PEOPLES BANCORPORATION INC /SC/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended Commission file
June 30, 2002 000-20616

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

South Carolina 57-09581843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1800 East Main Street, Easley, South Carolina 29640
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period
that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days.

Yes [X] No [ ]

The number of outstanding shares of the
issuer's $1.67 par value common stock as
of June 30, 2002 was 3,341,370.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands except share data)

1

PEOPLES BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands except share data)

2

Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2001 and 2002

(Amounts in thousands except share data)
(Unaudited)

* 5% stock dividends issued in January 2001 and 2002 are reflected in December
31, 2000 and 2001 data.

3

Peoples Bancorporation, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)

4

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of these policies is included in the 2001 Annual Report on Form
10-K and incorporated herein by reference.

STATEMENT OF CASH FLOWS

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

COMMON STOCK

The Board of Directors declared cash dividends of $0.05 per common share to
shareholders of record March 22, 2002, payable April 5, 2002, and $0.06 per
common share to shareholders of record June 21, 2002, payable July 5, 2002.

SFAS No. 128, "Earnings per Share" requires that the Company present basic
and diluted net income per common share. The assumed conversion of stock options
creates the difference between basic and diluted net income per share. Income
per share is calculated by dividing net income by the weighted average number of
common shares outstanding for each period presented. The weighted average number
of common shares outstanding for basic net income per common share for the six
months ended June 30, 2002 and 2001 was 3,332,863 and 3,326,448, respectively.
The weighted average number of common shares outstanding for diluted net income
per common share was 3,434,066 and 3,414,225 for the six months ended June 30,
2002 and 2001.

The Company issued a five-percent common stock dividend in January 2002.
Per share data in 2001 has been restated to reflect this transaction.

5

MANAGEMENT'S OPINION

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

6

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the 2001
Annual Report of Peoples Bancorporation, Inc. on Form 10-K. Results of
operations for the six-month period ending June 30, 2002 are not necessarily
indicative of the results to be attained for any other period.

Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the dates of the consolidated balance sheets and the consolidated statements of
income for the periods covered. Actual results could differ from those
estimates.

Forward-Looking Statements

From time to time, Peoples Bancorporation, Inc. (the "Company") may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products and similar matters. All statements that are not historical facts are
"forward-looking statements." Words such as "estimate," "project," "intend,"
"expect," "believe," "anticipate," "plan," and similar expressions identify
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performances, development and results of the Company's business
include, but are not limited to, the following: risks from changes in economic
and industry conditions; changes in interest rates; risks inherent in making
loans including repayment risks and value of collateral; dependence on senior
management; and recently-enacted or proposed legislation. Statements contained
in this filing regarding the demand for Peoples Bancorporation's products and
services, changing economic conditions, interest rates, consumer spending and
numerous other factors may be forward-looking statements and are subject to
uncertainties and risks.

Overview

Peoples Bancorporation, Inc. 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.

7

The Company commenced operations on July 1, 1992 upon effectiveness of the
acquisition of The Peoples National Bank. On May 19, 2000, the Company filed an
election with the Federal Reserve Bank of Richmond to become a financial holding
company, pursuant to the Gramm-Leach-Bliley Act of 1999, and the election became
effective June 23, 2000. As a financial holding company, Peoples Bancorporation,
Inc. may engage in activities that are financial in nature or incidental to a
financial activity as described in the law and regulations adopted pursuant to
the law. To date, the Company has not engaged in any activities other than those
permitted to a bank holding company and has not yet taken advantage of its
status as a financial holding company to engage in additional activities.

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").

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

8

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EARNINGS PERFORMANCE

Overview

The consolidated Company's net income for the second quarter of 2002 was
$941,000 or $0.27 per diluted share compared to $712,000 or $0.21 per diluted
share for the second quarter of 2001, an increase of 32.2%. Net income for the
six months ended June 30, 2002 was $2,091,000, or $0.61 per diluted share
compared to $1,424,000, or $0.42 per diluted share for the six months ended June
30, 2001, an increase of 46.8%. Return on average equity for the six months and
three months ended June 30, 2002 was 14.36% and 12.65% compared to 10.84% and
10.67% for the six months and three months ended June 30, 2001. Return on
average assets for the six months and three months ended June 30, 2002 was 1.27%
and 1.08% compared to 1.04% and 1.00% for the six months and three months ended
June 30, 2001. The increases in the Company's net income, earnings per fully
diluted share, return on average equity, and return on average assets in 2002
are attributable to increased earnings at the Company's bank subsidiaries. The
Peoples National Bank recorded net earnings of $1,595,000 for the six months
ended June 30, 2002 compared to net earnings of $1,261,000 for the six months
ended June 30, 2001, an increase of 26.5%. Bank of Anderson, N. A. recorded net
earnings of $354,000 for the six months ended June 30, 2002 compared to net
earnings of $157,000 for the six months ended June 30, 2001, an increase of
125.5%. Seneca National Bank recorded net earnings of $149,000 for the six
months ended June 30, 2002 compared to net earnings of $22,000 for the six
months ended June 30, 2001, an increase of 577.3%.

Interest Income, Interest Expense and Net Interest Income

The largest component of the Company's net income is net interest income.
Net interest income, which is the difference between the interest earned on
assets and the interest paid for the liabilities used to fund those assets,
measures the gross profit from lending and investing activities and is the
primary contributor to the Company's earnings. Net interest income before
provision for loan losses increased $637,000 or 27.3% to $2,969,000 in the
quarter ended June 30, 2002 compared to $2,332,000 in the quarter ended June 30,
2001. For the six months ended June 30, 2002 net interest income before
provision for loan losses increased $1,582,000 or 34.4% to $6,183,000 compared
to $4,601,000 for the six months ended June 30, 2001. The Company's net interest
margin for the six months and three months ended June 30, 2002 was 3.99% and
3.65%, respectively, compared to 3.60% and 3.49%, respectively, for the six
months and three months ended June 30, 2001. The increases in the net interest
income and in the net interest margin resulted primarily from decreases in rates
paid on interest-bearing liabilities at the Banks. This resulted from steeply
falling market interest rates beginning in January 2001. The increase in average
balances among earning assets also contributed to the Company's increase in the
dollar amount of net interest income.

9

The Company's total interest income for the second quarter of 2002 was
$5,026,000 compared to $5,181,000 for the second quarter of 2001, a decrease of
$155,000 or 3.0%. Total interest income for the six months ended June 30, 2002
was $9,965,000 compared to $10,236,000 for the six months ended June 30, 2001, a
decrease of $271,000 or 2.6%. Interest and fees on loans, the largest component
of total interest income, decreased $284,000 in the second quarter of 2002 to
$4,228,000 compared to $4,512,000 for the second quarter of 2001, a decrease of
6.3%. Interest and fees on loans decreased $323,000 for the six months ended
June 30, 2002 to $8,607,000 compared to $8,930,000 for the six months ended June
30, 2001, a decrease of 3.6%. The decrease in interest and fees on loans, as
well as the decrease in total interest income, resulted primarily from the lower
market interest rates that were experienced at the Company's bank subsidiaries
during the first half of 2002 when compared to the first half of 2001, and was
partially offset by the higher average balances in the various types of earning
assets.

The Company's total interest expense for the second quarter of 2002 was
$2,057,000 compared to $2,849,000 for the second quarter of 2001, a decrease of
$792,000, or 27.8%. Total interest expense for the six months ended June 30,
2002 was $3,782,000 compared to $5,635,000 for the six months ended June 30,
2001, a decrease of $1,853,000, or 32.9%. Interest expense on deposits, the
largest component of total interest expense, decreased $736,000 in the second
quarter of 2002 to $1,875,000 compared to $2,611,000 for the second quarter of
2001, a decrease of 28.2%. Interest expense on deposits decreased $1,651,000 for
the six months ended June 30, 2002 to $3,405,000 compared to $5,056,000 for the
six months ended June 30, 2001, a decrease of 32.6%. Interest on federal funds
purchased and securities sold under repurchase agreements, the second largest
component of total interest expense, decreased $50,000 or 29.4% to $120,000 in
the second quarter of 2002 compared to $170,000 for the second quarter of 2001.
Interest on federal funds purchased and securities sold under repurchase
agreements decreased $105,000 or 30.1% to $244,000 in the first half of 2002
compared to $349,000 for the first half of 2001. Interest on notes payable to
the Federal Home Loan Bank, the third largest component of total interest
expense, decreased $6,000 or 8.8% to $62,000 in the second quarter of 2002
compared to $68,000 for the second quarter of 2001. Interest on notes payable to
the Federal Home Loan Bank decreased $97,000 or 42.2% to $133,000 in the first
half of 2002 compared to $230,000 for the first half of 2001. The significant
decrease in interest expense among each of deposits, federal funds purchased,
securities sold under repurchase agreements, and notes payable to the Federal
Home Loan Bank is largely attributable to lower market interest rates
experienced at the Company's bank subsidiaries during the first half of 2002
when compared to the first half of 2001, and was partially offset by the higher
average balances in some of the accounts.

Provision for Loan Losses

The amount charged to the provision for loan losses by the Company is based
on management's judgment as to the amount required to maintain an allowance
adequate to provide for losses inherent in the Company's loan portfolio.

10

The provision for loan losses charged to operations during the three months
and six months ended June 30, 2002 was $198,000 and $511,000, respectively,
compared to $119,000 and $252,000, respectively, for the three months and six
months ended June 30, 2001. The increase in the Company's provision for loan
losses for the second quarter and first half of 2002 is largely attributable to
an increase in the volume of outstanding loans during 2002 when compared to 2001
and to management's view of current and future economic conditions.

Subsequent to June 30, 2002, one of the Company's subsidiary banks was
informed of a potential problem with one of its credits. At this time,
management feels it is difficult to determine the exact amount of probable loss,
but feels that the allowance for loan losses is adequate to absorb the maximum
loss of $250,000, should it occur.

Non-interest Income

Non-interest income increased $94,000 or 7.3% to $1,386,000 for the second
quarter of 2002 compared to $1,292,000 for the second quarter of 2001.
Non-interest income increased $282,000 or 11.3% to $2,788,000 for the first half
of 2002 compared to $2,506,000 for the first half of 2001. The increase in
non-interest income for the two comparative periods resulted largely from an
increase in fees associated with a relatively new overdraft privilege product,
which was implemented during the third quarter of 2000 at Peoples National Bank
and during the first quarter of 2001 at Bank of Anderson, N. A., and at Seneca
National Bank. No gain or loss was realized on the sale of securities during the
first six months of either 2002 or 2001.

Non-interest Expense

Total non-interest expense increased $294,000 or 12.3% to $2,690,000 for
the second quarter of 2002 from $2,396,000 for the second quarter of 2001. Total
non-interest expense increased $563,000 or 12.1% to $5,198,000 for the first
half of 2002 from $4,635,000 for the first half of 2001. Salaries and benefits,
the largest component of non-interest expense, increased $122,000, or 8.7%, to
$1,517,000 for the second quarter of 2002 from $1,395,000 for the second quarter
of 2001. Salaries and benefits increased $332,000, or 12.4%, to $3,001,000 for
the first half of 2002 from $2,669,000 for the first half of 2001. The increase
in salaries and benefits is primarily attributable to additional staffing
associated with the Company's continued growth and normal salary increases
throughout the Company.

BALANCE SHEET REVIEW

Loans

Outstanding loans (which excludes mortgage loans held for sale) represent
the largest component of earning assets at 66.6% of total earning assets. As of
June 30, 2002, the Company held total gross loans outstanding of $228,013,000.
Gross loans increased $15,477,000 or 7.3% from $212,536,000 in total gross

11

outstanding loans at December 31, 2001 and increased $32,062,000 or 16.4% from
$195,951,000 in total gross loans outstanding at June 30, 2001. The increase
resulted from new loans generated by the company's three banking subsidiaries.

The interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. The average
yield on the Company's loans for the six months and three months ended June 30,
2002 was 7.20% and 7.07%, respectively, compared to 8.92% and 8.20%,
respectively, for the six months and three months ended June 30, 2001.
Approximately 41.7% of the Company's loans are tied to the prime interest rate.

The Company's loan portfolio consists principally of residential mortgage
loans, commercial loans and consumer loans. Substantially all of these loans are
to borrowers located in South Carolina and are concentrated in the Company's
market areas.

The Company's real estate loans are primarily construction loans and other
loans secured by real estate, both commercial and residential, located within
the Company's trade areas. The Company does not actively pursue long-term,
fixed-rate mortgage loans for retention in its loan portfolio.

The Banks employ mortgage loan personnel who originate and package loans
that are pre-sold at origination to third parties and are classified as mortgage
loans held for sale for reporting purposes. At June 30, 2002 the Company held
$13,100,000 of mortgage loans held for sale compared to $40,925,000 at December
31, 2001 and $21,378,000 at June 30, 2001. The substantial swings in the level
of mortgage loans held for sale are due to wide fluctuations in the demand for
residential mortgages from time to time. During the three months ended June 30,
2002, the Company originated $73,837,000 and sold $82,668,000 in residential
mortgages. During the six months ended June 30, 2002, the Company originated
$159,071,000 and sold $186,896,000 in residential mortgages.

The Company's commercial lending activity is directed principally towards
businesses whose demands for funds fall within each Bank's legal lending limits
and which are potential deposit customers of the Banks. This category of loans
includes loans made to individuals, partnerships and corporate borrowers, which
are obtained for a variety of business purposes. Particular emphasis is placed
on loans to small and medium-sized businesses. The Company's commercial loans
are spread throughout a variety of industries, with no industry or group of
related industries accounting for a significant portion of the commercial loan
portfolio. Commercial loans are made on either a secured or unsecured basis.
When taken, security usually consists of liens on inventories, receivables,
equipment, furniture and fixtures. Unsecured commercial loans are generally
short-term with emphasis on repayment strengths and low debt-to-worth ratios. At
June 30, 2002 approximately $9,508,000 or 5.7% of commercial loans were
unsecured.

12

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

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

Allowance for Loan Losses

The allowance for loan losses at June 30, 2002 was $2,785,000 or 1.22% of
loans outstanding (which excludes mortgage loans held for sale) compared to
$2,288,000 or 1.08% of loans outstanding at December 31, 2001 and to $2,176,000
or 1.11% of loans outstanding at June 30, 2001. The allowance for loan losses is
based upon management's continuing evaluation of the collectability of past due
loans based on the historical loan loss experience of the Company, current
economic conditions affecting the ability of borrowers to repay, the volume of
loans, the quality of collateral securing non-performing and problem loans, and
other factors deserving recognition.

At June 30, 2002 the Company had $691,000 in non-accruing loans, no
restructured loans, $20,000 in loans more than ninety days past due and still
accruing interest, and $723,000 in Other Real Estate Owned. This compares to
$993,000 in non-accruing loans, $8,000 in restructured loans, no loans more than
ninety days past due on which interest was still being accrued, and $950,000 in
other real estate owned at December 31, 2001. At June 30, 2001, the Company had
$1,003,000 in non-accruing loans, no restructured loans, no loans more than
ninety days past due and still accruing interest, and $941,000 in Other Real
Estate Owned. Non-performing loans at June 30, 2002 consisted of $54,000 in
commercial loans, $631,000 in mortgage loans, and $6,000 in consumer loans.
Non-performing assets as a percentage of loans and other real estate owned was
0.59%, 0.77%, and 0.89% at June 30, 2002, December 31, 2001, and June 30, 2001,
respectively.

Net charge-offs during the first six months of 2002 were $14,000 compared
to net charge-offs of $98,000 for the first six months of 2001 and net
charge-offs of $627,000 for the year ended December 31, 2001. The allowance for
loan losses as a percentage of non-performing loans was 392%, 228%, and 217% as
of June 30, 2002, December 31, 2001, and June 30, 2001, respectively.

The Company accounts for impaired loans in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") 114,
Accounting by Creditors for Impairment of a Loan. SFAS No. 114, as amended by
SFAS No. 118, requires that impaired loans be measured based on the present
value of expected future cash flows or the underlying collateral values as
defined in the pronouncement. The Company includes the provisions of SFAS NO.
114, if any, in the allowance for loan losses. When the ultimate collectability
of an impaired loan's principal is in doubt, wholly or partially, all cash
receipts are then applied to principal. At each of June 30, 2002, June 30, 2001,
and December 31, 2001 the Company had no impaired loans.

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Securities

The Company invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, other
taxable securities, and in certain obligations of states and municipalities. The
Company does not invest in corporate bonds nor does it hold any trading
securities. The Company uses its investment portfolio to provide liquidity for
unexpected deposit liquidation or loan generation, to meet the Company's
interest rate sensitivity goals, to secure public deposits, and to generate
income. At June 30, 2002 securities totaled $61,362,000, which represents 18.1%
of total earning assets. Securities increased $25,869,000 or 72.9% from
$35,493,000 invested as of December 31, 2001 and $30,756,000 or 100.5% from
$30,606,000 invested as of June 30, 2001. The increase in securities is
primarily attributable to the investment of excess liquidity resulting from an
increase in deposits at the Company's bank subsidiaries.

At June 30, 2002 the Company's total investments classified as
available for sale had an amortized cost of $55,615,000 and a market value of
$56,419,000 for an unrealized gain of $804,000. This compares to an amortized
cost of $25,282,000 and a market value of $25,448,000 for an unrealized gain of
$166,000 on the Company's investments classified as available for sale at June
30, 2001. At December 31, 2001 the Company's total investments classified as
available for sale had an amortized cost of $30,076,000 and a market value of
$30,339,000 for an unrealized gain of $263,000.

Cash and Cash Equivalents

The Company's cash and cash equivalents increased $39,929,000 or 321.3%
to $52,355,000 at June 30, 2002 from $12,426,000 at December 31, 2001 and
$19,849,000 or 61.1% from $32,506,000 at June 30, 2001. This increase is the
result of increased deposits coupled with slightly lower loan demand. The
Company's intent is to employ these funds in higher yielding assets as
opportunities arise.

Deposits

The Bank's primary source of funds for loans and investments is its
deposits. Total deposits grew $67,920,000 or 28.7% to $304,722,000 at June 30,
2002 from $236,802,000 at December 31, 2001 and $66,935,000 or 28.2% from
$237,787,000 at June 30, 2001. The increase resulted from deposits generated by
all of the Banks. Competition for deposit accounts is primarily based on the
interest rates paid, location convenience and services offered.

During the first six months of 2002, interest-bearing deposits averaged
$233,008,000 compared to $192,544,000 for the first six months of 2001. From
time to time Peoples National Bank solicits certificates of deposit from various
sources through brokers and through a program designed to gather deposits via
the Internet. This is done to reduce the need for funding from other short-term

14

sources such as federal funds purchased and short-term borrowings from the
Federal Home Loan Bank of Atlanta. These non-traditional deposits are primarily
being used to fund Peoples National Bank's short-term mortgage lending
activities. On June 30, 2002 the outstanding certificates garnered through the
Internet totaled $4,450,000, and brokered deposits totaled $1,900,000. At
December 31, 2001 Internet certificates of deposits totaled $7,681,000 and
brokered deposits totaled $5,100,000. At June 30, 2001 Peoples National Bank had
$10,809,000 in Internet certificates of deposits and no brokered deposits

The average interest rate paid on interest-bearing deposits was 2.90%
for the first six months of 2002 compared to 5.25% for the first six months of
2001. In pricing deposits, the Company considers its liquidity needs, the
direction and levels of interest rates, and local market conditions. At June 30,
2002 interest-bearing deposits comprised 87.1% of total deposits compared to
85.6% at June 30, 2001.

The Company's core deposit base consists largely of consumer time
deposits, savings, NOW accounts, money market accounts and checking accounts.
Although such core deposits are becoming increasingly interest-sensitive for
both the Company and the industry as a whole, these core deposits continue to
provide the Company with a large source of funds. Core deposits as a percentage
of total deposits averaged approximately 76.8% and 72.6% for the six months
ended June 30, 2002 and June 30, 2001, respectively. The Company closely
monitors its reliance on certificates greater than $100,000, which are generally
considered less stable and less reliable than core deposits.

Borrowings

The Company's borrowings are comprised of federal funds purchased,
securities sold under repurchase agreements, and both short-term and long-term
advances from the Federal Home Loan Bank of Atlanta. At June 30, 2002 short-term
borrowings totaled $22,776,000 and were comprised entirely of securities sold
under repurchase agreements. At December 31, 2001 short-term borrowings totaled
$39,631,000 and were comprised of $20,646,000 in securities sold under
repurchase agreements and $18,985,000 in short-term advances from the Federal
Home Loan Bank of Atlanta. At June 30, 2001 short-term borrowings totaled
$18,409,000 and were comprised entirely of securities sold under repurchase
agreements. Short-term borrowings are used primarily for the immediate cash
needs of the Company. During 2002 the Company repaid short-term borrowings from
the Federal Home Loan Bank of Atlanta from funds generated from the sale of
mortgage loans held for sale and from an increase in core deposits. The Company
also had $5,000,000 of long-term advances from the Federal Home Loan Bank of
Atlanta at each of June 30, 2002, December 31, 2001, and June 30, 2001.

LIQUIDITY

Liquidity management involves meeting the cash flow requirements of the
Company. The Company's liquidity position is primarily dependent upon its need
to respond to short-term demand for funds caused by increased loan demand and
withdrawals from deposit accounts. The Company's primary liquidity sources

15

include cash and due from banks, federal funds sold, and securities available
for sale. In addition, the Company (through the Banks) has the ability to borrow
funds on a short-term basis from the Federal Reserve System and to purchase
federal funds from other financial institutions. The Banks are also members of
the Federal Home Loan Bank System and have the ability to borrow both short-term
and long-term funds on a secured basis. At June 30, 2002 The Peoples National
Bank had total borrowing capacity from the Federal Home Loan Bank of Atlanta
equal to twenty percent (20%) of its total assets or approximately $42,656,000.
The unused portion of this line of credit was $37,656,000 at June 30, 2002. The
Company's other two bank subsidiaries, Bank of Anderson and Seneca National
Bank, each had established secured lines of credit with the Federal Home Loan
Bank totaling ten percent (10%) of each bank's total assets or approximately
$10,260,000 and $4,727,000 respectively, all of which was unused. At June 30,
2002 the Banks had unused federal funds lines of credit totaling $12,750,000
with various correspondent banks.

Peoples Bancorporation, Inc., the parent holding company, has limited
liquidity needs, and requires liquidity to pay limited operating expenses and
dividends only.

During the first six months of 2002, the Company had capital
expenditures of approximately $927,000 associated with the purchase of a new
core data processing system. During the remainder of 2002, the Company expects
to spend approximately $180,000 more on the purchase of this system. In July of
2002 Bank of Anderson acquired a lot in Anderson to be used for a future branch
office at a cost of $444,000. The Company is also considering other capital
expenditures that may be made, in whole or in part, during the remainder of
2002. These include the possible construction of a branch banking facility for
Bank of Anderson for approximately $800,000 and the possible renovation and
expansion of the main office of Bank of Anderson for approximately $800,000. The
Company may additionally make other lesser capital expenditures through the
normal course of business.

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 RISK

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
June 30, 2002, the Banks had issued commitments to extend credit and letters of
credit of $59,805,000 through various types of arrangements. 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
standby letters of credit, which are assurances to a third party that they will
not suffer a loss if the Banks' customer fails to meet its contractual

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obligation to the third party. Standby letters of credit totaled $5,482,000 at
June 30, 2002. Past experience indicates that many of these standby letters of
credit will expire unused. However, through its various sources of liquidity,
the Company believes that it will have the necessary resources to meet these
obligations should the need arise. Most of the standby letters of credit are
secured by various types of collateral. The Company believes that the risk of
loss associated with standby letters of credit is comparable to the risk of loss
associated with its loan portfolio

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

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.

The following table sets forth the capital ratios for the Company and
the Banks as of June 30, 2002:

CAPITAL RATIOS
(Amounts in Thousands)

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IMPACT of NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No. 102 - Selected
Loan Loss Allowance Methodology Issues. This staff accounting bulletin clearly
defines the required development, documentation, and application of a systematic
methodology for determining allowances for loan and lease losses in accordance
with generally accepted accounting principles. The Company believes that it is
in compliance with SAB 102.

Additional accounting standards that have been issued or proposed by the FASB
that do not require adoption until a future date are not expected to have a
material impact on the consolidated financial statements upon adoption.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Company's market risk arises principally from interest rate
risk inherent in its lending, deposit, and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages certain other risks, such as credit quality and liquidity risk,
in the normal course of business, management considers interest rate risk to be
its most significant market risk and the risk that could potentially have the
largest material effect on the Company's financial condition and results of
operations. Other types of market risks, such as foreign currency risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.

The primary objective of Asset and Liability Management at the Company is
to manage interest rate risk and achieve reasonable stability in net interest
income throughout interest rate cycles. This is achieved by maintaining the
proper balance of rate-sensitive earning assets and rate-sensitive
interest-bearing liabilities. The relationship of rate-sensitive earning assets
to rate-sensitive interest-bearing liabilities is the principal factor in
projecting the effect that fluctuating interest rates will have on future net
interest income. Rate-sensitive assets and 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. At June 30, 2002, on a cumulative basis through 12
months, rate-sensitive liabilities exceeded rate-sensitive assets by
$75,363,000. This liability-sensitive position is largely attributable to the
Company's short-term Certificates of Deposit, Money Market accounts and NOW
accounts, which totaled $119,159,000, $73,582,000 and $33,058,000, respectively,
at June 30, 2002, and may reprice or mature within one year.

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PART II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

During the period ended June 30, 2002 the Registrant issued shares of common
stock to the following classes of persons upon the exercise of options issued
pursuant to the Registrant's 1997 Non-Employee Directors Stock Option Plan. The
securities were issued pursuant to the exemption from the registration provided
by Section 4(2) of the Securities Act of 1933 because the issuance did not
involve a public offering.

Aggregate
Class of # of Shares Exercise
Date Issued Purchasers Issued Price
----------- ---------- ------ -----
05/07/02 Director 12,761 $90,000

Item 4. Submission to a Vote of Security Holders

On May 21, 2002, the Company held its Annual Meeting of Shareholders. The result
of the 2002 Annual Meeting of Shareholders is as follows:

The following persons were elected as Directors to serve for the terms set forth
below with 2,285,623 shares voted, representing 68.7% of the total voting
shares:

For Withheld Against Term (years)
--- -------- ------- ------------
F. Davis Arnette, Jr. 2,267,489 18,137 0 3
Garnet A. Barnes 2,278,914 6,709 0 3
Charles E. Dalton 2,281,466 4,157 0 3
Robert E. Dye, Sr. 2,267,873 17,750 0 3
Larry D. Reeves 2,281,708 3,915 0 3
R. Riggie Ridgeway 2,267,873 17,750 0 3

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

No Exhibits

(b) Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter ended June 30,
2002.

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SIGNATURES

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

PEOPLES BANCORPORATION, INC.

Dated: August 6, 2002 By: /s/ Robert E. Dye, Sr.
------------------------
Robert E. Dye, Sr.
President and Chairman of the Board

Dated: August 6, 2002 By: /s/ William B. West
---------------------
William B. West
Sr. Vice President & CFO
(principal financial officer)

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