,507			52,707
Certificates of Deposit		214,608			232,828			249,556
Individual Retirement Accounts		38,853			36,221			31,991
Total Interest-bearing Deposits		424,638			426,899			407,203

Short-term Borrowings		11,616			13,994			37,547
Notes Payable - Other		167			-			3,385
Other Liabilities		4,065			4,278			4,605
Total Liabilities		491,911			494,052			499,060

Preferred Stock		12,878			12,745			8,754
Common Stock		7,781			7,773			7,808
Additional Paid-in Capital		41,715			41,675			41,691
Retained Earnings (Deficit)		(7,461	)		(8,216	)		(7,174	)
Total Shareholders’ Equity		54,913			53,977			51,079

Total Liabilities and Shareholders’ Equity	$	546,824		$	548,029		$	550,139

The following is a presentation of an analysis of the net interest income of the Company for the years ended December 31, 2011, 2010 and 2009 with respect to each major category of interest-earning assets and each major category of interest-bearing liabilities:

	Year Ended December 31, 2011 (dollars in thousands)
Assets	Average Amount		Interest Earned/Paid		Average Yield/Rate

Interest-bearing Deposits at Other Banks	$	-	$	-		0.00	%

Securities – Taxable		106,979		3,999		3.74	%
Tax-Exempt		64,609		2,387		5.60	%(1)

Federal Funds Sold		9,746		23		0.24	%

Gross Loans (2)		315,890		18,508		5.86	%

Total Earning Assets	$	497,224	$	24,917		5.26	%(1)

Liabilities
Interest Checking	$	72,795	$	524		0.72	%
Savings Deposits		11,270		25		0.22	%
Money Market		87,112		760		0.87	%
Certificates of Deposit		214,608		3,228		1.50	%
Individual Retirement Accounts		38,853		728		1.87	%
		424,638		5,265

Short-term Borrowings		11,783		76		0.64	%
Long-term Borrowings		-		-		0.00	%

Total Interest-bearing Liabilities	$	436,421	$	5,341		1.22	%

Excess of Interest-earning Assets over Interest-bearing Liabilities	$	60,803
Net Interest Income			$	19,576
Interest Rate Spread						4.04	%(1)
Net Yield on Earning Assets (3)						4.18	%(1)

(1) Includes a tax-equivalent adjustment of $1,230 to reflect the federal tax benefit of the tax-exempt securities 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.

	Year Ended December 31, 2010 (dollars in thousands)
Assets	Average Amount		Interest Earned/Paid		Average Yield/Rate

Interest-bearing Deposits at Other Banks	$	111	$	2		1.80	%

Securities – Taxable		87,071		3,430		3.94	%
Tax-Exempt		38,029		1,441		5.74	%(1)

Federal Funds Sold		13,027		38		0.29	%

Gross Loans (2)		359,828		21,341		5.93	%

Total Earning Assets	$	498,066	$	26,252		5.42	%(1)

Liabilities
Interest Checking	$	63,684	$	530		0.83	%
Savings Deposits		10,659		32		0.30	%
Money Market		83,507		1,181		1.41	%
Certificates of Deposit		232,828		4,537		1.95	%
Individual Retirement Accounts		36,221		898		2.48	%
		426,899		7,178

Short-term Borrowings		13,994		95		0.67	%
Long-term Borrowings		-		-		0.00	%

Total Interest-bearing Liabilities	$	440,893	$	7,273		1.65	%

Excess of Interest-earning Assets over Interest-bearing Liabilities	$	57,173
Net Interest Income			$	18,979
Interest Rate Spread						3.77	%(1)
Net Yield on Earning Assets (3)						3.96	%(1)

(1) Includes a tax-equivalent adjustment of $742 to reflect the federal tax benefit of the tax-exempt securities 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.

	Year Ended December 31, 2009 (dollars in thousands)
Assets	Average Amount		Interest Earned/Paid		Average Yield/Rate

Interest-bearing Deposits at Other Banks	$	569	$	23		4.04	%

Securities – Taxable		73,088		3,445		4.71	%
Tax-Exempt		38,242		1,498		5.94	%(1)

Federal Funds Sold		5,937		9		0.15	%

Gross Loans (2)		388,359		23,190		5.97	%

Total Earning Assets	$	506,195	$	28,165		5.72	%(1)

Liabilities
Interest Checking	$	62,622	$	468		0.75	%
Savings Deposits		10,327		47		0.46	%
Money Market		52,707		1,126		2.14	%
Certificates of Deposit		249,556		7,205		2.89	%
Individual Retirement Accounts		31,991		1,061		3.32	%
		407,203		9,907

Short-term Borrowings		37,547		181		0.48	%
Long-term Borrowings		3,385		182		5.38	%

Total Interest-bearing Liabilities	$	448,135	$	10,270		2.29	%

Excess of Interest-earning Assets over Interest-bearing Liabilities	$	58,060
Net Interest Income			$	17,895
Interest Rate Spread						3.43	%(1)
Net Yield on Earning Assets (3)						3.69	%(1)

(1) Includes a tax-equivalent adjustment of $774 to reflect the federal tax benefit of the tax-exempt securities 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.

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, 2011 compared to 2010 (dollars in thousands)

	Change in Volume			Change in Rate			Total Change
	Change in Volume			Change in Rate			Total Change
Interest earned on:
Interest-bearing Deposits at Other Banks	$	(1	)	$	(1	)	$	(2	)
Securities
Taxable		764			(195	)		569
Tax-Exempt (1)		995			(49	)		946
Federal Funds Sold		(9	)		(6	)		(15	)
Gross Loans (2)		(2,590	)		(243	)		(2,833	)

Total Interest Income		(841	)		(494	)		(1,335	)

Interest paid on:
Interest Checking		71			(77	)		(6	)
Savings Deposits		2			(9	)		(7	)
Money Market		41			(462	)		(421	)
Certificates of Deposit		(315	)		(994	)		(1,309	)
Individual Retirement Accounts		57			(227	)		(170	)
		(144	)		(1769	)		(1,913	)
Short-term Borrowings		(15	)		(4	)		(19	)
Notes Payable - Other		-			-			-

Total Interest Expense		(159	)		(1773	)		(1,932	)

Change in Net Interest Income	$	(682	)	$	1,279		$	597

(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 2011 compared to 2010 due to lower rates and decreased volume of loans and other earning assets, partially offset by increased volume of investment securities. Interest expense was also lower in 2011 compared to 2010 due primarily to lower market rates and a decrease in interest bearing liabilities. The net effect of these differences was an overall increase in the Company’s net interest income.

	Year Ended December 31, 2010 compared to 2009 (dollars in thousands)

	Change in Volume			Change in Rate			Total Change
	Change in Volume			Change in Rate			Total Change
Interest earned on:
Interest-bearing Deposits at Other Banks	$	(13	)	$	(8	)	$	(21	)
Securities
Taxable		605			(620	)		(15	)
Tax-Exempt (1)		(8	)		(49	)		(57	)
Federal Funds Sold		16			13			29
Gross Loans (2)		(1,698	)		(151	)		(1,849	)

Total Interest Income		(1,098	)		(815	)		(1,913	)

Interest paid on:
Interest Checking		8			54			62
Savings Deposits		1			(16	)		(15	)
Money Market		547			(492	)		55
Certificates of Deposit		(404	)		(2,264	)		(2,668	)
Individual Retirement Accounts		123			(286	)		(163	)
		275			(3,004	)		(2,729	)
Short-term Borrowings		(137	)		51			(86	)
Notes Payable - Other		(91	)		(91	)		(182	)

Total Interest Expense		47			(3,044	)		(2,997	)

Change in Net Interest Income	$	(1,145	)	$	2,229		$	1,084

(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 2010 compared to 2009 due to lower rates and decreased volume of loans and other earning assets. Interest expense was also lower in 2010 compared to 2009 due to lower market rates, and was partially offset by increased volume of deposits and other interest-bearing liabilities. The net effect of these differences was an overall increase in the Company’s net interest income.

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. Commercial loans are available to various types of businesses such as manufacturing, service industry and professional services and are made on either a secured or an unsecured basis. When taken collateral usually consists of liens on receivables, equipment, inventories, furniture, fixtures and equipment (“FF&E”), and cash instruments. Unsecured commercial loans are characteristically short-term in duration and based on the financial strength of the borrowing entity and guarantors and low debt-to-worth ratios. Commercial lending involves significant credit risk because repayment usually depends on the cash flows generated by a borrower’s business, and the debt service capacity of a business can deteriorate as a result of downturns in economic conditions. To control risk, these loans require more in-depth underwriting of past and future expected cash flows and other indicators of the borrower’s ability to repay on a timely basis. The borrower must provide at least two years of financial statements and tax returns of the borrower and any guarantors, as well as projections of expected business results of the borrower. Annual financial statements and tax returns are also required during the life of each loan. The Company typically advances 75% to 80% of the value of marketable equipment, and 50% to 70% on receivables, inventories and FF&E. Valuations of the receivables and inventories are required either quarterly or annually.

Residential Real Estate. Residential real estate loans consist mainly of first and second mortgage loans on single family homes, with some multifamily homes. These real estate loans involve credit risk since the repayment of residential real estate loans is dependent primarily on the income of the borrowers, with real estate serving as a secondary or liquidation source of repayment, which involves the risk of negative changes in the value of the underlying collateral. The Company does not originate high-risk mortgage loans such as so-called option ARMs and loans with high loan-to-value ratios without requiring the purchaser to obtain private mortgage insurance.

Commercial Real Estate. Commercial real estate loans generally have terms of five years or less, although payments may be structured on a longer amortization basis. The Company evaluates each borrower on an individual basis and attempts to determine the business risk and credit profile of each borrower. The Company attempts to reduce credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. Generally a borrower is required to have cash flow exceeding 115% of monthly debt service obligations. In order to ensure secondary sources of payment and liquidity to support a loan request, typically the personal financial statements and tax returns of the principal owners are reviewed, and often their personal guarantees are required.

Construction. Construction loans characteristically consist of the financing of one-to-four family dwellings and some nonfarm, nonresidential real estate for certain builder borrowers or the end-user of the construction project. The lesser of loan-to-cost and loan-to-value is generally restricted to 80% and permanent financing commitments are usually required prior to the advancement of loan proceeds. Construction loans generally carry a higher degree of credit risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and sometimes on the sale of the property. Specific risks are derived from cost overruns, mismanaged construction, inferior or improper construction techniques, economic changes or downturns during construction, rising interest rates which may prevent the sale of the property, and failure to sell completed projects in a timely manner. In an attempt to reduce risk associated with construction loans, we require in-depth underwriting to include an analysis of the project cost, plans and marketability of the ending collateral.

Consumer and other. The Banks make a variety of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, existing debt level, past credit history, and the availability and value of collateral. Interest rates are fixed and terms are commensurate with the use of the funds and collateral provided. Typically installment loans amortize over periods up to 60 months. Consumer loans are offered with a single maturity date when a specific source of repayment is available. Monthly payments of interest and a portion of the principal are typically required on revolving loan products. Consumer loans are generally considered to have greater credit risk than first or second mortgages on real estate because they may be unsecured, or if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

Distribution and Maturities of Loan Portfolio

Management believes the loan portfolio is adequately diversified. The largest component of the loan portfolio continues to be loans secured by real estate located primarily in the Upstate area of South Carolina, including certain commercial and industrial loans secured by real estate, mortgage loans, and construction loans. These loans represent $256,364,000 or 89.5% of total loans at December 31, 2011, compared to $305,262,000 or 89.6% at December 31, 2010. 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 2011, 2010, 2009, 2008 and 2007.

	2011						2010						2009						2008						2007
	Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total			Amount			% of Total
Commercial	$	23,973			8	%	$	28,362			8	%	$	29,240			8	%	$	43,451			11	%	$	47,885			11	%
Real Estate:
Residential real estate		99,031			34	%		106,759			31	%		107,942			29	%		124,445			31	%		108,161			26	%
Commercial real estate		154,647			54	%		192,351			57	%		212,812			57	%		111,844			28	%		107,531			26	%
Construction		2,686			2	%		6,152			2	%		14,458			4	%		104,390			26	%		138,926			33	%
Consumer and other		6,107			2	%		7,089			2	%		9,122			2	%		14,581			4	%		16,495			4	%
Total Loans	$	286,444			100	%	$	340,713			100	%	$	373,574			100	%	$	398,711			100	%	$	418,998			100	%
Allowance for loan losses		(6,846	)					(7,919	)					(7,431	)					(9,217	)					(4,310	)
Net Loans	$	279,598					$	332,794					$	366,143					$	389,494					$	414,688

The following is a presentation of maturities of loans as of December 31, 2011:

	Loan Maturity and Interest Sensitivity (dollars in thousands)

Type of Loans	Due in 1 Year or less		Due After 1 Year up to 5 years		Due after 5 years		Total

Commercial	$	10,721	$	9,817	$	3,435	$	23,973
Real Estate		69,120		124,649		62,595		256,364
Consumer and other		3,154		2,873		80		6,107
Total	$	82,995	$	137,339	$	66,110	$	286,444

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, 2011, the amount of loans due after one year with predetermined interest rates totaled approximately $112,820,000, while the amount of loans due after one year with variable or floating interest rates totaled approximately $90,629,000.

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	2011		2010		2009		2008		2007

Non-performing loans:
Non-accrual loans	$	8,637	$	15,734	$	14,881	$	16,950	$	7,505
Past due 90 days or more and still accruing		-		-		-		-		-
Total non-performing loans		8,637		15,734		14,881		16,950		7,505
Assets acquired in settlement of loans		15,103		13,344		11,490		5,428		1,023
Total non-performing assets	$	23,740	$	29,078	$	26,371	$	22,378	$	8,528

Non-performing Assets	2011		2010		2009		2008		2007

Non-performing assets as a percentage of loans and real estate acquired in settlement of loans	7.87	%	8.21	%	6.85	%	5.54	%	2.03	%
Allowance for loan losses as a percentage of non- performing loans	79	%	50	%	50	%	54	%	57	%

In an effort to more accurately reflect the status of the Company’s loan portfolio, accrual of interest is discontinued on a loan that displays certain indications of problems which might jeopardize full and timely collection of principal and/or interest. The Company’s Loan Policy drives the administration of problem loans. Loans are monitored through continuing review by credit managers, monthly reviews of exception reports, and ongoing analysis of asset quality trends, economic and business factors. Credit management activities, including specific reviews of new large credits, are reviewed by the Directors’ Loan Committees of each banking subsidiary, which meet monthly.

With respect to the loans accounted for on a non-accrual basis, the gross interest income that would have been recorded if the loans had been current in accordance with their original terms and outstanding throughout the period or since origination amounts to $493,000 for the year ended December 31, 2011. The interest on those loans that was included in net income for 2011 amounts to $555,000.

At December 31, 2011, there was $8,637,000 of non-accruing loans. The overall decrease in non-accruing loans since 2008 is due to the payoff or transfer of these loans into Other Real Estate Owned. For some of these non-accruing loans, management does not currently expect any loss of principal. Where principal losses are expected, these loans have already been written down by the expected amount of the loss. Furthermore, management believes that the Company’s allowance for loan losses is adequate to absorb any unidentified probable losses. At December 31, 2011, 92.5% of the Company’s non-accruing loans were secured by real estate.

At December 31, 2011, the Company held $15,103,000 in assets acquired in settlement of loans. This compares to $13,344,000 at December 31, 2010. During 2011 real estate was obtained from thirty-two loan relationships through foreclosure or deeds in lieu of foreclosure, and forty-two properties were sold in 2011. The following table summarizes changes in assets acquired in settlement of loans during the periods noted:

	For the years ended
	December 31,
	2011			2010
BALANCE, BEGINNING OF YEAR	$	13,344		$	11,490
Additions - foreclosures		8,078			9,943
Sales		(4,122	)		(7,017	)
Write downs		(2,197	)		(522	)
Valuation reserve		-			(550	)
BALANCE, END OF YEAR	$	15,103		$	13,344

The Banks use third-party appraisers to determine the fair value of collateral dependent loans. The Company’s current loan appraisal policy requires the Banks to obtain updated appraisals or evaluations on an annual basis. These documents are also reviewed for compliance with banking regulations. If any adjustments are needed, reductions are made to include projected market expenses to liquidate the collateral. Due to the timeliness of the appraisal process, no additional considerations for outdated appraisals are taken into account in determining the allowance for loans losses.

As of December 31, 2011, assets acquired in settlement of loans consisted of construction and land lots valued at $9,443,000, residential real estate valued at $3,817,000, and commercial real estate valued at $1,843,000. These assets are being actively marketed with the primary objective of liquidating the collateral at a level which most accurately approximates fair value and allows recovery of as much of the unpaid principal loan balance as possible upon the sale of the asset within a reasonable period of time. Based on currently available valuation information, the carrying value of these assets is believed to be representative of their fair value less estimated costs to sell, although there can be no assurance that the ultimate proceeds from the sale of these assets will be equal to or greater than their carrying values, particularly in the current real estate environment and with the continued downturn trend in third party values.

Potential Problem Loans

As of December 31, 2011, there were no potential problem loans classified for regulatory purposes as doubtful, substandard or special mention that are not included in non-accruing loans, which (i) represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results, liquidity, or capital resources of the Company, or (ii) represent material credits about which management is aware of any information that causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. As of December 31, 2011, management had identified $29,688,000 of performing loans where information about the borrowers or other characteristics of the loans indicated an increased risk of non-performance justifying increased management attention.

Impaired Loans

The Company uses practical methods to measure loan impairment as permitted by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). A loan is impaired when, based on current information and events, it is probable a creditor will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. A loan is also impaired when its original terms are modified in a troubled debt restructuring. The FASB ASC 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. When the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement. Once the recorded principal balance has been reduced to zero, future cash receipts are recorded as recoveries on any amounts previously charged-off. Further cash receipts are applied to interest income, to the extent that any interest has been foregone. Impaired loans totaled approximately $9,395,000 at December 31, 2011 and $15,619,000 at December 31, 2010. See also Item 8 – Financial Statements and Supplementary Data – Note 1 – “Summary of Significant Accounting Policies and Activities – Allowance for Loan Losses” and Note 4 – “Loans.”

Impaired Loan Analysis (dollar amounts in thousands):

	2011					2010					2009					2008					2007
	Outstanding			Amount		Outstanding			Amount		Outstanding			Amount		Outstanding			Amount		Outstanding			Amount
	#	Amount		Charged-off		#	Amount		Charged-off		#	Amount		Charged-off		#	Amount		Charged-off		#	Amount		Charged-off
Type of Loans
Commercial	1	$	78	$	-	2	$	483	$	-	2	$	70	$	-	-	$	-	$	-	1	$	30	$	-
Real estate	41		9,278		4,117	55		15,111		3.058	36		14,667		4,082	20		16,659		7,092	7		1,964		95
Consumer and other	4		39		58	1		25		-	2		9		10	1		12		10	2		30		15
Total	46	$	9,395	$	4,175	58	$	15,619	$	3,058	40	$	14,746	$	4,092	21	$	16,671	$	7,102	10	$	2,024	$	110

Troubled Debt Restructurings

In the course of working with borrowers, the Banks may choose to restructure the contractual terms of certain loans. In this scenario, the Banks attempt to work out an alternative payment schedule with the borrower in order to optimize collectibility of the loan. Any loans that are modified are reviewed by the Banks to identify if a troubled debt restructuring (“TDR”) has occurred. This occurs when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with the borrower’s current financial status, and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two. If such efforts by the Bank do not result in a satisfactory arrangement, the loan is referred to legal counsel, at which time collection and/or foreclosure proceedings are initiated. At any time prior to a sale of property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

At December 31, 2011 the principal balance of troubled debt restructurings totaled $3,808,000 representing eighteen loans, of which fourteen were in non accrual status. At December 31, 2010 the principal balance of troubled debt restructurings totaled $1,686,000 representing five loans, all of which were in non-accrual status. At December 31, 2009 the principal balance of troubled debt restructurings totaled $2,558,000 representing seven loans, of which three were in non-accrual status. At December 31, 2008 the principal balance of troubled debt restructurings totaled $477,000 representing one loan, which was not in non-accrual status. At December 31, 2007 the principal balance of troubled debt restructurings totaled $412,000 representing two loans, of which none were in nonaccrual status.

PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE

The purpose of the Company’s allowance for loan losses is to absorb loan losses that occur in the loan portfolios of its bank subsidiaries. The Company complies with the FASB Accounting Standards Codification when determining the adequacy of the allowance for loan losses. Management determines the adequacy of the allowance quarterly and considers a variety of factors in establishing a level of the allowance for loan losses and the related provision, which is charged to expense. Factors considered in determining the adequacy of the allowance for loan losses include: historical loan losses experienced by the Company, current economic conditions affecting a borrower’s ability to repay, the volume of outstanding loans, the trends in delinquent, non-accruing and potential problem loans, and the quality of collateral securing non-performing and problem loans. By considering the above factors, management attempts to determine the amount of reserves necessary to provide for inherent losses in the loan portfolios of its subsidiaries. However, the amount of reserves may change in response to changes in the financial condition of larger borrowers, changes in the Company’s local economies, industry trends, and regulatory requirements.

The allowance for loan losses for each portfolio segment is set at an amount that reflects management’s best judgment of the extent to which historical loss levels are more or less accurate indicators of current losses in the loan portfolios of its bank subsidiaries. While it is the Company’s policy to charge off in the current period loans in which a loss is considered probable, there are inherent losses that cannot be quantified precisely or attributed to particular loans or classes of loans. Because the state of the economy, industry trends, and conditions affecting individual borrowers may affect the amount of such losses, management’s estimate of the appropriate amount of the allowance is necessarily approximate and imprecise. The Company and its bank subsidiaries are also subject to regulatory examinations and determinations as to adequacy of the allowance for loan losses, which may take into account such factors as the methodology used to calculate the allowance for loan losses and the size of the allowance for loan losses in comparison to a group of peer companies identified by the regulatory agencies.

In assessing the adequacy of the allowance, management relies predominantly on its ongoing review of the loan portfolio, including historical charge-offs, which is undertaken both to ascertain whether there are probable losses that must be charged off and to assess the risk characteristics of the portfolio in the aggregate. The Company utilizes its credit administration department, as well as the services of an outside consultant from time to time, to perform quality reviews of its loan portfolio. The reviews consider the judgments and estimates of management and also those of bank regulatory agencies that review the loan portfolio as part of their regular examination process. The Office of the Comptroller of the Currency, as part of its routine examination process of national banks, including the Company’s Banks, may require additions to the allowance for loan losses based upon the regulator’s credit evaluations differing from those of management. The Company’s management believes it has in place the controls and personnel needed to adequately monitor its loan portfolios and the adequacy of the allowance for loan losses.

At December 31, 2011, the allowance for loan losses was $6,846,000 or 2.39% of gross outstanding loans, compared to $7,919,000 or 2.32% of gross outstanding loans at December 31, 2010. During 2011, the Company experienced net charge-offs of $4,176,000, or 1.32% of average loans, compared to net charge-offs of $6,137,000, or 1.71% of average loans during 2010. The Company’s provision for loan losses was $3,103,000 in 2011 compared to $6,625,000 in 2010.

Management continues to closely monitor the levels of non-performing and potential problem loans and will address the weaknesses in these credits to enhance the amount of ultimate collection or recovery on these assets. When increases in the overall level of non-performing and potential problem loans accelerates from the historical trend, management tends to adjust the methodology for determining the allowance for loan losses, which results in increases in the provision and the allowance for loan losses. This typically decreases net income.

The following table summarizes the allowance for loan loss balances of the Company at the beginning and end of each period, changes in the allowance arising from charge-offs and recoveries by category and additions to the allowance, which have been charged to expense.

Analysis of Allowance for Loan Losses (dollars in thousands)	Year ended December 31,
	2011			2010			2009			2008			2007
Balance at beginning of period	$	7,919		$	7,431		$	9,217		$	4,310		$	4,070
Provision charged to expense		3,103			6,625			4,958			13,820			900
Charge-offs		(4,293	)		(6,572	)		(6,989	)		(9,037	)		(706	)
Recoveries		117			435			245			124			46
Balance as end of period	$	6,846		$	7,919		$	7,431		$	9,217		$	4,310

The following table sets forth ratios of net charge-offs and the allowance for loan losses to the items stated:

Asset Quality Ratios:

	Year Ended December 31,
	2011			2010			2009			2008			2007

Net charge-offs to average loans outstanding during the year		1.32	%		1.71	%		1.74	%		2.14	%		0.17	%
Net charge-offs to total loans outstanding at end of year		1.46	%		1.80	%		1.81	%		2.24	%		0.16	%
Allowance for loan losses to average loans		2.17	%		2.20	%		1.91	%		2.21	%		1.12	%
Allowance for loan losses to total loans at end of year		2.39	%		2.32	%		1.99	%		2.31	%		1.03	%
Net charge-offs to allowance for loan losses at end of year		61.00	%		77.50	%		90.75	%		96.70	%		15.31	%
Net charge-offs to provision for loan losses		134.58	%		92.63	%		136.02	%		64.49	%		73.33	%

Allowance for Loan Losses Allocation

As of December 31, 2011:

(Dollars in thousands)	Commercial			Residential Real Estate		Commercial Real Estate		Commercial Construction		Consumer and Other			Total
Allowance for loan losses:
Allowance for loan losses, beginning of period	$	513		$	1,086	$	5,628	$	527	$	165		$	7,919
Charge-offs		20			496		3,382		325		70			4,293
Recoveries		22			7		9		-		79			117
Net charge-offs		(2	)		489		3,373		325		(9	)		4,176
Provision		305			475		1,972		170		181			3,103
Allowance for loans losses, end of period	$	820		$	1,072	$	4,227	$	372	$	355		$	6,846

Specific Reserves:
Impaired Loans	$	41		$	118	$	10	$	-	$	22		$	170
General Reserve		779			954		4,217		372		333			6,676
Total	$	820		$	1,072	$	4,227	$	372	$	355		$	6,846

Loans individually evaluated for impairment	$	78		$	442	$	8,359	$	478	$	38		$	9,395
Loans collectively evaluated for impairment		23,895			98,589		146,288		2,208		6,069			277,049
Total	$	23,973		$	99,031	$	154,647	$	2,686	$	6,107		$	286,444

The following table reflects charge-offs and recoveries per loan category:

(Dollars in thousands)	December 31,
	2011				2010				2009				2008				2007
	Charge- offs		Recoveries		Charge- offs		Recoveries		Charge- offs		Recoveries		Charge- offs		Recoveries		Charge- offs		Recoveries
Commercial	$	20	$	22	$	1,866	$	329	$	459	$	36	$	1,360	$	42	$	298	$	9
Residential real estate		496		7		1,160		77		2 066		166		3,028		68		210		10
Commercial real estate		3,382		9		938		6		854		18		1,926		5		-		7
Commercial Construction		325		-		2,589		5		3 514		19		2,651		-		110		7
Consumer and other		70		79		19		18		96		6		72		9		88		13
Total	$	4,293	$	117	$	6,572	$	435	$	6,989	$	245	$	9,037	$	124	$	706	$	46

The following table summarizes the allowance for loan loss balances of the Company at the end of each period by loan category.

Allocation of Allowance for Loan Losses
(Dollars in thousands)	Amount		% of Loans in each Loan Group			Amount		% of Loans in each Loan Group			Amount		% of Loans in each Loan Group			Amount		% of Loans in each Loan Group			Amount		% of Loans in each Loan Group
Balance at end of period applicable to:	2011					2010					2009					2008					2007

Commercial	$	820		12	%	$	513		6	%	$	527		7	%	$	747		8	%	$	1,368		32	%
Residential real estate		1,072		16	%		1,086		14	%		1,136		15	%		938		10	%		969		22	%
Commercial real estate		4,227		62	%		5,628		71	%		5,314		72	%		5,500		60	%		1,102		26	%
Commercial construction		372		5	%		527		7	%		15		0	%		996		11	%		176		4	%
Consumer and other		355		5	%		165		2	%		439		6	%		1,036		11	%		695		16	%
Total	$	6,846		100	%	$	7,919		100	%	$	7,431		100	%	$	9,217		100	%	$	4,310		100	%

The allowance for loan losses is available to absorb future loan charge-offs in the entire loan portfolio. 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, 2011. In the opinion of management, there are no material risks or significant loan concentrations, other than loans secured by real estate, in the present portfolio. The allowance for loan losses uses the Company’s procedures and methods which include the following risk factors, though not intended to be an all inclusive list:

The impact of changes in the international, national, regional and local economic and business conditions and developments that affect the collectibility of the loan portfolio, including those within our geographic market.

The cumulative impact of the extended duration of this economic deterioration on our borrowers, in particular those with real estate related loans.

Changes in the nature and volume in our loan portfolio.

The impact of changes in the experience, ability, and depth of the lending management and other relevant staff.

Changes in the value of underlying collateral for collateral-dependent loans.

The impact of changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans.

Changes in the quality of the Company’s loan review system.

No assurance can be given that the Company will not sustain loan losses in any particular period which are sizable in relation to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. The allowance for loan losses is also subject to review and approval by various regulatory agencies through their periodic examinations of the Company’s subsidiaries. Such examinations could result in required changes to the allowance for loan losses.

The local economy continues to struggle. The housing market, including construction and development projects, has demonstrated stress given reduced cash flows of individual borrowers, limited bank financing and credit availability, and slow property sales. The Company continues to diligently assess its risk, particularly in the real estate market. The Company’s special assets department has been proactive in foreclosure actions and sales in 2011. These actions should decrease the Company’s non-performing assets levels.

INVESTMENTS

The Company invests primarily in obligations of the United States of America or obligations guaranteed as to principal and interest by the United States of America, other taxable securities and in certain obligations of states and municipalities. The Banks enter into federal funds transactions with their principal correspondent banks and usually act as net sellers of such funds. The sale of federal funds amounts to a short-term loan from the selling bank to the purchasing bank.

The following table summarizes the amortized cost and market values of investment securities held by the Company at December 31, 2011, 2010 and 2009.

	Securities Portfolio Composition (dollars in thousands)
	2011				2010				2009
	Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value

TRADING ASSETS
Other Securities	$	160	$	160	$	76	$	76	$	128	$	128

AVAILABLE FOR SALE
Government Sponsored Enterprises		1,379		1,524		1,588		1,726		6,792		7,132
Mortgage Backed Securities		85,996		88,504		95,660		95,906		63,813		66,132
Other Securities		89		89		601		577		604		565
State and Political Subdivisions		98,803		103,001		32,585		32,441		28,950		29,398
Total Available for Sale		186,267		193,118		130,434		130,650		100,159		103,227
HELD TO MATURITY
State and Political Subdivisions		4,530		4,817		7,249		7,375		8,402		8,621

OTHER INVESTMENTS		2,633		2,633		4,319		4,319		4,456		4,456
Total	$	193,590	$	200,728	$	142,078	$	142,420	$	113,145	$	116,432

The Company accounts for investments in accordance with ASC Topic 320. Investments classified as available for sale are carried at market value. Unrealized holding gains or losses are reported as a component of shareholders’ equity net of deferred income taxes in comprehensive income. Securities classified as held to maturity are carried at amortized cost, adjusted for the amortization of premiums and the accretion of discounts. In order 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.

At December 31, 2011 the Company’s total investment portfolio classified as available for sale had a book value of $186,267,000 and a market value of $193,118,000 for a net unrealized gain of $6,851,000. The changes in the market valuation of the investment portfolio were directly related to the changes in market interest rates during the year. Management believes that maintaining most of its securities in the available for sale category provides greater flexibility in the management of the overall investment portfolio. In cases where the market value is less than book value, the Company has the ability and intent to hold these securities until the value recovers or the securities mature.

The following table indicates the respective maturities and weighted-average yields of securities as of December 31, 2011:

	Securities Maturity Schedule (dollars in thousands)
	Amortized Cost		Weighted Average Yield**

TRADING ASSETS
Other Securities
Greater than 10 Years	$	160		0.00	%

AVAILABLE FOR SALE
Government sponsored enterprises, mortgage backed securities and other securities:
0-1 Years	$	3,113		5.15	%
1-5 Years		59,670		4.29	%
5-10 Years		8,176		4.36	%
Greater than 10 Years		16,505		3.66	%
		87,464		4.28	%
State and political subdivisions:
0-1 Years		315		6.64	%*
1-5 Years		1,297		5.82	%*
5-10 Years		17,475		5.84	%*
Greater than 10 Years		79,716		6.10	%*
		98,803		6.06	%*

	Securities Maturity Schedule (dollars in thousands)
	Amortized Cost		Weighted Average Yield**

Other investments
No contractual maturity		2,633		n/a
Total	$	188,900		5.22	%*

HELD TO MATURITY
State and political subdivisions:
0-1 Year	$	750		5.04	%*
1-5 Years		1,498		4.69	%*
5-10 Years		1,740		5.89	%*
Greater than 10 Years		542		7.30	%*
Total	$	4,530		5.70	%*

* 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 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 deposits and brokered deposits are sometimes considered to be more volatile than deposits acquired in the local market areas. There were no internet deposits at December 31, 2011 or December 31, 2010. There were $32,444,000 and $43,194,000 of brokered deposits at December 31, 2011 and December 31, 2010, respectively. Traditional brokered time deposits booked through the Depository Trust Company decreased $1,591,000 or 6.3% from $25,121,000 at December 31, 2010 to $23,530,000 at December 31, 2011. Brokered time deposits within the Certificate of Deposit Account Registry Service (“CDARS”) decreased $9,159,000 or 50.7% from $18,073,000 at December 31, 2010 to $8,914,000 at December 31, 2011. All of the Company’s deposits under the CDARS program are retail in nature and originate from the Banks’ customer bases. The Company considers these brokered 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 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 2011 were $476,063,000 compared to $475,780,000 the prior year, an increase of $283,000 or 0.06%. In 2011 the average noninterest-bearing deposits increased approximately $2,544,000 or 5.2%, average interest-bearing checking accounts decreased $9,111,000 or 14.3%, average savings accounts increased $611,000 or 5.7%, average money market accounts increased $3,605,000 or 4.3%, average certificates of deposit decreased $18,220,000 or 7.8%, and individual retirement accounts increased $2,632,000 or 7.3%. 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, 2011, 2010 and 2009, the average amount of, and average rate paid on, each of the following deposit categories:

Deposit Category	Average Amount (dollars in thousands)						Average Rate Paid
	2011		2010		2009		2011			2010			2009
Noninterest-bearing Deposits	$	51,425	$	48,881	$	46,320		-			-			-
Interest-bearing Deposits
Interest Checking		72,795		63,684		62,622		0.72	%		0.83	%		0.75	%
Savings Deposits		11,270		10,659		10,327		0.22	%		0.30	%		0.46	%
Money Market		87,112		83,507		52,707		0.87	%		1.41	%		2.14	%
Certificates of Deposit		214,608		232,828		249,556		1.50	%		1.95	%		2.89	%
Individual Retirement Accounts		38,843		36,221		31,991		1.87	%		2.48	%		3.32	%

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 77% in 2011 and 71% in 2010. The Company closely monitors its reliance on certificates of deposit 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, excluding IRAs, and respective maturities as of December 31, 2011:

	Time Certificates of Deposit (dollars in thousands)
3 months or less	$	23,880
4-6 months		15,096
7-12 months		24,453
Over 12 months		23,774
Total	$	87,203

RETURN ON EQUITY AND ASSETS

Returns on average consolidated assets and average consolidated equity for the years ended December 31, 2011, 2010 and 2009 are as follows:

	2011			2010			2009
Return on average assets		0.54	%		0.07	%		0.06	%
Return on average total equity		5.36	%		0.71	%		0.63	%
Return on average common equity		5.04	%		-1.07	%		-0.53	%
Average equity to average assets ratio		10.04	%		9.85	%		9.28	%
Dividend payout ratio:
Preferred stock		23.45	%		180.63	%		120.31	%
Common stock		(2	)		(2	)		(2	)
______________________

(1) Preferred stock was issued in 2009.

(2) No cash dividends were paid on common stock in 2011, 2010 or 2009.

SHORT-TERM BORROWINGS

The following table summarizes the Company’s short-term borrowings for the years ended December 31, 2011, 2010 and 2009. These borrowings consist of federal funds purchased and securities sold under agreements to repurchase, which generally mature on a one-business-day basis.

Year Ended December 31,	Maximum Outstanding at any Month End		Annual Average Balance		Weighted Average Interest Rate			Year End Balance		Weighted Average Interest Rate at Year End
	(dollars in thousands)
2011:
Federal funds purchased	$	-	$	-		0.00	%	$	-		0.00	%
Securities sold under repurchase agreements	$	15,137	$	11,616		0.64	%	$	10,191		0.44	%
Advances from Federal Home Loan Bank	$	-	$	167		0.60	%	$	-		0.00	%
2010:
Federal funds purchased	$	-	$	77		0.64	%	$	-		0.00	%
Securities sold under repurchase agreements	$	16,572	$	13,809		0.68	%	$	10,362		0.71	%
Advances from Federal Home Loan Bank	$	2,000	$	154		0.38	%	$	-		0.00	%
2009:
Federal funds purchased	$	399	$	226		0.83	%	$	399		0.19	%
Securities sold under repurchase agreements	$	19,671	$	16,122		0.53	%	$	12,785		0.52	%
Advances from Federal Home Loan Bank	$	49,500	$	21,315		0.44	%	$	-		0.00	%

MARKET RISK - INTEREST RATE SENSITIVITY

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. The Company’s primary type of market risk is interest-rate risk.

The primary objective of Asset/Liability Management at the Company is to manage interest-rate risk and achieve reasonable stability in net interest income throughout interest-rate cycles in order to maintain adequate liquidity. The Company seeks to achieve this objective by maintaining the proper balance of rate-sensitive earning assets and rate-sensitive liabilities. The relationship of rate-sensitive earning assets to rate-sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate-sensitive assets and rate-sensitive liabilities are those that can be repriced to current market rates within a relatively short time period. Management monitors the rate sensitivity of earning assets and interest-bearing liabilities over the entire life of these instruments, but places particular emphasis on the first year.

Each of the Company’s banking subsidiaries has established an Asset/Liability Management Committee. These committees use a variety of tools to analyze interest-rate sensitivity, including a static gap presentation and a simulation model. A static gap presentation reflects the difference between total interest-sensitive assets and liabilities within certain time periods. While the static gap is a widely used measure of interest-rate sensitivity, it is not, in management’s opinion, the best indicator of a company’s true sensitivity position. Accordingly, the Company’s banking subsidiaries also use an earnings simulation model that estimates the variations in interest income under different interest-rate environments to measure and manage the Banks’ short-term interest-rate risk. According to the model, as of December 31, 2011 the Company was positioned so that net interest income would increase by approximately $1,136,000 over the next twelve months if market interest rates were to rise by 300 basis points at the beginning of the same period. Conversely, net interest income would decline by approximately $742,000 over the next twelve months if interest rates were to decline by 300 basis points at the beginning of the same period. Computation of prospective effects of hypothetical interest-rate changes are based on numerous assumptions, including relative levels of market interest rates and loan prepayment, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate all 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 seek 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, 2011 the Banks in aggregate had unused federal funds lines of credit totaling $22,000,000 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, 2011 the Banks in the aggregate had no long-term borrowings, no short-term borrowings, and $59,302,000 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’ $1,556,000 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. The Banks also have the ability to borrow funds from the Federal Reserve Bank through the Discount Window. This short-term borrowing relationship is collateralized by qualifying 1-4 family construction real estate, residential and commercial land, and commercial and industrial loans, aggregating approximately $12,378,000 at December 31, 2011. The Banks had no Discount Window advances at December 31, 2011.

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 on preferred stock. For further discussion of cash dividends on preferred stock see Item 8 – Financial Statements and Supplementary Data – “NOTE 16 – PREFERRED STOCK AND RESTRICTIONS ON DIVIDENDS”.

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, 2011, unfunded commitments to extend credit were $63,232,000, of which $58,105,000 was at variable rates and $5,127,000 was at fixed rates. These commitments included $1,483,000 of unfunded amounts of construction loans, $46,974,000 of undisbursed amounts of home equity lines of credit, $9,182,000 of unfunded amounts under commercial lines of credit, and $5,593,000 of other commitments to extend credit. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

At December 31, 2011 the Banks had issued commitments to extend credit through various types of arrangements, described further in the table below.

	December 31, 2011
	(dollars in thousands)
Unused Commitments
Lines of credit secured by residential properties	$	47,056
Lines of credit secured by commercial properties		1,919
Other unused commitments		14,257
Total	$	63,232

The commitments generally expire in one year. Past experience indicates that many of these commitments to extend credit will expire not fully used. However, as described under LIQUIDITY, the Company believes that it has adequate sources of liquidity to fund commitments that are drawn upon by the borrowers.

In addition to commitments to extend credit, the Banks also issue 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 his contractual obligation to the third party. At December 31, 2011, $1,808,000 was committed under letters of credit. Past experience indicates that many of these letters of credit will expire unused. However, through its various sources of liquidity, the Company believes that it will have the necessary resources to meet these obligations should the need arise. Various types of collateral secure most of the letters of credit. The Company believes that the risk of loss associated with letters of credit is comparable to the risk of loss associated with its loan portfolio. Moreover, the fair value associated with any letters of credit issued by the Company is immaterial to the Company.

Neither the Company nor its subsidiaries are involved in any other off-balance sheet arrangements or transactions that could result in liquidity needs or other commitments or significantly impact earnings. The Company did not have any obligations under non-cancelable operating lease agreements at December 31, 2011. Refer to Note 12 and Note 13 of the Company’s consolidated financial statements for a discussion of financial instruments with off-balance sheet risk and commitments and contingencies.

CAPITAL ADEQUACY AND RESOURCES

The capital needs of the Company have been met through the retention of earnings and from the proceeds of prior public stock offerings, as well as the sale of Fixed Rate Cumulative Perpetual Preferred Stock to the U. S. Treasury, pursuant to its Capital Purchase Program.

For publicly held bank holding companies, such as the Company, capital adequacy is evaluated on a consolidated basis. The Company’s banking subsidiaries must separately meet additional regulatory capital requirements imposed by the Office of the Comptroller of the Currency (the “Comptroller”). Generally, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) expects bank holding companies to operate above minimum capital levels.

The Federal Reserve Board has adopted a risk-based capital rule that requires bank holding companies to have qualifying capital to risk-weighted assets of at least 8%, with at least 4% being “Tier 1” capital. Tier 1 capital consists principally of common shareholders’ equity, non-cumulative preferred stock, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain intangible assets. “Tier 2” (or supplementary) capital consists of general loan loss reserves (subject to certain limitations), certain types of preferred stock and subordinated debt, and certain hybrid capital instruments and other debt securities such as equity commitment notes. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital components, provided that the maximum amount of Tier 2 capital that may be treated as qualifying capital is limited to 100% of Tier 1 capital.

The Comptroller’s regulations establish the minimum leverage capital ratio (Tier 1 capital to adjusted total assets) requirement for national banks at 3% in the case of a national bank that has the highest regulatory examination rating and is not contemplating significant growth or expansion. For all other national banks, the minimum leverage capital ratio requirement is 4%. Furthermore, the Comptroller reserves the right to require higher capital ratios in individual banks on a case-by-case basis when, in its judgment, additional capital is warranted by a deterioration of financial condition or when high levels of risk otherwise exist. Accordingly, the Comptroller has established individual minimum capital ratios for the Company’s three bank subsidiaries. Additionally, two of the Company’s three bank subsidiaries, have entered into formal agreements with the Comptroller for the banks to take various actions with respect to the operations of the banks. For further discussion of the higher individual minimum capital ratios and the formal agreements see footnote 1 to the table below and Item 8 – Financial Statements and Supplementary Data – “NOTE 19 – REGULATORY MATTERS”.

The Company’s and Banks’ capital ratios are presented as follows:

	December 31,
	2011			2010
Peoples Bancorporation, Inc.
Risk-based capital ratio		16.13	%		14.12	%
Tier 1 capital (to risk weighted assets)		14.87	%		12.86	%
Tier 1 capital (to adjusted total assets)		9.08	%		8.92	%

Peoples National Bank (1)
Risk-based capital ratio		15.95	%		13.29	%
Tier 1 capital (to risk weighted assets)		14.68	%		12.03	%
Tier 1 capital (to adjusted total assets)		9.48	%		8.91	%

Bank of Anderson (1)
Risk-based capital ratio		16.70	%		15.53	%
Tier 1 capital (to risk weighted assets)		15.45	%		14.28	%
Tier 1 capital (to adjusted total assets)		8.47	%		8.33	%

Seneca National Bank (1)
Risk-based capital ratio		14.82	%		13.71	%
Tier 1 capital (to risk weighted assets)		13.56	%		12.46	%
Tier 1 capital (to adjusted total assets)		8.52	%		8.82	%

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

See Item 8 – Financial Statements and Supplementary Data, Note 19, for more information about regulatory capital ratios.

PAYMENT OF DIVIDENDS

Payment of dividends by the Company is within the discretion of its Board of Directors subject to certain regulatory requirements, including prior approval by the Federal Reserve. The Company’s primary sources of funds with which to pay dividends to shareholders are the dividends it receives from the Banks.

The directors of a national bank may declare a dividend of so much of the undivided profits of the bank as the directors judge to be expedient, subject to certain limitations. A national bank may not declare and pay dividends in any year in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net income of the bank for the preceding two years, minus the sum of any transfers required by the Comptroller and any transfers required to be made to a fund for the retirement of any preferred stock, unless the Comptroller approves the declaration and payment of dividends in excess of such amount. Two of the Banks are subject to formal agreements that require the Comptroller’s prior approval to pay cash 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.

The Company has outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series T and Series W (the “Preferred Stock”), which are owned by the U. S. Treasury pursuant to its Capital Purchase Program. The Company declared and paid $690,000 in preferred stock dividends to the U.S. Treasury in 2011. The terms of the Preferred Stock limit the Company’s ability to pay common stock dividends or make repurchases of common stock under certain circumstances. The Company did not pay any cash dividends to its common shareholders in 2011.

For further information see Item 8 – Financial Statements and Supplementary Data – “NOTE 16 – PREFERRED STOCK AND RESTRICTIONS ON DIVIDENDS.”

MONETARY POLICIES AND EFFECT OF INFLATION

The earnings of bank holding companies are affected by the policies of regulatory authorities, including the Federal Reserve Board, in connection with its regulation of the money supply. Various methods employed by the Federal Reserve Board include open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike companies in most other industries, virtually all of the assets and liabilities of financial institutions are monetary in nature. As a result, interest rates generally have a more significant effect on a financial institution’s performance than does the effect of inflation. Interest rates do not necessarily change in the same magnitude as do the prices of goods and services.

While the effect of inflation on banks is normally not as significant as is its influence on those businesses that have large investments in plant and inventories, it does have some effect. During periods of high inflation, there are normally corresponding increases in the money supply, and banks will normally experience above-average growth in assets, loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses. Inflation that affects the Banks’ customers may also have an indirect effect on the Banks.

CORRESPONDENT BANKING

Correspondent banking involves the provision of services by one bank to another bank, which cannot provide that service for itself, or chooses not to, from an economic, regulatory or practical standpoint. The Banks purchase correspondent services offered by larger banks, including check collections, the sale and purchase of federal funds, security safekeeping, investment services, over-line and liquidity loan participations and sales of loans to or participations with correspondent banks.

The Banks have the option to sell loan participations to correspondent banks with respect to loans that exceed the Banks’ lending limits. Managements of the Banks have established correspondent banking relationships with South Carolina Bank and Trust, N.A., Columbia, South Carolina; CenterState Bank, N.A., Winter Haven, Florida; Community Bankers Bank, Midlothian, Virginia; and Wells Fargo 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.

REGULATORY CONSIDERATIONS

Bank holding companies and banks are extensively regulated under federal and state law. 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 Bank.

General

The Company and the Banks operate in a highly regulated environment, and their business activities are governed by statute, regulation, and administrative policies, and supervised by a number of federal regulatory agencies, including the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Comptroller, and the FDIC. The Company is also subject to limited regulation by the South Carolina State Board of Financial Institutions. The following discussion summarizes some of the relevant aspects of the laws and regulations that affect the Company and the Banks. It is important to note that these laws and regulations are intended primarily for the benefit and protection of the Banks’ depositors and the Depository Insurance Fund, and not for the protection of the Company’s shareholders or creditors. Proposals to change the laws and regulations that govern the banking industry are frequently raised in Congress, state legislatures, and various bank regulatory agencies, and such proposals have significantly increased in the wake of the recent financial crisis.

Financial institutions are being subjected to increased scrutiny and enforcement activity by state and federal banking agencies, the United States Department of Justice, the Securities and Exchange Commission, and other state and federal regulatory agencies. This increased scrutiny and enforcement activity entails significant potential increases in compliance requirements and associated costs. The banking regulators periodically examine the Company and the Banks to assess compliance with applicable requirements and the level of risk existing with respect to the Company’s and the Banks’ capital, asset quality, management, earnings, liquidity and sensitivity to market risk. When the results of examinations are less than satisfactory, the regulators are authorized to require the Company and the Banks to take appropriate corrective actions through the mechanisms of agreements with the Company or the Banks, or through enforcement orders. The regulators also have the power to enforce compliance with laws, regulations, regulatory policies and agreements as well as regulatory orders by the imposition of civil money penalties.

Regulation of the Company by the Federal Reserve and State Board

The Company is regulated by the Federal Reserve under the Federal Bank Holding Company Act of 1956, as amended (the “BHCA”). Under the BHCA, a bank holding company is generally prohibited from acquiring control of any company that is not a bank or engaged in permissible activities and from engaging in any business other than the business of banking or managing and controlling banks. However, there are certain activities which have been identified by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto, and are thus permissible for bank holding companies, directly or through subsidiaries, including the following activities: acting as an investment or financial advisor to subsidiaries and certain outside companies; leasing personal and real property or acting as a broker with respect thereto; providing management consulting advice to nonaffiliated banks and non-bank depository institutions; operating collection agencies and credit bureaus; acting as a futures commission merchant; providing data processing and data transmission services; acting as an insurance agent or underwriter with respect to limited types of insurance; performing real estate appraisals; arranging commercial real estate equity financing; providing securities brokerage services; and underwriting and dealing in obligations of the United States of America, the states and their political subdivisions.

A bank holding company may engage in a broader range of activities if it becomes a “financial holding company” pursuant to the Gramm-Leach-Bliley Act, which is described below under the caption “Gramm-Leach-Bliley Act.” 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 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 noted above, the Company also is subject to limited regulation by the State Board. Consequently, the Company must give notice to, or receive the approval of, the State Board pursuant to applicable law and regulations prior to engaging in the acquisition of South Carolina banking institutions or holding companies, or merging with a South Carolina bank holding company. The Company also may be required to file with the State Board periodic reports with respect to its financial condition and operation, management and inter-company relations between the Company and its subsidiaries.

Obligations of the Company to its Subsidiary Banks

A number of obligations and restrictions are imposed on bank holding companies and their depository institution subsidiaries by Federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution is in danger of becoming insolvent or is insolvent. For example, under the policy of the Federal Reserve and the Dodd-Frank Act, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended ("FDIA"), require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the Deposit Insurance Fund of the FDIC as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the Deposit Insurance Fund. The FDIC's claim for damages is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

The FDIA also provides that amounts received from the liquidation or other resolution of any insured depository institution by any receiver must be distributed (after payment of secured claims) to pay the deposit liabilities of the institution prior to payment of any other general or unsecured senior liability, subordinated liability, general creditor or shareholder. This provision gives depositors a preference over general and subordinated creditors and shareholders in the event a receiver is appointed to distribute the assets of any of the Banks.

Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

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”). These requirements define what qualifies as capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. In addition, the OCC may establish individual minimum capital requirements for a national bank that are different from the general requirements. 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.

The risk-based capital standards of both the Federal Reserve and the OCC explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agencies in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates should be considered by the agencies as a factor in evaluating a bank’s capital adequacy. The Federal Reserve also has issued additional capital guidelines for bank holding companies that engage in certain trading activities.

Bank regulators have continued to indicate their desire to raise capital requirements beyond current levels. Under the Dodd-Frank Act, regulatory authorities are required to impose new capital requirements on bank holding companies, which may be higher than current levels. However, management of the Company is unable to predict when any such higher capital requirements would be imposed, and if so, at what levels, and the total impact of such requirements on the Company.

The Company and each of the Banks exceeded all applicable capital requirements at December 31, 2011. The Comptroller currently requires that all three of the Company’s bank subsidiaries maintain the following minimum capital ratios: Tier-1 capital of at least 8% of adjusted total assets, Tier-1 capital of at least 10% of risk-weighted assets, and total risk-based capital of at least 12% of risk-weighted assets.

Payment of Dividends

The Company is a legal entity separate and distinct from the Banks. Most of the revenues of the Company are expected to continue to result from dividends paid to the Company by the Banks. There are statutory and regulatory requirements applicable to the payment of dividends by subsidiary banks as well as by the Company to its shareholders. See “Item 1 – Business – PAYMENT OF DIVIDENDS” above.

Regulation of the Banks

As national banks, the Banks are subject to supervision by the Comptroller and, to a limited extent, the FDIC, the Federal Reserve and the Bureau of Consumer Financial Protection. With respect to expansion, the Banks may establish branch offices anywhere in the United States with the prior approval of the Comptroller. 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 confidentiality of consumer financial records and the Electronic Funds Transfer Act and regulations promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. The Banks are also subject to the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; the Bank Secrecy Act, dealing with, among other things, the reporting of certain currency transactions; and the USA Patriot Act, dealing with, among other things, requiring the establishment of anti-money laundering programs including standards for verifying customer information at account opening.

The Banks are also subject to the requirements of the Community Reinvestment Act (the “CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. Each financial institution’s actual performance in meeting community credit needs is evaluated as part of the examination process, and also is considered in evaluating mergers, acquisitions and applications to open a branch or facility.

Loans and extensions of credit by national banks are subject to legal lending limitations. Under federal law, a national bank may grant unsecured loans and extensions of credit in an amount up to 15% of its unimpaired capital, surplus and allowance for loan losses to any person or entity. In addition, a national bank may grant loans and extensions of credit to a single person up to 10% of its unimpaired capital, surplus and allowance for loan losses, provided that the transactions are fully secured by readily marketable collateral having a market value determined by reliable and continuously available price quotations. This 10% limitation is separate from, and in addition to, the 15% limitation for unsecured loans. Loans and extensions of credit may exceed the general lending limits if they qualify under one of several exceptions. Such exceptions include, among others, certain loans or extensions of credit arising from the discount of commercial or business paper, the purchase of banker’s acceptances, loans secured by documents of title, loans secured by U. S. obligations and loans to or guaranteed by the federal government.

As national banks, the Banks are subject to examinations and reviews by the Comptroller. These examinations are typically completed on site, and the Banks are subject to off-site review as well. The Banks also submit to the FDIC quarterly reports of condition, as well as such additional reports as the national banking laws may require.

FDIC Insurance Assessments

During the first quarter of 2009, the FDIC announced a special one-time emergency assessment. The Company’s bank subsidiaries paid $247,000 on September 30, 2009 for the one-time emergency assessment. On November 12, 2009, the FDIC Board of Directors adopted a final rule requiring insured depository institutions to prepay their quarterly risk-based deposit insurance assessment for all of 2010, 2011 and 2012. On December 31, 2009, the Banks paid $3,981,000 for these quarterly assessments, of which $3,517,000 was booked as a prepaid expense. The FDIC also voted to adopt a uniform three-basis point increase in assessment rates effective January 1, 2011.

In November 2010, the FDIC approved two proposals that amend the deposit insurance assessment regulations. The first proposal implements a provision in the Dodd-Frank Act that changes the assessment base from one based on domestic deposits (as it has been since 1935) to one based on assets. The assessment base changes from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The second proposal changes the deposit insurance assessment system for large institutions in conjunction with the guidance given in the Dodd-Frank Act. Since the new base would be much larger than the current base, the FDIC will lower assessment rates, which achieves the FDIC’s goal of not significantly altering the total amount of revenue collected from the industry. Risk categories and debt rating will be eliminated from the assessment calculation for large banks which will instead use scorecards. The scorecards will include financial measures that are predictive of long-term performance. A large financial institution will continue to be defined as an insured depository institution with at least $10 billion in assets. Both changes in the assessment system will be effective as of April 1, 2011, and assessments will be payable at the end of September. In December 2010, the FDIC voted to increase the required amount of reserves for the designated reserve ratio (the “DRR”) to 2.0%. The ratio is higher than the 1.35% set by the Dodd-Frank Act in July 2010 and is an integral part of the FDIC’s comprehensive, long-range management plan for the DIF. In February 2011, the FDIC approved the final rules that, as noted above, change the assessment base from domestic deposits to average assets minus average tangible equity, adopt a new score-card based assessment system for financial institutions with more than $10 billion in assets, and finalize the DRR target size at 2.0% of insured deposits.

On December 29, 2010 the Dodd-Frank Act was amended to include full FDIC insurance on Interest on Lawyers Trust Accounts (“IOLTAs”). IOLTAs will receive unlimited insurance coverage as non-interest bearing transaction accounts for two years ending December 31, 2012.

Other Safety and Soundness Regulations

Prompt Corrective Action. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized."

A bank that is "undercapitalized" becomes subject to the prompt corrective action provisions of the FDIA: restricting payment of capital distributions and management fees; requiring the FDIC to monitor the condition of the bank; prohibiting the acceptance of employee benefit plan deposits; requiring submission by the bank of a capital restoration plan; restricting the growth of the bank's assets and requiring prior approval of certain expansion proposals. A bank that is "significantly undercapitalized" is additionally subject to restrictions on compensation paid to senior management of the bank. A bank that is "critically undercapitalized" is further subject to restrictions on the activities of the bank, restrictions on payments of subordinated debt of the bank, and is required to be placed in receivership within 90 days absent certain extensive circumstances. 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.

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 formal agreements with the Comptroller, neither Bank of Anderson, N.A. nor The Peoples National Bank may 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 Dodd-Frank Act discussed below expanded the provisions of the Riegle-Neal Act relating to authority of banks to branch across state lines. Under the Dodd-Frank Act, the authority of a bank to establish and operate branches within a state continues to be subject to applicable state branching laws, but interstate branching is permitted to the same extent it would be permitted under state law if the branching bank’s home office were located in the state in which the branch will be located.

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 expanded the activities in which a bank holding company and a bank can engage through affiliations created under a holding company structure or through a financial subsidiary if certain conditions are met. Significantly, the permitted financial activities for financial holding companies include authority to engage in merchant banking and insurance activities, including insurance portfolio investing. 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 personal financial information may be used by financial institutions. The regulations adopted pursuant to the Act govern the consumer’s right to opt-out of further disclosure of nonpublic personal financial information and require the Banks to provide initial and annual privacy notices. The Act and regulations also required the Banks to develop and maintain comprehensive plans for the safeguarding of customer information, which encompasses all aspects of the Banks’ technological environment, business practices, and facilities.

As noted previously, although the Company initially took advantage of the opportunity to become a financial holding company so that it would have power to offer expanded services, neither the Company nor the Banks used the additional power, and in 2008 the Company reverted its status back to that of a bank holding company. Although 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, 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.

Governmental Response to 2008 Financial Crisis

During the fourth quarter of 2008 and continuing throughout 2009 the FDIC, the Federal Reserve, the Department of the Treasury and Congress took a number of actions designed to alleviate or correct mounting problems in the financial services industry. A number of these initiatives were directly applicable to community banks.

Congress enacted the Emergency Economic Stabilization Act of 2008 which, among other things, temporarily increased the maximum amount of FDIC deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief Program (“TARP”) administered by Treasury. In October 2008, Treasury announced a Capital Purchase Program (“CPP”) under TARP to increase the capital of healthy banks. Under the CPP, Treasury purchased preferred stock with warrants from qualified banks and bank holding companies in an amount up to 3% of the seller’s risk-weighted assets as of September 30, 2008. The Company filed an application which received approval, and in 2009 the Company sold preferred stock and warrants to the Treasury for $12,660,000.

The FDIC also implemented in October 2008 a Temporary Liquidity Guarantee Program consisting of a deposit insurance component pursuant to which it undertook to provide deposit insurance in an unlimited amount for non-interest bearing transaction accounts, and a debt guarantee component pursuant to which it undertook to fully guarantee senior, unsecured debt issued by banks or bank holding companies. Coverage of both components was automatic until December 5, 2008, at which time covered institutions could opt out of one or both of the components. Institutions not opting out would be charged fees for their participation in the components. The Banks did not opt out of either component.

An unfortunate consequence of the difficulties that have beset the banking industry since the latter part of 2008 has been a large increase in bank failures, which has led to substantial claims being made against the FDIC’s Deposit Insurance Fund. In order to increase the amount in the DIF to reflect the increased risk of additional bank failures and insurance claims, the FDIC raised its assessments on banks for 2009, issued a special one-time assessment of 5 cents per $100 of assessable deposits paid in September, 2009 based on deposits at June 30, 2009, and adopted a final rule requiring insured depository institutions to prepay their quarterly risk-based deposit insurance assessments through 2012 on December 31, 2009. The Banks paid FDIC insurance in the amount of $4,814,000 in 2009 and expensed $1,297,000 in 2009. The Banks expensed $962,258 and $1,095,000 for FDIC insurance in 2011 and 2010, respectively. See also “--FDIC Insurance Assessments.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

On July 21, 2010 the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry. The Dodd-Frank Act will have extensive effects on all financial institutions, and includes provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks. Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments.

The Dodd-Frank Act requires regulatory agencies to implement new regulations that will establish the parameters of the new regulatory framework and provide a clearer understanding of the legislation’s effect on banks. We are in the process of evaluating this legislation and determining the impact it will have on our current and future operations. However, the manner and degree to which it affects our business will be significantly impacted by the implementing regulations that are ultimately adopted. Accordingly, at the present time we cannot fully assess the impact that the act will have on us, though we are confident it will increase our cost of doing business and the time spent by management on regulatory compliance matters.

Legislative Proposals

Proposed legislation that could significantly affect the business of banking is introduced in Congress and the General Assembly of South Carolina from time to time. For example, numerous bills are pending in Congress and the South Carolina Legislature to provide various forms of relief to homeowners from foreclosure of mortgages as a result of publicity surrounding economic problems resulting from subprime mortgage lending and the economic adjustments in national real estate markets. Broader problems in the financial sector of the economy, which became apparent in 2008, have led to numerous calls for, and legislative and regulatory proposals for, restructuring of the regulation of financial institutions. Management of the Company cannot predict the future course of such legislative proposals or their impact on the Company and the Banks should they be adopted.

EMPLOYEES

The Company and the Banks employed 105 full-time and 17 part-time persons as of December 31, 2011. Management believes that its employee relations are good.

EXECUTIVE OFFICERS

The executive officers of the Company are L. Andrew Westbrook, III, President and Chief Executive Officer; William B. West, Executive Vice President and Treasurer; and Robert E. Dye, Jr., Senior Vice President, Chief Financial Officer and Secretary. Information about all of the executive officers is set forth in Item 10, Part III of this report on Form 10-K.

AVAILABLE INFORMATION

The Company electronically files with the Securities and Exchange Commission (“SEC”) its annual reports on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “1934 Act”), and proxy materials pursuant to Section 14 of the 1934 Act. The SEC maintains a site on the Internet at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The Company also makes its filings available, free of charge, upon written request to Ms. Patricia A. Jensen, Senior Vice President, Peoples Bancorporation, Inc., P.O. Box 1989, Easley, South Carolina 29641.

ITEM 1 A. RISK FACTORS

Merger Risk Factors

On December 19, 2011, the Company and SCBT Financial Corporation (“SCBT”) agreed to a strategic business combination in which the Company will merge with and into SCBT, with SCBT continuing as the surviving corporation (referred to as the “merger”). Immediately following the merger, each of the Company’s three bank subsidiaries will merge with SCBT, N. A., a wholly-owned bank subsidiary of SCBT, with SCBT, N. A. continuing as the surviving bank (referred to as the ”bank merger”). A special meeting of shareholders will be held in the second quarter of 2012 to vote on this merger. Following are risks to be considered.

Because the market price of SCBT common stock will fluctuate, our shareholders cannot be certain of the market value of the merger consideration they will receive.

Upon completion of the merger, each share of our common stock will be converted into 0.1413 of a share of SCBT common stock. The market value of the merger consideration may vary from the closing price of SCBT common stock on the date SCBT announced the merger, on the date that the proxy statement/prospectus is mailed to our shareholders, on the date of the special meeting of our shareholders and on the date the merger is completed and thereafter. Any change in the market price of SCBT common stock prior to the completion of the merger will affect the market value of the merger consideration that the our shareholders will receive upon completion of the merger. Stock price changes may result from a variety of factors that are beyond our control and the control of SCBT, including but not limited to general market and economic conditions, changes in our respective businesses, operations and prospects and regulatory considerations. Therefore, at the time of our special meeting, our shareholders will not know the precise market value of the consideration they will receive at the effective time of the merger.

The market price of SCBT common stock after the merger may be affected by factors different from those affecting the shares of the Company or SCBT currently.

Upon completion of the merger, holders of our common stock will become holders of SCBT common stock. Our business differs from that of SCBT’s, and, accordingly, the results of operations of the combined company and the market price of SCBT common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of the two companies.

Regulatory approvals may not be received, may take longer than expected, or may impose conditions that are not presently anticipated.

Before the merger and the bank mergers may be completed, SCBT and the Company must obtain approvals from the Federal Reserve Board, the OCC and the South Carolina State Board of Financial Institutions. Other approvals, waivers or consents from regulators may also be required. These regulators may impose conditions on the completion of the merger or require changes to the terms of the merger. Such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of SCBT following the merger.

Combining the two companies may be more difficult, costly, or time consuming than expected.

The Company and SCBT have operated and, until the completion of the merger, will continue to operate, independently. The success of the merger, including anticipated cost savings, will depend, in part, on SCBT’s ability to successfully combine the businesses of the Company and SCBT. To realize these anticipated benefits, after the completion of the merger, SCBT expects to integrate the Company’s business into its own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. The loss of key employees could adversely affect SCBT’s ability to successfully conduct its business in the markets in which we now operate, which could have an adverse effect on SCBT’s financial results and the value of its common stock. If SCBT experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause SCBT and/or the Company to lose customers or cause customers to remove their accounts from SCBT and/or the Company and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of the companies during this transition period and for an undetermined period after completion of the merger. In addition, the actual cost savings of the merger could be less than anticipated.

Termination of the merger agreement could negatively impact us.

If the merger agreement is terminated, there may be various consequences. For example, the Company’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. Additionally, if the merger agreement is terminated, the market price of our common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed. If the merger agreement is terminated and our board of directors seeks another merger or business combination, our shareholders cannot be certain that the Company will be able to find a party willing to pay the equivalent or greater consideration than that which SCBT has agreed to pay in the merger. In addition, if the merger agreement is terminated under certain circumstances, including circumstances involving a change in recommendation by our board of directors, we may be required to pay SCBT a termination fee of $1.5 million.

We will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships with us. Retention of certain employees by us may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the Company or SCBT. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Company or SCBT, our Company’s business assumed by SCBT following the merger could be harmed. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course prior to completion of the merger.

The completion of the merger may trigger change in control provisions in certain agreements to which we are a party.

The completion of the merger may trigger change in control provisions in certain agreements to which we are a party. If the Company or SCBT are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements (including terminating the agreements or seeking monetary penalties). Even if the Company or SCBT is able to obtain waivers, the counterparties may demand a fee for such waivers or seek to renegotiate the agreements on materially less favorable terms than those currently in place.

Risks Related to Our Business

There can be no assurance that recent government actions will help stabilize the U.S. financial system.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, various branches and agencies of the U.S. Government have put in place laws, regulations and programs to address capital and liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that such laws, regulations and programs will have on the financial markets, including the extreme levels of volatility, liquidity and confidence issues, and limited credit availability currently being experienced. The failure of such laws, regulations and programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

Recent levels of market volatility are unprecedented.

The volatility and disruption of financial and credit markets has reached unprecedented levels for recent times. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. If recent levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The soundness of other financial institutions could adversely affect us.

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers, dealers, commercial banks, investment banks, and government sponsored enterprises. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit risk may be exacerbated when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or other obligation due us. There is no assurance that any such losses would not materially and adversely affect our results of operations or earnings.

Our primary source of funding for our operations is deposits from customers in our local market. Should other banks in or near our market areas fail, it could cause our deposit customers to lose confidence in banks and cause them to withdraw or substantially restrict their deposits with us. If such activity reached a high enough level, it could substantially disrupt our business. There is no assurance that such disruptions, were they to occur, would not materially and adversely affect our results of operations or earnings.

Current market developments may adversely affect our industry, business and results of operations.

Dramatic declines in the housing market during the prior four years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps, other derivative securities, and mortgage loans have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide, funding to borrowers, including other financial institutions. The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely, directly or indirectly, affect our business, financial condition and results of operations.

We depend on the services of a number of key personnel, and a loss of any of those personnel could disrupt our operations and result in reduced revenues.

The success of our business depends to a great extent on our customer relationships. Our growth and development to date have depended in large part on the efforts of our senior management team. A number of these senior officers have primary contact with our customers and are extremely important in maintaining personalized relationships with our customer base, a key aspect of our business strategy, and in increasing our market presence. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations and possibly result in reduced revenues if we were unable to find suitable replacements promptly.

We may be unable to successfully manage our future growth.

Our future profitability will depend in part on our ability to manage growth successfully. Our ability to manage growth successfully will depend on our ability to maintain cost controls and asset quality while attracting additional loans and deposits, as well as on factors beyond our control, such as economic conditions and interest rate trends. If we grow too quickly and are not able to control costs and maintain asset quality, growth could materially adversely affect our financial performance.

Our continued ability to grow or regulatory requirements may require us to raise additional capital in the future, but that capital may not be available when it is needed or be available on favorable terms.

We anticipate that our current capital resources will satisfy our capital requirements for the immediate future. Nevertheless, we may need to raise additional capital to support additional growth or to meet regulatory requirements. Our ability to raise additional capital, if needed, will depend, among other things, on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. If we cannot raise additional capital on acceptable terms when needed, our ability to further expand our operations through internal growth and acquisitions could be limited, and we could be forced to raise capital on terms that would substantially dilute existing shareholders.

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. In originating loans, there is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan, and in the case of a collateralized loan, the quality of the collateral. Management maintains an allowance for loan losses based on experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for probable loan losses based upon a percentage of the outstanding balances and for specific loans when their collectibility is considered questionable.

As of December 31, 2011, the Company’s allowance for loan losses was $6,846,000, which represents approximately 2.4% of its total outstanding loans. The Banks had $8,637,000 in non-accruing loans as of December 31, 2011. The allowance may not prove sufficient to cover future loan losses. Although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to the Banks’ non-performing or performing loans. In addition, regulatory agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination. Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases in the allowance may be required in the future if economic conditions should worsen. Material additions to the Company’s allowance for loan losses would adversely impact our net income and capital.

If our non-performing assets increase, our earnings will suffer.

At December, 31, 2011 non-performing assets (which consist of non-accruing loans, other loans 90-or-more-days delinquent, and assets acquired in settlement of loans) totaled $23,740,000 or 4.3% of total assets, which is a decrease of $5,338,000 or 18.4% compared to non-performing assets at December 31, 2010. At December 31, 2010 non-performing assets were $29,078,000 or 5.4% of total assets. Non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or other real estate owned. We maintain a reserve for probable losses, which is established through a current period charge to earnings allocated to the provision for loan losses. When appropriate, we also charge down the value of properties in our portfolio of other real estate owned to reflect changing market values. There are also legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance expense related to our portfolio of other real estate owned. The resolution of non-performing assets requires the active involvement of management, which can detract from more profitable endeavors. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly at that time which will decrease our earnings.

Our business is concentrated in the Upstate area of South Carolina, and as has been the case over the prior four years, a continuing downturn in the economy of the area, a continuing decline in area real estate values or other events in our market area may adversely affect our business.

Substantially all of our business is located in the Upstate area of South Carolina. As a result, our financial condition and results of operations are likely to be affected by changes in the Upstate economy. Over the past four years, we have experienced the adverse effects of the economic recession in the form of increased default and delinquent payment of loans, and decreases in the value of collateral securing loans and of real estate acquired in settlement of loans. If the economic downturn and general decline in Upstate area real estate values or other adverse economic conditions continue, we would expect continuing decreases in loan demand, increases in default of loans, and decreases in the value of the collateral securing loans. The existence of all of these adverse economic conditions has a material adverse effect on our business operations, future prospects, and financial condition. The longer such adverse economic conditions persist, the greater the negative impact on us will be.

We face strong competition from larger, more established competitors, which may adversely affect our ability to operate profitably.

We encounter strong competition from financial institutions operating in the Upstate area of South Carolina. In the conduct of our business, we also compete with credit unions, insurance companies, money market mutual funds and other financial institutions, some of which are not subject to the same degree of regulation as we are. Many of these competitors have substantially greater resources and lending abilities than we have and offer services, such as investment banking, trust and international banking services that we do not provide. We believe that we have competed, and will continue to be able to compete, effectively with these institutions because of our experienced bankers and personalized service, as well as through loan participations and other strategies and techniques. However, we cannot promise that we are correct in our belief. If we are wrong, our ability to operate profitably may be negatively affected.

We are subject to a variety of operational risks, including reputational risk, legal risk and compliance risk, and the risk of fraud and theft by employees or outsiders, which may adversely affect our business and results of operations.

We are exposed to many types of operations risks, including reputational risks, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from faulty or disabled computer or telecommunication systems.

If personal, non-public, confidential or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and our large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages, or natural disasters, disease pandemics or other damage to property or physical assets), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in our diminished ability to operate our business (for example, by requiring us to expend significant resources to correct the defect), as well as potential liability to customers, reputational damage and regulatory intervention, which could adversely affect our business, financial condition and results of operations, perhaps materially.

In particular, we are subject to security, transactional and operation risks relating to the use of technology that could damage our reputation and our business.

We rely heavily on communications and information systems to conduct our business serving both internal and customer constituencies. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures, security applications and fraud mitigation applications, designed to prevent or limit the effect of the failure, interruption, fraud attacks or security breach of our information systems, there can be no assurance that any such failures, in interruptions, fraud attacks or security breaches will not occur or, if they do occur, that they will be adequately addressed. Furthermore, breaches of any third party technology may also cause reimbursable loss to our consumer and business customers, through no fault of our own. Fraud attacks targeting customer-controlled devices, plastic payment card terminals, and merchant data collection points provide another source of potential loss, again through no fault of our own. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and cash flows.

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. Beginning in September 2007 the Federal Reserve incrementally decreased short-term interest rates to near zero percent by December 2008, with no subsequent changes in 2009, 2010 or 2011. 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, and the ability of borrowers to perform under existing loans of all types from the effect of increases in interest rates.

Failure of two of our subsidiary banks to comply with the terms of their formal agreements with the OCC could result in penalties and more stringent enforcement action against that bank.

Two of our three Banks, Bank of Anderson, N. A., and The Peoples National Bank have both entered into formal agreements with the OCC to take various actions required by the OCC. Failure of the Banks to fully comply with all of the terms of the formal agreements could result in the OCC’s taking more stringent enforcement actions against the Banks, including the imposition of civil money penalties, the imposition of cease-and-desist orders, or under extreme conditions the appointment of a receiver or revocation of the Banks’ charters. Such actions by the OCC could have a material adverse effect on our financial condition or results of operation.

Risks Related to Our Common Stock

Our common stock has a limited trading market, which may make the prompt execution of sale transactions difficult.

Our common stock is not traded on any exchange. Although our common stock is traded over the counter and quotations of bid and ask information are provided by the National Association of Securities Dealers, Inc.’s OTC Bulletin Board, no active trading market has developed and none is expected to develop in the foreseeable future. Accordingly, if you wish to sell shares you may experience a delay or have to sell them at a lower price in order to sell them promptly, if at all.

We may issue additional securities, which could affect the market price of our common stock and dilute your ownership.

We may issue additional securities to raise additional capital to support growth, offset losses, redeem our preferred stock, or to make acquisitions. Sales of a substantial number of shares of our preferred stock or our common stock, or the perception by the market that those sales could occur, could cause the market price of our common stock to decline or could make it more difficult for us to raise capital through the sale of common stock or to use our common stock in future acquisitions. The issuance of substantial amounts of additional securities could reduce shareholders’ proportionate ownership of the Company.

The Series T and W Preferred Stock impact net income available to our common shareholders and earnings per common share.

The dividends declared on the Series T and Series W Preferred Stock reduce the net income available to common shareholders and our earnings per common share. The Series T and W Preferred Stock also are entitled to receive preferential treatment in the event of liquidation, dissolution or winding up of the Company. Moreover, the securities purchase agreement between us and the Treasury pursuant to the CPP provides that, prior to the earlier of (i) three years from the date of sale and (ii) the date on which all of the shares of the preferred stock have been redeemed by us or transferred by the Treasury to third parties, we may not, without the consent of the Treasury, increase the cash dividend on our common stock.

We may need to raise additional capital in the future to redeem the Series T and W Preferred Stock or to support further growth, but that capital may not be available when it is needed.

We are required by regulatory authorities to maintain adequate levels of capital to support our operations. To support our continued growth, we may need to raise additional capital. In addition, when we decide to redeem the Series T and W Preferred Stock that we issued to the Treasury Department we may need to raise additional capital to do so. Our ability to raise additional capital, if needed, will depend in part on conditions in the capital markets at that time, which are outside our control. Accordingly, we cannot be assured of the ability to raise additional capital, if needed, on terms that are acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired. In addition, if we decide to raise additional equity capital, your interest could be diluted.

There is no guarantee we will be able to pay cash dividends in the future at any level.

Declaration and payment of dividends are within the discretion of our board of directors, and subject to regulatory requirements imposed by the Federal Reserve. 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 their businesses and 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. Our ability to pay dividends is also subject to restrictions under the terms of the Purchase Agreement with the U. S. Department of the Treasury relating to its purchase of our preferred stock.

Provisions in our articles of incorporation and South Carolina law may discourage or prevent takeover attempts, and these provisions may have the effect of reducing the market price for our stock.

Our articles of incorporation include several provisions that may have the effect of discouraging or preventing hostile takeover attempts, and therefore of making the removal of incumbent management difficult. The provisions include staggered terms for our board of directors and requirements of supermajority votes to approve certain business transactions. In addition, South Carolina law contains several provisions that may make it more difficult for a third party to acquire control of us without the approval of our board of directors, and may make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock. To the extent that these provisions are effective in discouraging or preventing takeover attempts, they may tend to reduce the market price for our stock.

Our common stock is not insured, so you could lose your total investment.

Our common stock is not a deposit, savings account or obligation of our Banks and is not insured by the Federal Deposit Insurance Corporation or any other government agency. Should our business fail you could lose your total investment.

Risks Related to Our Industry

We are subject to governmental regulation, which could change and increase our cost of doing business or have an adverse effect on our business.

We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Most of this regulation is designed to protect our depositors and other customers, not our shareholders. Our compliance with the requirements of these agencies is costly and may limit our growth and restrict certain of our activities, including, payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, and locations of offices. We are also subject to capitalization guidelines established by federal authorities and our failure to meet those guidelines could result in limitations being imposed on our activities or, in an extreme case, in one or more of our banks being placed in receivership. We are also subject to the extensive and expensive requirements imposed on public companies by the Sarbanes-Oxley Act of 2002 and related regulations.

Various laws, including the Federal Deposit Insurance Act and the Emergency Economic Stability Act of 2008 (“EESA”), and related regulations are structured to spread the governmental costs of problems in the financial industry broadly over the financial industry in order to prevent the taxpayers from having to pay such costs. As a result, assessments by the FDIC to pay for deposit insurance have increased, and will likely continue to increase, substantially, and the total our banks will be required to pay could increase enough to materially affect our income and our ability to operate profitably. Additionally, EESA contains a provision for the financial industry to be required to absorb, in an as yet undetermined fashion, any losses suffered by the government on account of its acquiring troubled assets under the Troubled Assets Relief Program of EESA. The Dodd-Frank Act also makes numerous changes in the way financial institutions are regulated, and creates a new agency to regulate consumer protection as well as expanding and modifying consumer protection laws.

The laws and regulations applicable to the banking industry could change at any time, and numerous regulations required by the Dodd-Frank Act are yet to be adopted. Therefore, 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, such regulation may not necessarily put us at a competitive disadvantage with respect to other similarly situated banks and holding companies, but 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

None.

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. The 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 four 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; and a fourth 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 Peoples National Bank closed a branch office in Greenville, South Carolina located at 300 Mills Avenue on November 11, 2010.

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.

Bank of Anderson owns a 0.99-acre lot, without improvements, on Highway 81 North in Anderson County, South Carolina for the purpose of building an additional branch facility in the future.

Seneca National Bank, located at 201 By-Pass 123, Seneca, South Carolina, operates out of a two-story brick building containing approximately 6,688 square feet situated on 1.097 acres of land in Seneca, South Carolina, which is owned by Seneca National Bank.

All locations of the Company and the Banks are considered suitable and adequate for their intended purposes. Management believes that insurance coverage on the foregoing properties is adequate.

ITEM 3. LEGAL PROCEEDINGS

On January 18, 2012, two purported shareholders of Peoples filed a class action lawsuit in the Court of Common Pleas for the Thirteenth Judicial District, State of South Carolina, County of Pickens, captioned F. Davis Arnette and Mary F. Arnette v. Peoples Bancorporation, Inc., Case No. 2012-CP-39-0064. The Complaint names as defendants the Company, the current members of the Company’s board of directors, who are referred to as the director defendants, and SCBT. The Complaint is brought on behalf of a putative class of shareholders of the Company’s common stock and seeks a declaration that it is properly maintainable as a class action. The Complaint alleges that the director defendants breached their fiduciary duties by failing to maximize shareholder value in connection with the proposed merger with SCBT and also alleges that SCBT aided and abetted those breaches of fiduciary duty. The Complaint further alleges that the director defendants breached their fiduciary duties to the Company’s shareholders by improperly securing for themselves certain benefits not shared equally by the Company’s shareholders and by approving certain terms and conditions in the merger agreement that may be adverse to potential alternate acquirers of the Company. The Complaint seeks declaratory and injunctive relief to prevent the completion of the merger, an accounting to determine damages sustained by the putative class, and costs including plaintiffs’ attorneys’ and experts’ fees. Each of the Company and SCBT believes that the claims asserted in the Complaint are without merit.

The Company is subject to other 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. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The common stock of the Company is traded over the counter. Quotations of bid and ask information are provided electronically by the OTC Bulletin Board under the symbol “PBCE.OB.” The reported high and low bid prices for each quarter of 2011 and 2010 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, 2010	$	1.75	$	2.90
June 30, 2010	$	1.75	$	2.76
September 30, 2010	$	1.35	$	1.89
December 31, 2010	$	1.12	$	1.85
March 31, 2011	$	1.25	$	1.72
June 30, 2011	$	1.05	$	2.00
September 30, 2011	$	1.50	$	1.65
December 31, 2011	$	1.00	$	4.00

As of February 13, 2012, the number of holders of record of the Company’s common stock was 942 and the number of issued and outstanding shares was 7,039,263.

During 2011 the Company paid dividends of $690,000 on its preferred stock to the U.S. Treasury. The Company paid no cash dividends to its common shareholders in 2011 or 2010. Prior to 2009, cash dividends were paid to common shareholders at the discretion of the Board of Directors.

On each of July 13, 1992, July 12, 1993, December 12, 1994, November 30, 1995, November 8, 1996, October 31, 1997, December 7, 1998, January 14, 2000, January 5, 2001, January 4, 2002, November 18, 2002, November 17, 2003, January 4, 2005, December 30, 2005, January 5, 2007 and January 4, 2008 the Company paid 5% stock dividends to common shareholders.

It is the policy of the Board of Directors of the Company to reinvest earnings for such periods of time as is necessary to the successful operations of the Company and of the Banks. Future dividends will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors of the Company. Payment of dividends is also subject to regulatory restrictions (see Item 1 -- Business, “PAYMENT OF DIVIDENDS”), and a contractual agreement not to pay cash dividends, except under certain circumstances, without the prior consent of the U. S. Department of the Treasury while it owns the Company’s preferred stock.

Unregistered Sales of Equity Securities and Use of Proceeds

Other than as reported in a previously filed Form 10-Q or Form 8-K, the Company did not sell any equity securities during the years ended December 31, 2011 and 2010 that were not registered under the Securities Act of 1933.

Purchases of Equity Securities by the Company and Affiliated Purchasers

Neither the Company nor any “affiliated purchaser” as defined in 17 C.F.R. 240.10b-18(a)(3) purchased any shares or units of any class of the Company’s equity securities that are registered pursuant to Section 12 of the Exchange Act during the fourth quarter of 2011. Accordingly, no disclosure is required pursuant to 17 C.F.R. §229.703.

Securities Authorized for Issuance under Equity Compensation Plans

The information required by 17 C.F.R. 229.201(d) is set forth under Item 12.

ITEM 6. SELECTED FINANCIAL DATA

	FIVE-YEAR FINANCIAL SUMMARY (All amounts, except per share data, in thousands)
	2011			2010			2009			2008			2007
INCOME STATEMENT DATA
Net interest income	$	19,576		$	18,979		$	17,895		$	16,634		$	18,924
Provision for loan losses		3,103			6,625			4,958			13,820			900
Other operating income		4,208			4,876			3,701			732			3,842
Other operating expenses		17,437			17,516			17,007			17,106			15,966
Net income (loss)		2,943			383			320			(8,376	)		4,343
Net income (loss) available to common shareholders		2,119			(440	)		(224	)		(8,376	)		4,343

PER COMMON SHARE DATA (1)
Net income (loss) per common share -
Basic	$	0.30		$	(0.06	)	$	(0.03	)	$	(1.19	)	$	0.59
Diluted		0.30			(0.06	)		(0.03	)		(1.19	)		0.59
Cash dividends declared		0.00			0.00			0.00			0.15			0.20

BALANCE SHEET DATA
Total assets	$	549,702		$	541,070		$	556,601		$	559,875		$	558,443
Total deposits		476,453			474,754			484,996			445,369			417,621
Total loans (net)		279,598			332,794			366,143			389,494			414,688
Investment securities		200,441			142,294			116,213			112,247			102,693
Total earning assets		503,261			490,696			502,222			520,908			523,597
Shareholders’ equity		58,985			52,298			54,443			41,512			50,241

OTHER DATA
Return on average assets		0.54	%		0.07	%		0.06	%		-1.51	%		0.84	%
Return on average common equity		5.36	%		-1.07	%		-0.53	%		-17.83	%		9.03	%

PEOPLES BANCORPORATION INC /SC/ 10-K