FIRST COMMUNITY CORP /SC/ - Annual Report: 2006 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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Annual
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the fiscal year ended December 31, 2006
Or
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Transition
Report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from
to
Commission
file number: 000-28344
First
Community Corporation
(Exact
name of registrant as specified in its charter)
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South
Carolina
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57-1010751
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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5455
Sunset Blvd.,
Lexington,
South Carolina
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29072
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(Address
of principal executive offices)
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(Zip
Code)
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803-951-2265
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
stock, $1.00 par value per share
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The
NASDAQ Capital Market
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
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 Exchange Act. Yes o
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
past 90 days. Yes x
No o
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.
Yes
o
No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. Se definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer
o Non-accelerated
filer
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
As
of
June 30, 2006, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $52,493,000 based on the closing sale
price of $18.18 on June 30, 2006, as reported on The NASDAQ Capital Market.
3,220,908
shares of the issuer’s common stock were issued and outstanding as of March 15,
2007.
Documents
Incorporated by Reference
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Proxy
Statement for the Annual Meeting of Shareholders to be held on May
16,
2007.
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Part
III (Portions of Items 10-14)
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1
TABLE
OF CONTENTS
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CAUTIONARY
STATEMENT REGARDING
FORWARD-LOOKING
STATEMENTS
This
Report contains statements which constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the
Securities Exchange Act of 1934. These statements are based on many assumptions
and estimates and are not guarantees of future performance. Our actual results
may differ materially from those projected in any forward-looking statements,
as
they will depend on many factors about which we are unsure, including many
factors which are beyond our control. The words “may,” “would,” “could,”
“will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as
well as similar expressions, are meant to identify such forward-looking
statements. Potential risks and uncertainties include, but are not limited
to
those described below under Item 1A- Risk Factors and the
following:
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the
businesses of First Community and DeKalb Bankshares may not be integrated
successfully or such integration may take longer to accomplish than
expected;
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the
expected cost savings and any revenue synergies from the merger may
not be
fully realized within the expected
timeframes;
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success
and timing of other business
strategies;
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significant
increases in competitive pressure in the banking and financial services
industries;
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changes
in the interest rate environment which could reduce anticipated or
actual
margins;
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changes
in political conditions or the legislative or regulatory
environment;
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general
economic conditions, either nationally or regionally and especially
in our
primary service area, becoming less favorable than expected, resulting
in,
among other things, a deterioration in credit
quality;
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changes
occurring in business conditions and
inflation;
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changes
in technology;
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changes
in monetary and tax policies;
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the
level of allowance for loan loss;
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the
rate of delinquencies and amounts of charge-offs;
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the
rates of loan growth;
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adverse
changes in asset quality and resulting credit risk-related losses
and
expenses;
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loss
of consumer confidence and economic disruptions resulting from terrorist
activities;
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changes
in the securities markets; and
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other
risks and uncertainties detailed from time to time in our filings
with the
Securities and Exchange Commission.
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We
undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
PART
I
Item
1. Business
General
First
Community Corporation, a bank holding company registered under the Bank Holding
Company Act of 1956, was incorporated under the laws of South Carolina in 1994
primarily to own and control all of the capital stock of First Community Bank,
N.A., which commenced operations in August 1995. On October 1, 2004, we
consummated our acquisition of DutchFork Bancshares, Inc. and its wholly-owned
subsidiary, Newberry Federal Savings Bank. During
the second quarter of 2006, we completed our acquisition of DeKalb Bankshares,
Inc., the holding company for The Bank of Camden. We
engage
in a commercial banking business from our main office in Lexington, South
Carolina and our 12 full-service offices are located in Lexington (two), Forest
Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin, Northeast Columbia,
Prosperity, Newberry (two) and Camden. We offer a wide-range of traditional
banking products and services for professionals and small- to medium-sized
businesses, including consumer and commercial, mortgage, brokerage and
investment, and insurance services. We also offer online banking to our
customers. Our stock trades on The NASDAQ Capital Market under the symbol
FCCO.
As
of
December 31, 2004, the company no longer met the requirements to qualify as
a
small business issuer as defined in Rule 12b-2 of the Securities Exchange Act
of
1934 (the “Exchange Act”). All reports of the company, beginning with the Form
10-Q for the quarter ended March 31, 2005, are presented in accordance with
Regulation S-K. The company, however, is not an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. As a result,
the company
qualifies for the extended compliance period with respect the accountants report
on management’s assessment of internal control over financial reporting and
management’s annual report on internal control over financial reporting required
by PCAOB Auditing Standards No. 2.
Location
and Service Area
The
bank
is engaged in a general commercial and retail banking business, emphasizing
the
needs of small-to-medium sized businesses, professional concerns and
individuals, primarily in Richland, Lexington, Kershaw and Newberry counties
of
South Carolina and the surrounding areas.
Richland
County, Lexington County, Kershaw County and Newberry County are located in
the
geographic center of the state of South Carolina. Columbia, the capital of
South
Carolina, is located within and divided between Richland and Lexington
counties. Columbia can be reached via three interstate highways: I-20,
I-26, and I-77. Columbia is served by several airlines as well as by passenger
and freight rail service. According to the U. S. Census Bureau,
Richland,
Lexington, Kershaw and Newberry Counties,
which
include the primary service areas for the existing twelve sites of the bank,
had
estimated populations in 2005 of 340,078, 235,272, 56,486 and 37,250,
respectively.
The
principal components of the economy within our market area are service
industries, government, and wholesale and retail trade. The largest
employers in the area, each of which employs in excess of 3,000 people, include
Fort Jackson Army Base, the University of South Carolina, Palmetto Health
Alliance, Blue Cross Blue Shield and SCANA Corporation. The area has
experienced steady growth over the past 10 years and we expect that the area,
as
well as the service industry needed to support it, will to continue to
grow. For 2003, Richland, Lexington, Kershaw and Newberry Counties had
estimated median household incomes of $39,737, $45,677, $40,288 and $33,137,
respectively, compared to $38,003 for South Carolina as a whole.
Banking
Services
We
offer
a full range of deposit services that are typically available in most banks
and
thrift institutions, including checking accounts, NOW accounts, savings accounts
and other time deposits of various types, ranging from daily money market
accounts to longer-term certificates of deposit. The transaction accounts
and time certificates are tailored to our principal market area at rates
competitive to those offered in the area. In addition, we offer certain
retirement account services, such as Individual Retirement Accounts
(IRAs). All deposit accounts are insured by the FDIC up to the maximum
amount allowed by law (generally, $100,000 or $250,000 in the case of IRA
accounts per depositor subject to aggregation rules). We solicit these
accounts from individuals, businesses, associations and organizations, and
governmental authorities.
We
also
offer a full range of commercial and personal loans. Commercial loans
include both secured and unsecured loans for working capital (including
inventory and receivables), business expansion (including acquisition of real
estate and improvements), and purchase of equipment and machinery.
Consumer loans include secured and unsecured loans for financing automobiles,
home improvements, education, and personal investments. We also make real
estate construction and acquisition loans. We originate fixed and variable
rate mortgage loans substantially all of which are closed in the name of a
third
party which, are sold into the secondary market. Our lending activities
are subject to a variety of lending limits imposed by federal law. While
differing limits apply in certain circumstances based on the type of loan or
the
nature of the borrower (including the borrower’s relationship to the bank), in
general we are subject to a loans-to-one-borrower limit of an amount equal
to
15% of the bank’s unimpaired capital and surplus, or 25% of the unimpaired
capital and surplus if the excess over 15% is approved by the board of directors
of the bank and is fully secured by readily marketable collateral. We may
not make any loans to any director, officer, employee, or 10% shareholder of
the
company or the bank unless the loan is approved by our board of directors and
is
made on terms not more favorable to such person than would be available to
a
person not affiliated with the bank.
Other
bank services include internet banking, cash management services, safe deposit
boxes, travelers checks, direct deposit of payroll and social security checks,
and automatic drafts for various accounts. We offer non-deposit investment
products and other investment brokerage services through a registered
representative with an affiliation through GAA Securities, Inc. We are
associated with Jeannie, Star, and Plus networks of automated teller machines
and Mastermoney debit cards that may be used by our customers throughout South
Carolina and other regions. We also offer VISA and MasterCard credit card
services through a correspondent bank as our agent.
We
currently do not exercise trust powers, but can begin to do so with the prior
approval of the OCC.
Competition
The
banking business is highly competitive. We compete as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions and money market mutual funds operating in Richland, Lexington, Kershaw
and Newberry Counties and elsewhere. As of June 30, 2006, there were 24
financial institutions operating approximately 198 offices in Lexington,
Richland, Kershaw and Newberry Counties. The competition among the various
financial institutions is based upon a variety of factors, including interest
rates offered on deposit accounts, interest rates charged on loans, credit
and
service charges, the quality of services rendered, the convenience of banking
facilities and, in the case of loans to large commercial borrowers, relative
lending limits. Size gives larger banks certain advantages in competing
for business from large corporations. These advantages include higher
lending limits and the ability to offers services in other areas of South
Carolina. As a result, we do not generally attempt to compete for the
banking relationships of large corporations, but concentrate our efforts on
small-to-medium sized businesses and individuals. We believe we have
competed effectively in this market by offering quality and personal
service.
Employees
As
of
December 31, 2006, we had 137 full-time employees. We believe that our relations
with our employees are good.
SUPERVISION
AND REGULATION
Both
the
company and the bank are subject to extensive state and federal banking laws
and
regulations that impose specific requirements or restrictions on and provide
for
general regulatory oversight of virtually all aspects of our operations. These
laws and regulations are generally intended to protect depositors, not
shareholders. The following summary is qualified by reference to the statutory
and regulatory provisions discussed. Changes in applicable laws or regulations
may have a material effect on our business and prospects. Our operations may
be
affected by legislative changes and the policies of various regulatory
authorities. We cannot predict the effect that fiscal or monetary policies,
economic control, or new federal or state legislation may have on our business
and earnings in the future.
The
following discussion is not intended to be a complete list of all the activities
regulated by the banking laws or of the impact of such laws and regulations
on
our operations. It is intended only to briefly summarize some material
provisions.
First
Community Corporation
We
own
100% of the outstanding capital stock of the bank, and therefore we are
considered to be a bank holding company under the federal Bank Holding Company
Act of 1956, as amended (the “Bank Holding Company Act”). As a result, we are
primarily subject to the supervision, examination and reporting requirements
of
the Board of Governors of the Federal Reserve (the "Federal Reserve") under
the
Bank Holding Company Act and its regulations promulgated thereunder. Moreover,
as a bank holding company of a bank located in South Carolina, we also are
subject to the South Carolina Banking and Branching Efficiency Act.
Permitted
Activities.
Under
the
Bank Holding Company Act, a bank holding company is generally permitted to
engage in, or acquire direct or indirect control of more than 5% of the voting
shares of any company engaged in, the following activities:
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banking
or managing or controlling banks;
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furnishing
services to or performing services for our subsidiaries;
and
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any
activity that the Federal Reserve determines to be so closely related
to
banking as to be a proper incident to the business of
banking.
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Activities
that the Federal Reserve has found to be so closely related to banking as to
be
a proper incident to the business of banking include:
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factoring
accounts receivable;
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making,
acquiring, brokering or servicing loans and usual related
activities;
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leasing
personal or real property;
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operating
a non-bank depository institution, such as a savings
association;
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trust
company functions;
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financial
and investment advisory activities;
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conducting
discount securities brokerage
activities;
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underwriting
and dealing in government obligations and money market
instruments;
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providing
specified management consulting and counseling
activities;
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performing
selected data processing services and support
services;
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acting
as agent or broker in selling credit life insurance and other types
of
insurance in connection with credit transactions;
and
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performing
selected insurance underwriting
activities.
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As
a bank
holding company we also can elect to be treated as a “financial holding
company,” which would allow us engage in a broader array of activities. In sum,
a financial holding company can engage in activities that are financial in
nature or incidental or complimentary to financial activities, including
insurance underwriting, sales and brokerage activities, providing financial
and
investment advisory services, underwriting services and limited merchant banking
activities. We have not sought financial holding company status, but may elect
such status in the future as our business matures. If we were to elect in
writing for financial holding company status, each insured depository
institution we control would have to be well capitalized, well managed and
have
at least a satisfactory rating under the CRA (discussed below).
The
Federal Reserve has the authority to order a bank holding company or its
subsidiaries to terminate any of these activities or to terminate its ownership
or control of any subsidiary when it has reasonable cause to believe that the
bank holding company’s continued ownership, activity or control constitutes a
serious risk to the financial safety, soundness or stability of it or any of
its
bank subsidiaries.
Change
in Control.
In
addition, and subject to certain exceptions, the Bank Holding Company Act and
the Change in Bank Control Act, together with regulations promulgated there
under, require Federal Reserve approval prior to any person or company acquiring
“control” of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed to exist
if
a person acquires 10% or more, but less than 25%, of any class of voting
securities and either the company has registered securities under Section 12
of
the Securities Exchange Act of 1934 or no other person owns a greater percentage
of that class of voting securities immediately after the transaction. Our common
stock is registered under Section 12 of the Securities Exchange Act. The
regulations provide a procedure for rebutting control when ownership of any
class of voting securities is below 25%.
Source
of Strength.
In
accordance with Federal Reserve Board policy, we are expected to act as a source
of financial strength to the bank and to commit resources to support the bank
in
circumstances in which we might not otherwise do so. Under the Bank Holding
Company Act, the Federal Reserve Board may require a bank holding company to
terminate any activity or relinquish control of a non-bank subsidiary, other
than a non-bank subsidiary of a bank, upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness or stability of any depository institution subsidiary of a bank
holding company. Further, federal bank regulatory authorities have additional
discretion to require a bank holding company to divest itself of any bank or
non-bank subsidiaries if the agency determines that divestiture may aid the
depository institution’s financial condition.
Capital
Requirements.
The
Federal Reserve Board imposes certain capital requirements on the bank holding
company under the Bank Holding Company Act, including a minimum leverage ratio
and a minimum ratio of “qualifying” capital to risk-weighted assets. These
requirements are described below under “First Community Bank, N.A. - Capital
Regulations.” Subject to our capital requirements and certain other
restrictions, we are able to borrow money to make a capital contribution to
the
bank, and these loans may be repaid from dividends paid from the bank to the
company. Our ability to pay dividends is subject to regulatory restrictions
as
described below in “First Community Bank, N.A. - Dividends.” We are also able to
raise capital for contribution to the bank by issuing securities without having
to receive regulatory approval, subject to compliance with federal and state
securities laws.
South
Carolina State Regulation.
As a
South Carolina bank holding company under the South Carolina Banking and
Branching Efficiency Act, we are subject to limitations on sale or merger and
to
regulation by the South Carolina Board of Financial Institutions (the "S.C.
Board"). We are not required to obtain the approval of the S.C. Board prior
to
acquiring the capital stock of a national bank, but we must notify them at
least
15 days prior to doing so. We must receive the Board’s approval prior to
engaging in the acquisition of a South Carolina state chartered bank or another
South Carolina bank holding company.
First
Community Bank, N.A.
The
bank
operates as a national banking association incorporated under the laws of the
United States and subject to examination by the Office of the Comptroller of
the
Currency (the "Comptroller") . Deposits in the bank are insured by the Federal
Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is
currently $100,000 for each non-retirement depositor and $250,000 for certain
retirement-account depositors. The Comptroller and the FDIC regulate or monitor
virtually all areas of the bank’s operations, including
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security
devices and procedures;
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adequacy
of capitalization and loss reserves;
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loans;
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investments;
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borrowings;
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deposits;
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mergers;
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issuances
of securities;
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payment
of dividends;
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interest
rates payable on deposits;
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interest
rates or fees chargeable on loans;
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establishment
of branches;
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corporate
reorganizations;
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maintenance
of books and records; and
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adequacy
of staff training to carry on safe lending and deposit gathering
practices.
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The
Comptroller requires the bank to maintain specified capital ratios and imposes
limitations on the bank’s aggregate investment in real estate, bank premises,
and furniture and fixtures. The Comptroller of the Currency also requires the
bank to prepare annual reports on the bank’s financial condition and to conduct
an annual audit of its financial affairs in compliance with its minimum
standards and procedures.
All
insured institutions must undergo regular on-site examinations by their
appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate federal
banking agency against each institution or affiliate as it deems necessary
or
appropriate. Insured institutions are required to submit annual reports to
the
FDIC, their federal regulatory agency, and state supervisor when applicable.
The
FDIC has developed a method for insured depository institutions to provide
supplemental disclosure of the estimated fair market value of assets and
liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured
depository institution. The federal banking regulatory agencies to prescribe,
by
regulation, standards for all insured depository institutions and depository
institution holding companies relating, among other things, to the
following:
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internal
controls;
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information
systems and audit systems;
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loan
documentation;
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credit
underwriting;
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interest
rate risk exposure; and
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asset
quality.
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Prompt
Corrective Action.
As an
insured depository institution, the bank is required to comply with the capital
requirements promulgated under the Federal Deposit Insurance Act and the
Comptroller’s prompt corrective action regulations thereunder, which set
forth five
capital categories, each with specific regulatory consequences. Under these
regulations, the categories are:
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Well
Capitalized — The institution exceeds the required minimum level for each
relevant capital measure. A well capitalized institution is one
(i) having a total capital ratio of 10% or greater, (ii) having
a tier 1 capital ratio of 6% or greater, (iii) having a leverage
capital ratio of 5% or greater and (iv) that is not subject to any
order or written directive to meet and maintain a specific capital
level
for any capital measure.
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Adequately
Capitalized — The institution meets the required minimum level for each
relevant capital measure. No capital distribution may be made that
would
result in the institution becoming undercapitalized. An adequately
capitalized institution is one (i) having a total capital ratio of 8%
or greater, (ii) having a tier 1 capital ratio of 4% or greater and
(iii) having a leverage capital ratio of 4% or greater or a leverage
capital ratio of 3% or greater if the institution is rated composite
1
under the CAMELS (Capital, Assets, Management, Earnings, Liquidity
and
Sensitivity to market risk) rating
system.
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Undercapitalized
— The institution fails to meet the required minimum level for any
relevant capital measure. An undercapitalized institution is one
(i) having a total capital ratio of less than 8% or (ii) having
a tier 1 capital ratio of less than 4% or (iii) having a leverage
capital
ratio of less than 4%, or if the institution is rated a composite
1 under
the CAMEL rating system, a leverage capital ratio of less than
3%.
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Significantly
Undercapitalized — The institution is significantly below the required
minimum level for any relevant capital measure. A significantly
undercapitalized institution is one (i) having a total capital ratio
of less than 6% or (ii) having a tier 1 capital ratio of less than 3%
or (iii) having a leverage capital ratio of less than
3%.
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Critically
Undercapitalized — The institution fails to meet a critical capital level
set by the appropriate federal banking agency. A critically
undercapitalized institution is one having a ratio of tangible equity
to
total assets that is equal to or less than 2%.
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If
the
Comptroller determines, after notice and an opportunity for hearing, that the
bank is in an unsafe or unsound condition, the regulator is authorized to
reclassify the bank to the next lower capital category (other than critically
undercapitalized) and require the submission of a plan to correct the unsafe
or
unsound condition.
If
the
bank is not well capitalized, it cannot accept brokered deposits without prior
FDIC approval and, if approval is granted, cannot offer an effective yield
in
excess of 75 basis points on interests paid on deposits of comparable size
and
maturity in such institution’s normal market area for deposits accepted from
within its normal market area, or national rate paid on deposits of comparable
size and maturity for deposits accepted outside the bank’s normal market area.
Moreover, if the bank becomes less than adequately capitalized, it must adopt
a
capital restoration plan acceptable to the Comptroller that is subject to a
limited performance guarantee by the corporation. The bank also would become
subject to increased regulatory oversight, and is increasingly restricted in
the
scope of its permissible activities. Each company having control over an
undercapitalized institution also must provide a limited guarantee that the
institution will comply with its capital restoration plan. Except under limited
circumstances consistent with an accepted capital restoration plan, an
undercapitalized institution may not grow. An undercapitalized institution
may
not acquire another institution, establish additional branch offices or engage
in any new line of business unless determined by the appropriate Federal banking
agency to be consistent with an accepted capital restoration plan, or unless
the
FDIC determines that the proposed action will further the purpose of prompt
corrective action. The appropriate federal banking agency may take any action
authorized for a significantly undercapitalized institution if an
undercapitalized institution fails to submit an acceptable capital restoration
plan or fails in any material respect to implement a plan accepted by the
agency. A critically undercapitalized institution is subject to having a
receiver or conservator appointed to manage its affairs and for loss of its
charter to conduct banking activities.
An
insured depository institution may not pay a management fee to a bank holding
company controlling that institution or any other person having control of
the
institution if, after making the payment, the institution, would be
undercapitalized. In addition, an institution cannot make a capital
distribution, such as a dividend or other distribution that is in substance
a
distribution of capital to the owners of the institution if following such
a
distribution the institution would be undercapitalized. Thus, if payment of
such
a management fee or the making of such would cause the bank to become
undercapitalized, it could not pay a management fee or dividend to us. As of
December 31, 2006, the bank was deemed to be “well capitalized.”
Deposit
Insurance and Assessments.
Deposits at the bank are insured by the Deposit Insurance Fund (the "DIF")
as
administered by the FDIC, up to the applicable limits established by law -
generally $100,000 per accountholder and $250,000 for certain retirement
accountholders. In accordance with regulations adopted to implement the Federal
Deposit Insurance Reform Act of 2005 (“FDIRA”), deposit insurance premium
assessments are based upon perceived risks to the DIF, by evaluating an
institution's supervisory ratios and other financial ratios and then determining
insurance premiums based upon the likelihood an institution could be downgraded
to a CAMELS 3 or worse in the succeeding year. As a result, institutions deemed
to pose less risk, pay lower premiums than those institutions deemed to pose
more risk, which pay more.
FDIRA
caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue
cash dividends, awarded on a historical basis, for the amount of the DIF over
the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits
at
year-end, the FDIC is required issue cash dividends, awarded on a historical
basis, for half of the amount of the excess. Pursuant to the FDIRA, the FDIC
will begin to indexing deposit insurance coverage levels for inflation beginning
in 2012. Moreover, if we become undercapitalized we cannot accept employee
benefit plan deposits.
Transactions
with Affiliates and Insiders.
The bank
is subject to the provisions of Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments
in, or certain other transactions with, affiliates and on the amount of advances
to third parties collateralized by the securities or obligations of affiliates.
The aggregate of all covered transactions is limited in amount, as to any one
affiliate, to 10% of the bank’s capital and surplus and, as to all affiliates
combined, to 20% of the bank’s capital and surplus. Furthermore, within the
foregoing limitations as to amount, each covered transaction must meet specified
collateral requirements. Compliance is also required with certain provisions
designed to avoid the taking of low quality assets.
The
bank
also is subject to the provisions of Section 23B of the Federal Reserve Act
which, among other things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies. The bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders, and their related interests. Such extensions of credit (i) must
be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
The
Federal Reserve Board has issued Regulation W, which codifies prior regulations
under Sections 23A and 23B of the Federal Reserve Act and interpretative
guidance with respect to affiliate transactions. Regulation W incorporates
the
exemption from the affiliate transaction rules but expands the exemption to
cover the purchase of any type of loan or extension of credit from an affiliate.
In addition, under Regulation W:
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a
bank and its subsidiaries may not purchase a low-quality asset from
an
affiliate;
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covered
transactions and other specified transactions between a bank or its
subsidiaries and an affiliate must be on terms and conditions that
are
consistent with safe and sound banking practices; and
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with
some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging
from
100% to 130%, depending on the type of collateral, of the amount
of the
loan or extension of credit.
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Regulation
W generally excludes all non-bank and non-savings association subsidiaries
of
banks from treatment as affiliates, except to the extent that the Federal
Reserve Board decides to treat these subsidiaries as affiliates. The regulation
also limits the amount of loans that can be purchased by a bank from an
affiliate to not more than 100% of the bank's capital and surplus.
Dividends.
A
national bank may not pay dividends from its permanent capital. All dividends
must be paid out of undivided profits then on hand, after deducting expenses,
including reserves for losses and bad debts. In addition, a national bank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of the bank’s net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the Comptroller is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for
that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus.
Branching.
National
banks are required by the National Bank Act to adhere to branch office banking
laws applicable to state banks in the states in which they are located. Under
current South Carolina law, the bank may open branch offices throughout South
Carolina with the prior approval of the Comptroller. In addition, with prior
regulatory approval, the bank is able to acquire existing banking operations
in
South Carolina. Furthermore, federal legislation permits interstate branching,
including out-of-state acquisitions by bank holding companies, interstate
branching by banks if allowed by state law, and interstate merging by banks.
South Carolina law, with limited exceptions, currently permits branching across
state lines through interstate mergers.
Community
Reinvestment Act.
The
Community Reinvestment Act requires that the Comptroller evaluate the record
of
the bank in meeting the credit needs of its local community, including low
and
moderate income neighborhoods. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility. Failure
to
adequately meet these criteria could impose additional requirements and
limitations on our bank.
Finance
Subsidiaries.
Under
the Gramm-Leach-Bliley Act (the "GLBA"), subject to certain conditions imposed
by their respective banking regulators, national and state-chartered banks
are
permitted to form “financial subsidiaries” that may conduct financial or
incidental activities, thereby permitting bank subsidiaries to engage in certain
activities that previously were impermissible. The GLBA imposes several
safeguards and restrictions on financial subsidiaries, including that the parent
bank’s equity investment in the financial subsidiary be deducted from the bank’s
assets and tangible equity for purposes of calculating the bank’s capital
adequacy. In addition, the GLBA imposes new restrictions on transactions between
a bank and its financial subsidiaries similar to restrictions applicable to
transactions between banks and non-bank affiliates.
Other
Regulations.
Interest
and other charges collected or contracted for by the bank are subject to state
usury laws and federal laws concerning interest rates. The bank’s loan
operations are also subject to federal laws applicable to credit transactions,
such as:
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the
federal Truth-In-Lending Act, governing disclosures of credit terms
to
consumer borrowers;
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the
Home Mortgage Disclosure Act of 1975, requiring financial institutions
to
provide information to enable the public and public officials to
determine
whether a financial institution is fulfilling its obligation to help
meet
the housing needs of the community it serves;
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the
Equal Credit Opportunity Act, prohibiting discrimination on the basis
of
race, creed or other prohibited factors in extending credit;
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the
Fair Credit Reporting Act of 1978, governing the use and provision
of
information to credit reporting agencies;
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the
Fair Debt Collection Act, governing the manner in which consumer
debts may
be collected by collection agencies; and
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the
rules and regulations of the various federal agencies charged with
the
responsibility of implementing such federal laws.
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The
deposit operations of the bank also are subject to:
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the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
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the
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve Board to implement that Act, which governs 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.
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Enforcement
Powers.
The bank
and its “institution-affiliated parties,” including its management, employees
agents independent contractors and consultants such as attorneys and accountants
and others who participate in the conduct of the financial institution’s
affairs, are subject to potential civil and criminal penalties for violations
of
law, regulations or written orders of a government agency. These practices
can
include the failure of an institution to timely file required reports or the
filing of false or misleading information or the submission of inaccurate
reports. Civil penalties may be as high as $1,000,000 a day for such violations.
Criminal penalties for some financial institution crimes have been increased
to
twenty years. In addition, regulators are provided with greater flexibility
to
commence enforcement actions against institutions and institution-affiliated
parties. Possible enforcement actions include the termination of deposit
insurance. Furthermore, banking agencies’ power to issue cease-and-desist orders
were expanded. Such orders may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, rescind agreements or contracts, or take other actions as
determined by the ordering agency to be appropriate.
USA
PATRIOT Act. The
USA
PATRIOT Act became effective on October 26, 2001, amended, in part, the
Bank Secrecy Act and provides, in part, for the facilitation of information
sharing among governmental entities and financial institutions for the purpose
of combating terrorism and money laundering by enhancing anti-money laundering
and financial transparency laws, as well as enhanced information collection
tools and enforcement mechanics for the U.S. government, including:
(i) requiring standards for verifying customer identification at account
opening; (ii) rules to promote cooperation among financial institutions,
regulators, and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering; (iii) reports by nonfinancial
trades and businesses filed with the Treasury Department’s Financial Crimes
Enforcement Network for transactions exceeding $10,000; and (iv) filing
suspicious activities reports by brokers and dealers if they believe a customer
may be violating U.S. laws and regulations and requires enhanced due diligence
requirements for financial institutions that administer, maintain, or manage
private bank accounts or correspondent accounts for non-U.S.
persons.
Under
the
USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) can send our
banking regulatory agencies lists of the names of persons suspected of
involvement in terrorist activities. The bank can be requested, to search its
records for any relationships or transactions with persons on those lists.
If
the bank finds any relationships or transactions, it must file a suspicious
activity report and contact the FBI.
The
Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.
Department of the Treasury, is responsible for helping to insure that United
States entities do not engage in transactions with “enemies” of the United
States, as defined by various Executive Orders and Acts of Congress. OFAC has
sent, and will send, our banking regulatory agencies lists of names of persons
and organizations suspected of aiding, harboring or engaging in terrorist acts.
If the bank finds a name on any transaction, account or wire transfer that
is on
an OFAC list, it must freeze such account, file a suspicious activity report
and
notify the FBI. The bank has appointed an OFAC compliance officer to oversee
the
inspection of its accounts and the filing of any notifications. The bank
actively checks high-risk OFAC areas such as new accounts, wire transfers and
customer files. The bank performs these checks utilizing software, which is
updated each time a modification is made to the lists provided by OFAC and
other
agencies of Specially Designated Nationals and Blocked Persons.
Privacy
and Credit Reporting. Financial
institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing to consumers. It is the bank’s policy not to disclose any
personal information unless required by law.
Like
other lending institutions, the bank utilizes credit bureau data in its
underwriting activities. Use of such data is regulated under the Federal Credit
Reporting Act on a uniform, nationwide basis, including credit reporting,
prescreening, sharing of information between affiliates, and the use of credit
data. The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”)
authorizes states to enact identity theft laws that are not inconsistent with
the conduct required by the provisions of the FACT Act.
Check
21.
The
Check Clearing for the 21st Century Act gives “substitute checks,” such as a
digital image of a check and copies made from that image, the same legal
standing as the original paper check. Some of the major provisions
include:
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allowing
check truncation without making it mandatory;
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demanding
that every financial institution communicate to accountholders in
writing
a description of its substitute check processing program and their
rights
under the law;
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legalizing
substitutions for and replacements of paper checks without agreement
from
consumers;
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retaining
in place the previously mandated electronic collection and return
of
checks between financial institutions only when individual agreements
are
in place;
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requiring
that when accountholders request verification, financial institutions
produce the original check (or a copy that accurately represents
the
original) and demonstrate that the account debit was accurate and
valid;
and
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requiring
the re-crediting of funds to an individual’s account on the next business
day after a consumer proves that the financial institution has erred.
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Effect
of Governmental Monetary Policies.
Our
earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve Bank’s monetary policies have had, and are likely to continue to have,
an important impact on the operating results of commercial banks through its
power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve Board have major effects upon the levels of bank loans, investments
and
deposits through its open market operations in United States government
securities and through its regulation of the discount rate on borrowings of
member banks and the reserve requirements against member bank deposits. It
is
not possible to predict the nature or impact of future changes in monetary
and
fiscal policies.
Proposed
Legislation and Regulatory Action.
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations, and competitive
relationships of the nation’s financial institutions. We cannot predict whether
or in what form any proposed regulation or statute will be adopted or the extent
to which our business may be affected by any new regulation or
statute.
Item
1A. Risk Factors
Our
recent operating results may not be indicative of our future operating
results.
We
may
not be able to sustain our historical rate of growth. Because of our
relatively short operating history, it will be difficult for us to generate
similar earnings growth as we continue to expand, and consequently our
historical results of operations will not necessarily be indicative of our
future operations. Various factors, such as economic conditions,
regulatory and legislative considerations, and competition, may also impede
our
ability to expand our market presence. If we experience a significant
decrease in our historical rate of growth, our results of operations and
financial condition may be adversely affected because a high percentage of
our
operating costs are fixed expenses.
Our
decisions regarding credit risk and reserves for loan losses may materially
and
adversely affect our business.
Making
loans and other extensions of credit is an essential element of our
business. Although we seek to mitigate risks inherent in lending by
adhering to specific underwriting practices, our loans and other extensions
of
credit may not be repaid. The risk of nonpayment is affected by a number
of factors, including:
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the
duration of the credit;
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credit
risks of a particular customer;
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changes
in economic and industry conditions;
and
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in
the case of a collateralized loan, risks resulting from uncertainties
about the future value of the
collateral.
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We
attempt to maintain an appropriate allowance for loan losses to provide for
potential losses in our loan portfolio. We periodically determine the
amount of the allowance based on consideration of several factors,
including:
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an
ongoing review of the quality, mix, and size of our overall loan
portfolio;
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our
historical loan loss experience;
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evaluation
of economic conditions;
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regular
reviews of loan delinquencies and loan portfolio quality;
and
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the
amount and quality of collateral, including guarantees, securing
the
loans.
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There
is
no precise method of predicting credit losses; therefore, we face the risk
that
charge-offs in future periods will exceed our allowance for loan losses and
that
additional increases in the allowance for loan losses will be required.
Additions to the allowance for loan losses would result in a decrease of our
net
income, and possibly our capital.
Lack
of seasoning of our loan portfolio may increase the risk of credit defaults
in
the future.
Due
to
the rapid growth of our bank over the past several years, a material portion
of
the loans in our loan portfolio and of our lending relationships are of
relatively recent origin. In general, loans do not begin to show signs of
credit deterioration or default until they have been outstanding for some period
of time, a process we refer to as “seasoning.” As a result, a portfolio of older
loans will usually behave more predictably than a newer portfolio. In
addition, we acquired a substantial portion of the loans in our loan portfolio
and of our lending relationships through our acquisitions of DutchFork
Bancshares, Inc. and DeKalb Bankshares, Inc. Because these loans and lending
relationships are new to us, we may have more difficulty in assessing the risk
of credit defaults from these relationships. Because of both our internal
loan growth and our acquisitions, the current level of delinquencies and
defaults may not be representative of the level that will prevail when the
portfolio becomes more seasoned, which may be higher than current levels.
If delinquencies and defaults increase, we may be required to increase our
provision for loan losses, which would adversely affect our results of
operations and financial condition.
An
economic downturn, especially one affecting the Lexington, Richland, Newberry,
and Kershaw Counties and the surrounding areas, could reduce our customer base,
our level of deposits, and demand for financial products such as
loans.
Our
success significantly depends upon the growth in population, income levels,
deposits, and housing starts in our market of Lexington, Richland, Newberry,
and
Kershaw Counties and the surrounding area. If the communities in which we
operate do not grow or if prevailing economic conditions locally or nationally
are
unfavorable,
our business may not succeed. An economic downturn would likely contribute
to the deterioration of the quality of our loan portfolio and reduce our level
of deposits, which in turn would hurt our business. If an economic
downturn occurs in the economy as a whole, or in Lexington, Richland, Newberry,
and Kershaw Counties and the surrounding area, borrowers may be less likely
to
repay their loans as scheduled. Moreover, the value of real estate or
other collateral that may secure our loans could be adversely affected.
Unlike many larger institutions, we are not able to spread the risks of
unfavorable local economic conditions across a large number of diversified
economies. An economic downturn could, therefore, result in losses that
materially and adversely affect our business.
Changes
in prevailing interest rates may reduce our
profitability.
Our
results of operations depend in large part upon the level of our net interest
income, which is the difference between interest income from interest-earning
assets, such as loans and mortgage-backed securities, and interest expense
on
interest-bearing liabilities, such as deposits and other borrowings.
Depending on the terms and maturities of our assets and liabilities, a
significant change in interest rates could have a material adverse effect on
our
profitability. Many factors cause changes in interest rates, including
governmental monetary policies and domestic and international economic and
political conditions. While we intend to manage the effects of changes in
interest rates by adjusting the terms, maturities, and pricing of our assets
and
liabilities, our efforts may not be effective and our financial condition and
results of operations could suffer. After operating in a historically low
interest rate environment, the Federal Reserve began raising short-term interest
rates in the second quarter of 2004. At December 31, 2006, we anticipate
that our balance sheet is currently structured so that net income is not
materially impacted in a rising interest rate environment. However, no assurance
can be given that the Federal Reserve will actually continue to raise interest
rates or that the results we anticipate will actually occur.
We
are dependent on key individuals, and the loss of one or more of these key
individuals could curtail our growth and adversely affect our
prospects.
Michael
C. Crapps, our president and chief executive officer, has extensive and
long-standing ties within our primary market area and substantial experience
with our operations, and he has contributed significantly to our growth.
If we lose the services of Mr. Crapps, he would be difficult to replace and
our
business and development could be materially and adversely
affected.
Our
success also depends, in part, on our continued ability to attract and retain
experienced loan originators, as well as other management personnel. Competition
for personnel is intense, and we may not be successful in attracting or
retaining qualified personnel. Our failure to compete for these personnel,
or
the loss of the services of several of such key personnel, could adversely
affect our growth strategy and seriously harm our business, results of
operations, and financial condition.
We
are subject to extensive regulation that could limit or restrict our
activities.
We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by various regulatory agencies.
Our compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits,
and locations of offices. We are also subject to capitalization guidelines
established by our regulators, which require us to maintain adequate capital
to
support our growth.
The
laws
and regulations applicable to the banking industry could change at any time,
and
we cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business
and financial results of all commercial banks and bank holding companies, our
cost of compliance could adversely affect our ability to operate
profitably.
The
Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated
by
the Securities and Exchange Commission that are now applicable to us, have
increased the scope, complexity, and cost of corporate governance, reporting,
and disclosure practices. To comply with the Sarbanes-Oxley Act, we have
previously hired outside consultant to assist with our internal audit and
internal control functions. We have experienced, and we expect to continue
to
experience, greater compliance costs, including costs related to internal
controls, as a result of the Sarbanes-Oxley Act.
We
are in
the process of evaluating our internal controls to allow management to report
on
our internal control for our fiscal year 2007, and for our independent
registered public accounting firm to attest to our internal controls for fiscal
year 2008. We are performing the system and process evaluation and testing
(and any necessary
remediation)
required to comply with the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act. While we currently
anticipate that we will be able to fully implement the requirements relating
to
internal controls and all other aspects of Section 404 in a timely manner,
as
required by Section 404 and the SEC's related regulations, we
could identify deficiencies that we may not be able to remediate in time to
meet this deadline. If we are not able to implement or maintain the requirements
of Section 404 in a timely manner or with adequate compliance, we could be
subject to scrutiny by regulatory authorities and the trading price of our
stock
could decline. Moreover, effective internal controls are
necessary for us to produce reliable financial reports and are important to
helping prevent financial fraud. If we cannot provide reliable financial reports
or prevent fraud, our business and operating results could be harmed, investors
and regulators could lose confidence in our reported financial information,
and
the trading price of our stock could drop significantly. We
currently anticipate that we will fully implement the requirements relating
to internal controls and all other aspects of Section 404 within the required
time frames.
Our
continued pace of growth may require us to raise additional capital in the
future, 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. 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 assure you of our
ability to raise additional capital, if needed, on terms 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.
We
face strong competition for customers, which could prevent us from obtaining
customers and may cause us to pay higher interest rates to attract
customers.
The
banking business is highly competitive, and we experience competition in our
market from many other financial institutions. We compete with commercial
banks, credit unions, savings and loan associations, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market funds, and other mutual funds, as well as other super-regional,
national, and international financial institutions that operate offices in
our
primary market areas and elsewhere. We compete with these institutions
both in attracting deposits and in making loans. In addition, we have to
attract our customer base from other existing financial institutions and from
new residents. Many of our competitors are well-established, larger
financial institutions. These institutions offer some services, such as
extensive and established branch networks, that we do not provide. There
is a risk that we will not be able to compete successfully with other financial
institutions in our market, and that we may have to pay higher interest rates
to
attract deposits, resulting in reduced profitability. In addition,
competitors that are not depository institutions are generally not subject
to
the extensive regulations that apply to us.
We
will face risks with respect to expansion through acquisitions or
mergers.
We
completed our acquisition of DeKalb Bankshares and The Bank of Camden in June
2006. We face a risk that the expected cost savings and any revenue synergies
from this merger may not be fully realized within the expected timeframes,
or
that disruption from the merger may make it more difficult to maintain
relationships with our or DeKalb’s customers, employees, or suppliers.
In
addition, from time to time we may seek to acquire other financial institutions
or parts of those institutions. We may also expand into new markets or
lines of business or offer new products or services. These activities
would involve a number of risks, including:
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the
potential inaccuracy of the estimates and judgments used to evaluate
credit, operations, management, and market risks with respect to
a target
institution;
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the
time and costs of evaluating new markets, hiring or retaining experienced
local management, and opening new offices and the time lags between
these
activities and the generation of sufficient assets and deposits to
support
the costs of the expansion;
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the
incurrence and possible impairment of goodwill associated with an
acquisition and possible adverse effects on our results of operations;
and
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the
risk of loss of key employees and
customers.
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Our
decisions regarding credit risk and reserves for loan losses may materially
and
adversely affect our business.
While
we
generally underwrite the loans in our portfolio in accordance with our own
internal underwriting guidelines and regulatory supervisory guidelines, in
certain circumstances we have made loans which exceed either our internal
underwriting guidelines, supervisory guidelines, or both. As of December 31,
2006, approximately $10.3 million of our loans, or 22.4% of our bank’s capital,
had loan-to-value ratios that exceeded regulatory supervisory guidelines, of
which 10 loans totaling approximately $3.3 million had loan-to-value ratios
of
100% or more. In addition, supervisory limits on commercial loan to value
exceptions are set at 30% of our bank’s capital. At December 31, 2006, $9.3
million of our commercial loans, or 20.5% of our bank’s capital, exceeded the
supervisory loan to value ratio. The number of loans in our portfolio with
loan-to-value ratios in excess of supervisory guidelines, our internal
guidelines, or both could increase the risk of delinquencies and defaults in
our
portfolio.
A
significant portion of our loan portfolio is secured by real estate, and events
that negatively impact the real estate market could hurt our business.
A
significant portion of our loan portfolio is secured by real estate. As of
December 31, 2006, approximately 88.1% of our loans had real estate as a primary
or secondary component of collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended.
A
weakening of the real estate market in our primary market area could result
in
an increase in the number of borrowers who default on their loans and a
reduction in the value of the collateral securing their loans, which in turn
could have an adverse effect on our profitability and asset quality. If we
are
required to liquidate the collateral securing a loan to satisfy the debt during
a period of reduced real estate values, our earnings and capital could be
adversely affected. Acts of nature, including hurricanes, tornados, earthquakes,
fires and floods, which may cause uninsured damage and other loss of value
to
real estate that secures these loans, may also negatively impact our financial
condition.
Item
1B. Unresolved Staff Comments
We
have
no unresolved staff comments with the SEC regarding our periodic or currect
reports under the Exchange Act.
Item
2. Description of Property.
Lexington
Property.
The
principal place of business of both the company and our main office is located
at 5455 Sunset Boulevard, Lexington, South Carolina 29072. The site of the
bank’s main office branch is a 2.29 acre plot of land. This site was
purchased for $576,000 and the building cost were approximately $1.0
million. The branch operates in an 8,500 square foot facility located on
this site.
In
October 2000, the bank acquired an additional 2.0 acres adjacent to the existing
facility for approximately $300,000. This site was designed to allow for
24,000 to 48,000 square foot facility at some future date. The bank completed
construction and occupied the 28,000 square foot administrative center in July
2006. The total construction cost for the building is approximately $3.4
million. The Lexington property is owned by the bank.
Forest
Acres Property.
We
operate a branch office facility at 4404 Forest Drive, Columbia, South Carolina
29206. The Forest Acres site is .71 acres. The banking facility is
approximately 4,000 square feet with a total cost of land and facility
approximately $920,000. This property is owned by the bank.
Irmo
Property.
We
operate a branch office facility at 1030 Lake Murray Boulevard, Irmo, South
Carolina 29063. The Irmo site is approximately 1.00 acre. The
banking facility is approximately 3,200 square feet with a total cost of land
and facility of approximately $1.1 million. This property is owned by the
bank.
Cayce/West
Columbia Property.
We
operate a branch office facility at 506 Meeting Street, West Columbia, South
Carolina, 29169. The Cayce/West Columbia site is approximately 1.25
acres. The banking facility is approximately 3,800 square feet with a
total cost of land and facility of approximately $935,000. This property is
owned by the bank.
Gilbert
Property. We
operate a branch office at 4325 Augusta Highway Gilbert, South Carolina
29054. The facility is an approximate 3000 square foot facility located on
an approximate one acre lot. The total cost of the land and facility was
approximately $768,000. This property is owned by the bank.
Chapin
Office. We
operate a branch office facility at 137 Amicks Ferry Rd., Chapin, South Carolina
29036. The facility is approximately 3,000 square feet and is located on a
three
acre lot. The total cost of the facility and land was approximately $1.3
million. This property is owned by the bank.
Northeast
Columbia.
We
operate a branch office facility at
9822
Two Notch Rd, Columbia, South Carolina 29223.
The
facility is approximately 3,000 square feet and is located on a 1.0 acre
lot. The total cost of the facility and land was approximately $1.2
million. This property is owned by the bank.
College
Street. We
operate a branch office at 1323 College Street, Newberry, South Carolina
29108. This banking office was acquired in connection with the DutchFork
merger. The banking facility is approximately 3,500 square feet and is
located on a .65 acre lot. The total cost of the facility and land was
approximately $365,000. This property is owned by the bank.
Prosperity
Property.
We operate a branch office at 101 N. Wheeler Avenue, Prosperity, South Carolina
29127. This office was acquired in connection with the DutchFork
merger. The banking facility is approximately 1,300 square feet and is
located on a .31 acre lot. The total cost of the facility and land was
approximately $175,000. This property is owned by the bank.
Wilson
Road. We
operate a branch office at 1735 Wilson Road, Newberry, South Carolina
29108. The banking office was acquired in connection with the DutchFork
merger. This banking facility is approximately 12,000 square feet and is
located on a 1.56 acre lot. Adjacent to the branch facility is a 13,000
square foot facility which was formerly utilized as the DutchFork operations
center. The total cost of the facility and land was approximately $3.3
million. This property is owned by the bank.
Redbank
Property. We
operate a branch office facility at 1449 Two Notch Road, Lexington, South
Carolina 29073. This branch opened for operation on February 3,
2005. The facility is approximately 3,000 square feet and is located on a
1.0 acre lot. The total cost of the facility and land was approximately
$1.3 million. This property is owned by the bank.
Camden
Property. We
operate a branch office facility at 631 DeKalb Street, Camden, South Carolina
29020. This office was acquired in connection with the DeKalb
merger. The facility is approximately 11,247 square feet and is located on
a 2.2 acre lot. The total cost of the facility and land was approximately
$2.4 million. This property is owned by the bank.
Highway
219 Property. A
.61
acre lot located on highway 219 in Newberry County was acquired in connection
with the DutchFork merger. This lot may be used for a future branch
location but no definitive plans have been made. The cost of the lot was
$430,000. This property is owned by the bank.
Item
3. Legal Proceedings.
Neither
the company nor the bank is a party to, nor is any of their property the subject
of, any material pending legal proceedings related to the business of the
company or the bank.
Item
4. Submission of Matters to a Vote of Security
Holders.
No
matter
was submitted to a vote of security holders during the fourth quarter of the
fiscal year covered by this report.
PART
II
Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters, and Issuer Purchases of Equity
Securities.
As
of
March 1, 2007, there were approximately 1,545 shareholders of record of our
common stock. On January 15, 2003, our stock began trading on The NASDAQ Capital
Market under the trading symbol of “FCCO.” Prior to January 15, 2003, our
stock was quoted on the OTC Bulletin Board under the trading symbol
“FCCO.OB.” The following table sets forth the high and low sales price
information as reported by NASDAQ in 2006 and 2005, and the dividends per share
declared on our common stock in each such quarter. All information has
been adjusted for any stock splits and stock dividends effected during the
periods presented.
|
|
High
|
Low
|
Dividends
|
|||||||
|
|
|
|
|
|||||||
|
2006
|
|
|
|
|||||||
|
Quarter
ended March 31, 2006
|
$
|
19.63
|
$
|
17.75
|
$
|
0.05
|
||||
|
Quarter
ended June 30, 2006
|
$
|
18.79
|
$
|
17.11
|
$
|
0.06
|
||||
|
Quarter
ended September 30, 2006
|
$
|
18.32
|
$
|
16.62
|
$
|
0.06
|
||||
|
Quarter
ended December 31, 2006
|
$
|
18.75
|
$
|
16.50
|
$
|
0.06
|
||||
|
2005
|
||||||||||
|
Quarter
ended March 31, 2005
|
$
|
22.42
|
$
|
18.80
|
$
|
0.05
|
||||
|
Quarter
ended June 30, 2005
|
$
|
20.49
|
$
|
16.73
|
$
|
0.05
|
||||
|
Quarter
ended September 30, 2005
|
$
|
20.45
|
$
|
18.50
|
$
|
0.05
|
||||
|
Quarter
ended December 31, 2005
|
$
|
20.50
|
$
|
18.35
|
$
|
0.05
|
||||
We
expect
comparable dividends to be paid to the shareholders for the foreseeable
future. Notwithstanding the foregoing, the future dividend policy of the
company is subject to the discretion of the board of directors and will depend
upon a number of factors, including future earnings, financial condition, cash
requirements, and general business conditions. Our ability to pay dividends
is
generally limited by the ability of our
subsidiary
bank to pay dividends to us. As
a
national bank, our bank may only pay dividends out of its net profits then
on
hand, after deducting expenses, including losses and bad debts. In
addition, the bank is prohibited from declaring a dividend on its shares of
common stock until its surplus equals its stated capital, unless there has
been
transferred to surplus no less than one-tenth of the bank’s net profits of the
preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC will be required if the total of all
dividends declared in any calendar year by the bank exceeds the bank’s net
profits to date, as defined, for that year combined with its retained net
profits for the preceding two years less any required transfers to
surplus. At December 31, 2006, the bank had $8.2 million free of these
restrictions. The OCC also has the authority under federal law to enjoin a
national bank from engaging in what in its opinion constitutes an unsafe or
unsound practice in conducting its business, including the payment of a dividend
under certain circumstances.
On
June
21, 2006, our board of directors approved a new plan to repurchase up to 150,000
shares of our common stock on the open market. The following table reflects
share repurchase activity during the fourth quarter ended December 31,
2006:
|
Period
|
Total
Number
of
Shares
Purchased
|
Average
Price
Paid
Per
Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
Maximum
Number
of
Shares that May
Yet
Be Purchased
Under
the Plans or
Programs
|
|
October
1, 2006 to October 31, 2006
|
4,800
|
$18.10
|
4,800
|
90,600
|
|
November
1, 2006 to November 30, 2006
|
7,100
|
$18.13
|
7,100
|
83,500
|
|
December
1, 2006 to December 31,2006
|
3,600
|
$17.74
|
3,600
|
79,900
|
|
Total
|
15,500
|
$18.04
|
15,500
|
79,900
|
FIVE
YEAR CUMULATIVE TOTAL RETURNS
COMPARISON
OF FIRST COMMUNITY CORPORATION,
NASDAQ
STOCK MARKET (U.S.) INDEX,
AND
NASDAQ BANK INDEX
See
Tabular Information Below
|
12/31/2001
|
12/31/2002
|
12/31/2003
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
||||||||||||||
|
First
Community Corporation
|
100.00
|
122.45
|
201.28
|
186.86
|
175.27
|
161.13
|
|||||||||||||
|
NASDAQ
Composite Index
|
100.00
|
68.76
|
103.67
|
113.16
|
115.57
|
127.58
|
|||||||||||||
|
SNL
Southeast Bank Index
|
100.00
|
110.46
|
138.72
|
164.50
|
168.39
|
197.45
|
|||||||||||||
Item
6. Selected Financial Data
First
Community Corporation
Selected
Financial Data
(Amounts
in thousands, except per share data)
|
2006
|
2005
|
2004
|
2003
|
2002
|
||||||||||||
|
Operations
Statement Data:
|
||||||||||||||||
|
Net
interest income
|
$
|
14,323
|
$
|
12,994
|
$
|
9,596
|
$
|
7,648
|
$
|
7,044
|
||||||
|
Provision
for loan losses
|
528
|
329
|
245
|
167
|
677
|
|||||||||||
|
Non-interest
income
|
4,401
|
3,298
|
1,774
|
1,440
|
1,232
|
|||||||||||
|
Non-interest
expense
|
13,243
|
11,838
|
7,977
|
6,158
|
5,377
|
|||||||||||
|
Income
taxes
|
1,452
|
1,032
|
963
|
965
|
758
|
|||||||||||
|
Net
income
|
$
|
3,501
|
$
|
3,093
|
$
|
2,185
|
$
|
1,797
|
$
|
1,464
|
||||||
|
Per
Share Data:
|
||||||||||||||||
|
Net
income diluted (1)
|
$
|
1.10
|
$
|
1.04
|
$
|
1.09
|
$
|
1.08
|
$
|
0.90
|
||||||
|
Cash
dividends
|
.23
|
.20
|
0.20
|
0.19
|
0.12
|
|||||||||||
|
Book
value at period end (1)
|
19.36
|
17.82
|
18.09
|
12.21
|
11.61
|
|||||||||||
|
Tangible
book value at period end (1)
|
10.05
|
8.34
|
8.19
|
11.74
|
11.02
|
|||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Total
assets
|
$
|
548,056
|
$
|
467,455
|
$
|
455,706
|
$
|
215,029
|
$
|
195,201
|
||||||
|
Loans
|
275,189
|
221,668
|
186,771
|
121,008
|
99,991
|
|||||||||||
|
Securities
|
176,523
|
176,372
|
196,026
|
58,954
|
69,785
|
|||||||||||
|
Deposits
|
414,941
|
349,604
|
337,064
|
185,259
|
168,062
|
|||||||||||
|
Shareholders'
equity
|
63,208
|
50,767
|
50,463
|
19,509
|
18,439
|
|||||||||||
|
Average
shares outstanding (1)
|
3,097
|
2,847
|
1,903
|
1,590
|
1,588
|
|||||||||||
|
Performance
Ratios:
|
||||||||||||||||
|
Return
on average assets
|
0.68
|
%
|
0.67
|
%
|
0.76
|
%
|
0.88
|
%
|
0.82
|
%
|
||||||
|
Return
on average equity
|
6.12
|
%
|
6.12
|
%
|
8.00
|
%
|
9.49
|
%
|
8.35
|
%
|
||||||
|
Return
on average tangible equity
|
12.69
|
%
|
13.33
|
%
|
10.39
|
%
|
9.94
|
%
|
8.87
|
%
|
||||||
|
Net
interest margin
|
3.27
|
%
|
3.30
|
%
|
3.72
|
%
|
4.02
|
%
|
4.26
|
%
|
||||||
|
Dividend
payout ratio
|
20.35
|
%
|
18.35
|
%
|
17.39
|
%
|
16.81
|
%
|
13.04
|
%
|
||||||
|
Asset
Quality Ratios:
|
||||||||||||||||
|
Allowance
for loan losses to period
|
||||||||||||||||
|
End
total loans
|
1.17
|
%
|
1.22
|
%
|
1.48
|
%
|
1.41
|
%
|
1.53
|
%
|
||||||
|
Allowance
for loan losses to
|
||||||||||||||||
|
Non-performing
assets
|
716.04
|
%
|
487.48
|
%
|
2,291.34
|
%
|
2,131.25
|
%
|
1,059.03
|
%
|
||||||
|
Non-performing
assets to total assets
|
.09
|
%
|
.12
|
%
|
.03
|
%
|
.04
|
%
|
.07
|
%
|
||||||
|
Net
charge-offs (recoveries) to average loans
|
.13
|
%
|
.19
|
%
|
.13
|
%
|
(.01
|
%)
|
.16
|
%
|
||||||
|
Capital
and Liquidity Ratios:
|
||||||||||||||||
|
Tier
1 risk-based capital
|
13.48
|
%
|
13.24
|
%
|
12.91
|
%
|
13.21
|
%
|
14.03
|
%
|
||||||
|
Total
risk-based capital
|
14.40
|
%
|
14.12
|
%
|
13.86
|
%
|
14.42
|
%
|
15.28
|
%
|
||||||
|
Leverage
ratio
|
9.29
|
%
|
9.29
|
%
|
8.51
|
%
|
8.87
|
%
|
8.77
|
%
|
||||||
|
Equity
to assets ratio
|
11.53
|
%
|
10.86
|
%
|
9.60
|
%
|
9.07
|
%
|
9.45
|
%
|
||||||
|
Average
loans to average deposits
|
64.83
|
%
|
59.81
|
%
|
61.00
|
%
|
63.33
|
%
|
60.71
|
%
|
||||||
(1)
Adjusted for the
February 28, 2002 5-for-4 stock split.
Item
7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
First
Community Corporation is a one bank holding company headquartered in Lexington,
South Carolina. We operate from our
main
office in Lexington, South Carolina and our 12 full-service offices are located
in Lexington (two), Forest Acres, Irmo, Cayce-West Columbia, Gilbert, Chapin,
Northeast Columbia, Prosperity, Newberry (two) and Camden.
During
the second quarter of 2006,
we
completed our acquisition of DeKalb Bankshares,
Inc.,
the holding company for The Bank of Camden. The
merger added one office in Kershaw County located in the Midlands of South
Carolina. During the fourth quarter of 2004, we completed our first acquisition
of another financial institution when we merged with DutchFork Bancshares,
Inc.,
the holding company for Newberry Federal Savings Bank. The merger added three
offices in Newberry County. We engage in a general commercial and retail banking
business characterized by personalized service and local decision making,
emphasizing the banking needs of small to medium-sized businesses, professional
concerns and individuals.
During
2006, we continued to implement our strategy to continue leveraging the
DutchFork acquisition as well as integrate the operations of DeKalb into our
systems. We experienced organic loan growth (growth excluding the DeKalb merger)
of 9.7%,
or
$21.5 million. Organic deposit growth was 6.4% or $22.3 million. We added
approximately $26.6 million in loans and $27.3 million in deposits through
our
acquisition of DeKalb. This continued growth in our loan portfolio is consistent
with our strategy to leverage the deposit base in Newberry County that we
acquired in the DutchFork acquisition. Our loan to deposit ratio at December
31,
2006 was 66.3% as compared to 63.4% at December 31, 2005. The continued growth
in core deposits as well as cash flow provided from our investment portfolio
provided the needed cash flow to fund loan growth. Total assets grew to $548.1
million, loans to $275.2 million and deposits to $414.9 million at December
31,
2006.
Our net
income increased $409,000 in 2006, or 13.2%, over the year ended December 31,
2005. The increase was primarily attributable to the continued growth in the
level of earning assets. Net income was $3.5 million, or $1.10 diluted earnings
per share in 2006, compared to $3.1 million, or $1.04 diluted earnings per
share
in 2005.
The
following discussion describes
our
results of operations for 2006 as compared to 2005 (and 2005 compared to 2004
and also analyzes our financial condition as of December 31, 2006 as compared
to
December 31, 2005. Like most community banks, we derive most of our income
from
interest we receive on our loans and investments. A primary source of funds
for
making these loans and investments is our deposits, on which we pay interest.
Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits. Another key measure is the spread between the
yield we earn on these
interest-earning assets and the rate we pay on our interest-bearing liabilities.
We
have
included a number of tables to assist in our description of these measures.
For
example, the “Average Balances” table shows the average balance during
2006,
2005 and 2004
of
each category of our assets and liabilities, as well as the yield we earned
or
the rate we paid with respect to each category. A review of this table shows
that our loans typically provide higher interest yields than do other types
of
interest earning assets, which is why we intend to channel a substantial
percentage of our earning assets into our loan portfolio. Similarly, the
“Rate/Volume Analysis” table helps demonstrate the impact of changing interest
rates and changing volume of assets and liabilities during the years shown.
We
also track the sensitivity of our various categories of assets and liabilities
to changes in interest rates, and we have included a “Sensitivity Analysis
Table” to help explain this. Finally, we have included a number of tables that
provide detail about our investment securities, our loans, and our deposits
and
other borrowings.
There
are
risks inherent in all loans, so we maintain an allowance for loan losses to
absorb probable losses on existing loans that may become uncollectible. We
establish and maintain this allowance by charging a provision for loan losses
against our operating earnings. In the following section we have included a
detailed discussion of this process, as well as several tables describing our
allowance for loan losses and the allocation of this allowance among our various
categories of loans.
In
addition to earning interest on our loans and investments, we earn income
through fees and other expenses we charge to our customers. We describe the
various components of this noninterest income, as well as our noninterest
expense, in the following discussion. The
discussion and analysis also identifies significant factors that have affected
our financial position and operating results during the periods included in
the
accompanying financial statements. We encourage you to read this discussion
and
analysis in conjunction with the financial statements and the related notes
and
the other statistical information also included in this report.
Mergers
On
June
9, 2006 we consummated our merger with DeKalb Bankshares, Inc. Pursuant to
the
merger, we issued 364,034 shares of common stock valued at $7.6 million and
paid
$2.4 million in cash to shareholders of DeKalb. Other costs related to the
merger included stock options valued at $585,000 and direct acquisition costs
of
$277,000. The
fair
value of assets acquired at the date of acquisition was $46.4 million, including
$4.9 million in goodwill and $522,000 in core deposit intangible. The fair
value
of liabilities assumed amounted to $36.2 million. Periods
prior to June 9, 2006 do not include the effect of the merger with
DeKalb.
On
October
1, 2004, we completed our merger with DutchFork Bancshares, Inc.
Pursuant to the merger,
we issued 1,169,898 shares of common stock valued at $27.3 million and paid
$18.3 million to
shareholders of DutchFork. Other costs
related to the merger included stock options valued at $2.6 million and direct
acquisition costs of $1.1 million. The fair value of assets acquired at the
date
of acquisition was $224.2 million, including $24.2 million in goodwill and
$2.9
million in core deposit intangible. The fair value of liabilities assumed
amounted to $174.9 million. The results of operations for the years ended
December 31, 2006 and 2005 include a full year of the results of the merger
with
DutchFork as compared to three months for the year ended December 31, 2004.
Due
to the relative asset size of DutchFork as compared to First Community
Corporation, the comparison of the results of operations between the various
periods is significantly affected by the merger.
Results
of Operations
Our
net
income was $3.5 million, or $1.10 diluted earnings per share, for the year
ended
December 31, 2006, as compared to net income of $3.1 million, or $1.04 diluted
earnings per share, for the year ended December 31, 2005, and $2.2 million,
or
$1.09 diluted earnings per share, for the year ended December 31, 2004. The
increase in net income for 2006 as compared to 2005 resulted primarily from
an
increase in the level of average earning assets of $44.0 million. The effect
of
the increase in earning assets was offset by a 3 basis point decrease in the
net
interest margin from 3.30% during 2005 to 3.27% during 2006. On a tax equivalent
basis, the net interest margin was 3.36% and 3.44% for the years ended December
31, 2006 and 2005, respectively. Net interest spread, the difference between
the
yield on earning assets and the rate paid on interest-bearing liabilities,
was
2.88% in 2006 as compared to 3.05% in 2005 and 3.72% in 2004. See below under
"Net Interest Income" and “Market Risk and Interest Rate Sensitivity” for a
further discussion about the effect of this decrease in the net interest spread
and in our net interest margin. Net interest income increased to $14.3 million
for the year ended December 31, 2006 from $13.0 million in 2005. The provision
for loan losses was $528,000 in 2006 as compared to $329,000 in 2005.
Non-interest income increased to $4.4 million in 2006 from $3.3 million in
2005
due primarily to increased deposit service charges resulting from higher average
deposit account balances as well as the introduction of an overdraft protection
program in the fourth quarter of 2005. Non-interest expense increased to $13.2
million in 2006 as compared to $11.8 million in 2005. This increase is
attributable to increases in all expense categories required to support the
continued growth of the bank.
The
increase in net income from 2004 to 2005 resulted primarily from an increase
in
the level of average earning assets of $136.0 million, which was partially
offset by a decrease in the net interest margin from 3.72% in 2004 compared
to
3.30% in 2005. Earning assets averaged $393.9 million in 2005 as compared to
$257.9 million in 2004. Non-interest income increased from $1.8 million in
2004
to $3.3 million in 2005 due to increased deposit service charges and increases
in ATM/debit card fees and ATM surcharge fees. In addition, in 2005 we had
gains
on the sale of securities of $188,000 and gains on the early extinguishment
of
debt of $124,000. This compares to gains on sale of securities of $11,000 in
2004. Non-interest expense increased to $11.8 million in 2005 as compared to
$8.0 million in 2004. This increase is attributable to increases in all expense
categories required to support the continued growth of the bank. In addition,
expenses related to the operations of the branches acquired in the DutchFork
acquisition on October 1, 2004 are included in the 2005 results for the entire
year whereas in 2004 they were only included for the three months subsequent
to
the consummation of the merger.
Net
Interest Income
Net
interest income is our primary source of revenue. Net interest income is the
difference between income earned on assets and interest paid on deposits and
borrowings used to support such assets. Net interest income is determined by
the
rates earned on our interest-earning assets and the rates paid on our
interest-bearing liabilities, the relative amounts of interest-earning assets
and interest-bearing liabilities, and the degree of mismatch and the maturity
and repricing characteristics of its interest-earning assets and
interest-bearing liabilities.
Net
interest income totaled $14.3 million in 2006, $13.0 million in 2005 and $9.6
million in 2004. The yield on earning assets, which was 5.06% in 2004, increased
to 5.42% and 6.22% in 2005 and 2006, respectively. The rate paid on
interest-bearing liabilities was 1.60% in 2004, 2.37% in 2005 and 3.34% in
2006.
The
net interest margin was 3.72% in 2004, 3.44% in 2005 and 3.27% in 2006. The
continued decrease in net interest margin in 2006 as compared to 2005 was a
result of a smaller rise in average yields on interest earning assets relative
to the rise in the average cost of interest-bearing liabilities. Our loan to
deposit ratio on average during 2006 was 64.8%, as compared to 59.8% in 2005
and
61.0% during 2004. Loans typically provide a higher yield than other types
of
earning assets and thus one of our goals continues to be to grow the loan
portfolio as a percentage of earning assets which should improve the overall
yield on earning assets and the net interest margin. At December 31, 2006,
the
loan to deposit ratio had increased to 66.3%.
The
inverted yield curve throughout much of 2006 as well as a very competitive
deposit and lending environment were significant contributors to the decline
in
the net interest margin. The
yield
on earning assets increased by 80 basis points in 2006 as compared to 2005,
whereas the cost of interest-bearing funds increased by 97 basis points during
the same period. The higher increase in the cost of funds as compared to yield
on interest earning assets was primarily due to a significant increase in our
funding cost on time deposits. Approximately, 84.2% of our time deposits reprice
within 12 months and as a result of increases in short term interest rates
during 2006 the cost of these deposits increased 127 basis points in 2006.
The
average cost of time deposits was 4.18% in 2006 as compared to 2.89% and 2.13%
in 2005 and 2004, respectively. The average borrowed funds to total interest
bearing-liabilities in 2006 was 17.0%, as compared to 19.2% and 11.4% in 2005
and 2004, respectively. During 2004, we borrowed $15.0 million in long-term
debt
to facilitate the merger with DutchFork and acquired $35.0 million in Federal
Home Loan Bank advances as a result of the merger. Longer term borrowed funds
typically have a higher interest rate than our mix of deposit products. Our
average cost of borrowed funds for 2006 was 3.70% as compared to 3.84% and
2.92%
in 2005 and 2004, respectively.
Average
Balances, Income Expenses and Rates.
The
following tables depict, for the periods indicated, certain information related
to our average balance sheet and our average yields on assets and average costs
of liabilities. Such yields are derived by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been derived from daily averages.
|
(In
thousands)
|
Year
ended December 31,
|
|||||||||||||||||||||||||||
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
Average
Balance
|
Income/
Expense
|
Yield/
Rate
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||
|
Earning
assets
|
||||||||||||||||||||||||||||
|
Loans
|
$
|
249,209
|
$
|
18,613
|
7.47
|
%
|
$
|
202,143
|
$
|
13,608
|
6.73
|
%
|
$
|
141,793
|
$
|
9,063
|
6.39
|
%
|
||||||||||
|
Securities
|
175,145
|
7,891
|
4.51
|
%
|
184,057
|
7,465
|
4.06
|
%
|
92,933
|
3,647
|
3.92
|
%
|
||||||||||||||||
|
Other
short-term investments (2)
|
13,543
|
741
|
5.47
|
%
|
7,670
|
271
|
3.53
|
%
|
23,167
|
334
|
1
.44
|
%
|
||||||||||||||||
|
Total
earning assets
|
437,897
|
27,245
|
6.22
|
%
|
393,870
|
21,344
|
5.42
|
%
|
257,893
|
13,044
|
5.06
|
%
|
||||||||||||||||
|
Cash
and due from banks
|
10,170
|
10,456
|
8,425
|
|||||||||||||||||||||||||
|
Premises
and equipment
|
19,211
|
14,710
|
9,740
|
|||||||||||||||||||||||||
|
Intangible
assets
|
29,603
|
27,320
|
6,434
|
|||||||||||||||||||||||||
|
Other
assets
|
17,945
|
15,404
|
5,739
|
|||||||||||||||||||||||||
|
Allowance
for loan losses
|
(3,002
|
)
|
(2,774
|
)
|
(2,063
|
)
|
||||||||||||||||||||||
|
Total
assets
|
$
|
511,824
|
$
|
458,986
|
$
|
286,168
|
||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
$
|
58,099
|
305
|
0.52
|
%
|
$
|
55,289
|
187
|
0.34
|
%
|
$
|
36,906
|
110
|
0.30
|
%
|
|||||||||||||
|
Money
market accounts
|
48,399
|
1,547
|
3.20
|
%
|
41,615
|
829
|
1.99
|
%
|
29,568
|
284
|
0.96
|
%
|
||||||||||||||||
|
Savings
deposits
|
29,108
|
209
|
0.72
|
%
|
31,988
|
214
|
0.67
|
%
|
22,070
|
155
|
0.70
|
%
|
||||||||||||||||
|
Time
deposits
|
185,653
|
7,768
|
4.18
|
%
|
156,131
|
4,513
|
2.89
|
%
|
102,322
|
2,180
|
2.13
|
%
|
||||||||||||||||
|
Other
borrowings
|
65,815
|
3,093
|
4.70
|
%
|
67,941
|
2,606
|
3.84
|
%
|
24,596
|
719
|
2.92
|
%
|
||||||||||||||||
|
Total
interest-bearing liabilities
|
387,074
|
12,922
|
3.34
|
%
|
352,964
|
8,349
|
2.37
|
%
|
215,462
|
3,448
|
1.60
|
%
|
||||||||||||||||
|
Demand
deposits
|
63,167
|
52,964
|
41,663
|
|||||||||||||||||||||||||
|
Other
liabilities
|
.4,378
|
2,536
|
1,573
|
|||||||||||||||||||||||||
|
Shareholders'
equity
|
57,205
|
50,522
|
27,470
|
|||||||||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$
|
511,824
|
$
|
458,986
|
$
|
286,168
|
||||||||||||||||||||||
|
Net
interest spread
|
2.88
|
%
|
3.05
|
%
|
3.46
|
%
|
||||||||||||||||||||||
|
Net
interest income/margin
|
$
|
14,323
|
3.27
|
%
|
$
|
12,995
|
3.30
|
%
|
$
|
9,596
|
3.72
|
%
|
||||||||||||||||
|
Net
interest margin (tax equivalent)
|
3.36
|
%
|
3.44
|
%
|
3.82
|
%
|
||||||||||||||||||||||
(1)
All
loans and deposits are domestic. Average loan balances include non-accrual
loans
(2)
The
computation includes federal funds sold, securities purchased under agreement
to
resell and interest bearing deposits.
The
following table presents the dollar amount of changes in interest income and
interest expense attributable to changes in volume and the amount attributable
to changes in rate. The combined effect in both volume and rate, which cannot
be
separately identified, has been allocated proportionately to the change due
to
volume and due to rate.
(In
thousands)
|
2006
versus 2005
|
2005
versus 2004
|
||||||||||||||||||
|
Increase
(decrease ) due to
|
Increase
(decrease ) due to
|
||||||||||||||||||
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||
|
Assets
|
|||||||||||||||||||
|
Earning
assets
|
|||||||||||||||||||
|
Loans
|
$
|
3,404
|
$
|
1,600
|
$
|
5,004
|
$
|
4,092
|
$
|
453
|
$
|
4,545
|
|||||||
|
Investment
securities
|
(330
|
)
|
757
|
427
|
3,700
|
118
|
3,818
|
||||||||||||
|
Other
short-term investments
|
274
|
196
|
470
|
(
326
|
)
|
262
|
(
64
|
)
|
|||||||||||
|
Total
earning assets
|
2,538
|
3.363
|
5,901
|
7,445
|
854
|
8,299
|
|||||||||||||
|
Interest-bearing
liabilities
|
|||||||||||||||||||
|
Interest-bearing
transaction accounts
|
10
|
108
|
118
|
65
|
12
|
77
|
|||||||||||||
|
Money
market accounts
|
152
|
566
|
718
|
150
|
394
|
544
|
|||||||||||||
|
Savings
deposits
|
(26
|
)
|
21
|
(5
|
)
|
67
|
(7
|
)
|
59
|
||||||||||
|
Time
deposits
|
967
|
2,288
|
3,255
|
2,418
|
(85
|
)
|
2,333
|
||||||||||||
|
Other
short-term Borrowings
|
(79
|
)
|
565
|
487
|
1,603
|
284
|
1,887
|
||||||||||||
|
Total
interest-bearing liabilities
|
870
|
3,702
|
4,573
|
6,394
|
(1,493
|
)
|
4,901
|
||||||||||||
|
Net
interest income
|
$
|
1,328
|
$
|
3,398
|
|||||||||||||||
Market
Risk and Interest Rate Sensitivity
Market
risk reflects the risk of economic loss resulting from adverse changes in market
prices and interest rates. The risk of loss can be measured in either diminished
current market values or reduced current and potential net income. Our primary
market risk is interest rate risk. We have established an Asset/Liability
Management Committee (“ALCO”) to monitor and manage interest rate risk. The ALCO
monitors and manages the pricing and maturity of its assets and liabilities
in
order to diminish the potential adverse impact that changes in interest rates
could have on its net interest income. The ALCO has established policies
guidelines and strategies with respect to interest rate risk exposure and
liquidity.
A
monitoring technique employed by us is the measurement of our interest
sensitivity “gap,” which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. Also, asset/liability modeling is performed to assess
the
impact varying interest rates and balance sheet mix assumptions will have on
net
interest income. Interest rate sensitivity can be managed by repricing assets
or
liabilities, selling securities available-for-sale, replacing an asset or
liability at maturity or by adjusting the interest rate during the life of
an
asset or liability. Managing the amount of assets and liabilities repricing
in
the same time interval helps to hedge the risk and minimize the impact on net
interest income of rising or falling interest rates. Neither the “gap” analysis
or asset/liability modeling are precise indicators of our interest sensitivity
position due to the many factors that affect net interest income including,
the
timing, magnitude and frequency of interest rate changes as well as changes
in
the volume and mix of earning assets and interest-bearing
liabilities.
The
following table illustrates our interest rate sensitivity at December 31,
2006.
Interest
Sensitivity Analysis
(In
thousands)
|
Within
One
Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
Over
Five
Years
|
Total
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Earning
assets
|
||||||||||||||||
|
Loans
(1)
|
$
|
140,072
|
$
|
67,537
|
$
|
58,162
|
$
|
8,971
|
$
|
274,742
|
||||||
|
Securities
(2)
|
48,891
|
73,267
|
17,396
|
39,703
|
179,257
|
|||||||||||
|
Federal
funds sold, securities purchased under agreements to resell and other
earning assets
|
17,793
|
-
|
-
|
-
|
17,793
|
|||||||||||
|
Total
earning assets
|
206,756
|
140,804
|
75,558
|
48,674
|
471,792
|
|||||||||||
|
Liabilities
|
||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||
|
Interest
bearing deposits
|
||||||||||||||||
|
NOW
accounts
|
16,011
|
28,820
|
9,606
|
9,606
|
64,043
|
|||||||||||
|
Money
market accounts
|
40,393
|
10,406
|
-
|
-
|
50,799
|
|||||||||||
|
Savings
deposits
|
7,997
|
10,976
|
3,658
|
3,504
|
26,135
|
|||||||||||
|
Time
deposits
|
168,874
|
19,566
|
11,847
|
1
|
200,288
|
|||||||||||
|
Total
interest-bearing deposits
|
233,275
|
69,768
|
25,111
|
13,111
|
341,265
|
|||||||||||
|
Other
borrowings
|
35,617
|
2,020
|
26,919
|
288
|
64,844
|
|||||||||||
|
Total
interest-bearing liabilities
|
268,892
|
71,788
|
52,030
|
13,399
|
406,109
|
|||||||||||
|
Period
gap
|
$
|
(62,136
|
)
|
$
|
69,016
|
$
|
23,528
|
$
|
35,275
|
$
|
65,683
|
|||||
|
Cumulative
gap
|
$
|
(62,136
|
)
|
$
|
6,880
|
$
|
30,408
|
$
|
65,683
|
$
|
65,683
|
|||||
|
Ratio
of cumulative gap to total earning assets
|
(13.17
|
%)
|
1.46
|
%
|
6.45
|
%
|
13.92
|
%
|
13.92
|
%
|
||||||
_________________________
|
(1)
|
Loans
classified as non-accrual as of December 31, 2006 are not included
in the
balances.
|
|
(2)
|
Securities
based on amortized cost.
|
At
December 31, 2006, we had entered into interest rate cap and floor agreements
with a notional amount of $10,000,000 each. The cap rate of interest is 4.50%
three month LIBOR and the floor rate of interest is 5.00% three month LIBOR.
The
fair value of the agreements at December 31, 2006 were $373,000. These
agreements were entered into to protect assets and liabilities from the negative
effects of volatility in interest rates. The agreements provide for a payment
to
the bank of the difference between the cap/floor rate of interest and the market
rate of interest. The bank’s exposure to credit risk is limited to the ability
of the counterparty to make potential future payments required pursuant to
the
agreement. The bank’s exposure to market risk of loss is limited to the market
value of the cap and floor. The market rate of the cap was $180,000 and the
floor market value was $191,000 at December 31, 2006. Any gain or loss on the
value of this contract is recognized in earnings on a current basis. The bank
received payments under the terms of the cap contract in the amount $49,000
during the year ended December 31, 2006. No payments were received under the
terms of the cap contract in 2005 and no payments have been received under
the
terms of the floor contract in 2006. The bank recognized $18,409 and $37,897
in
other income to reflect the increase in the value of the contracts for the
years
ended December 31, 2006 and 2005, respectively. The cap agreement and floor
agreement expire on August 1, 2009 and August 31, 2011,
respectively.
Through
simulation modeling, we monitor the effect that an immediate and sustained
change in interest rates of 100 basis points and 200 basis points up and down
will have on net-interest income over the next 12 months. Based on the many
factors and assumptions used in simulating the effect of changes in interest
rates, the following table estimates the hypothetical percentage change in
net
interest income at December 31, 2006 and 2005 over the subsequent 12 months.
Even though we are liability sensitive the model at December 31, 2006 reflects
a
decrease in net interest income in a declining rate environment. This primarily
results from the current level of interest rates being paid on our interest
bearing transaction accounts as well as money market accounts. The interest
rates on these accounts are at a level where they can not be repriced in
proportion to the change in interest rates. The increase and decrease of 100
and
200 basis points assume a simultaneous and parallel change in interest rates
along the entire yield curve..
Net
Interest Income Sensitivity
|
Change
in
short-term
interest
|
Hypothetical
percentage
change in
net
interest income
December
31,
|
|||
|
rates
|
2006
|
2005
|
||
|
+200bp
|
-
2.73%
|
+
0.74%
|
||
|
+100bp
|
-
1.19%
|
+
0.75%
|
||
|
Flat
|
-
|
-
|
||
|
-100bp
|
-
0.79%
|
-
2.79%
|
||
|
-200bp
|
-
4.16%
|
-
8.30%
|
||
We
also
perform a valuation analysis projecting future cash flows from assets and
liabilities to determine the Present Value of Equity (PVE) over a range of
changes in market interest rates. The sensitivity of PVE to changes in interest
rates is a measure of the sensitivity of earnings over a longer time horizon.
At
December 31, 2006 and 2005 the PVE, exposure in a plus 200 basis point increase
in market interest rates was estimated to be 9.92% and 8.03%,
respectively.
Provision
and Allowance for Loan Losses
At
December 31, 2006, the allowance for loan losses amounted to $3.2 million,
or
1.17% of total loans, as compared to $2.7 million, or 1.22% of total loans,
at
December 31, 2005. Our provision for loan loss was $528,000 for the year ended
December 31, 2006 as compared to $329,000 and $245,000 for the years ended
December 31, 2005 and 2004, respectively. The provision is made based on our
assessment of general loan loss risk and asset quality. The allowance for loan
losses represents an amount which we believe will be adequate to absorb probable
losses on existing loans that may become uncollectible. Our judgment as to
the
adequacy of the allowance for loan losses is based on a number of assumptions
about future events, which we believe to be reasonable, but which may or may
not
prove to be accurate. Our determination of the allowance for loan losses is
based on evaluations of the collectibility of loans, including consideration
of
factors such as the balance of impaired loans, the quality, mix, and size of
our
overall loan portfolio, economic conditions that may affect the borrower’s
ability to repay, the amount and quality of collateral securing the loans,
our
historical loan loss experience, and a review of specific problem loans. We
also
consider subjective issues such as changes in the lending policies and
procedures, changes in the local/national economy, changes in volume or type
of
credits, changes in volume/severity of problem loans, quality of loan review
and
board of director oversight and concentrations of credit. While net charge-offs
declined during 2006 the charge-offs for installment and other credit card
loans
increased 186.1% from $72,000 in 2005 to $206,000 in 2006. This primarily
results from the introduction of the overdraft protection program in the fourth
quarter of 2005. Overdrafts are included in loans on the balance sheet and
charge-off of the overdraft amount, excluding fees, is charged to the allowance
for loan losses. In evaluating this overdraft protection program it was
anticipated that these consumer charge-offs would increase. Periodically, we
adjust the amount of the allowance based on changing circumstances. We charge
recognized losses to the allowance and add subsequent recoveries back to the
allowance for loan losses.
We
perform an analysis quarterly to assess the risk within the loan portfolio.
The
portfolio is segregated into similar risk components for which historical loss
ratios are calculated and adjusted for identified changes in current portfolio
characteristics. Historical loss ratios are calculated by product type and
by
regulatory credit risk classification. The allowance consist of an allocated
and
unallocated allowance. The allocated portion is determined by types and ratings
of
loans
within the portfolio. The unallocated portion of the allowance is established
for losses that exist in the remainder of the portfolio and compensates for
uncertainty in estimating the loan losses.
There
can
be no assurance that charge-offs of loans in future periods will not exceed
the
allowance for loan losses as estimated at any point in time or that provisions
for loan losses will not be significant to a particular accounting period.
The
allowance is also subject to examination and testing for adequacy by regulatory
agencies, which may consider such factors as the methodology used to determine
adequacy and the size of the allowance relative to that of peer institutions.
Such regulatory agencies could require us to adjust our allowance based on
information available to them at the time of their examination.
At
December 31, 2006, 2005, and 2004, we had non-accrual loans in the amount of
$449,000, $101,000 and $0, respectively. There were $1.6 million, $387,000
and
$411,000 in loans delinquent greater than 30 days at December 31, 2006, 2005
and
2004, respectively. There were $22,000, $34,000 and $80,000 in loans greater
than 90 days delinquent and still accruing interest at December 31, 2006, 2005
and 2004, respectively. As a result of the merger with DeKalb, we acquired
an
allowance for loan losses in the amount of $320,000. This allowance for loan
losses had been recorded through the provision for loan losses for DeKalb prior
to the merger, which was consummated on June 9, 2006.
Our
management continuously monitors non-performing, classified and past due loans
to identify deterioration regarding the condition of these loans. We identified
six loans in the amount of $769,000 which are current as to principal and
interest and not included in non-performing assets but that could be potential
problem loans.
Allowance
for Loan Losses
|
(Dollars
in thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
Average
loans outstanding
|
$
|
249,209
|
$
|
202,143
|
$
|
141,793
|
$
|
111,928
|
$
|
93,992
|
||||||
|
Loans
outstanding at period end
|
$
|
275,189
|
$
|
221,668
|
$
|
186,771
|
$
|
121,009
|
$
|
99,991
|
||||||
|
Total
nonaccrual loans
|
$
|
449
|
$
|
101
|
-
|
$
|
80
|
$
|
144
|
|||||||
|
Loans
past due 90 days and still accruing
|
$
|
22
|
$
|
34
|
$
|
80
|
$
|
109
|
$
|
24
|
||||||
|
Beginning
balance of allowance
|
$
|
2,701
|
$
|
2,764
|
$
|
1,705
|
$
|
1,525
|
$
|
1,000
|
||||||
|
Loans
charged-off:
|
||||||||||||||||
|
1-4
family residential mortgage
|
97
|
119
|
5
|
27
|
-
|
|||||||||||
|
Home
equity
|
-
|
274
|
-
|
-
|
-
|
|||||||||||
|
Commercial
|
142
|
56
|
196
|
157
|
156
|
|||||||||||
|
Installment
& credit card
|
206
|
72
|
93
|
51
|
16
|
|||||||||||
|
Total
loans charged-off
|
445
|
521
|
294
|
235
|
172
|
|||||||||||
|
Recoveries:
|
||||||||||||||||
|
1-4
family residential mortgage
|
2
|
-
|
-
|
-
|
-
|
|||||||||||
|
Home
equity
|
-
|
-
|
-
|
-
|
19
|
|||||||||||
|
Commercial
|
59
|
99
|
90
|
247
|
1
|
|||||||||||
|
Installment
& credit card
|
50
|
30
|
23
|
1
|
-
|
|||||||||||
|
Total
recoveries
|
111
|
129
|
113
|
248
|
20
|
|||||||||||
|
Net
loans charged off (recovered)
|
334
|
392
|
181
|
(
13
|
)
|
152
|
||||||||||
|
Provision
for loan losses
|
528
|
329
|
245
|
167
|
677
|
|||||||||||
|
Purchased
in acquisition
|
320
|
-
|
995
|
-
|
-
|
|||||||||||
|
Balance
at period end
|
$
|
3,215
|
$
|
2,701
|
$
|
2,764
|
$
|
1,705
|
$
|
1,525
|
||||||
|
Net
charge -offs to average loans
|
0.13
|
%
|
0.19
|
%
|
0.13
|
%
|
(0.01
|
%)
|
0.16
|
%
|
||||||
|
Allowance
as percent of total loans
|
1.17
|
%
|
1.22
|
%
|
1.48
|
%
|
1.41
|
%
|
1.53
|
%
|
||||||
|
Non-performing
loans as % of total loans
|
.16
|
%
|
.05
|
%
|
-
|
0.07
|
%
|
0.14
|
%
|
|||||||
|
Allowance
as % of non-performing loans
|
716.04
|
%
|
2674.26
|
%
|
-
|
2131.25
|
%
|
1059.03
|
%
|
|||||||
The
following table presents an allocation of the allowance for loan losses at
the
end of each of the past four years. The allocation is calculated on an
approximate basis and is not necessarily indicative of future losses or
allocations. The entire amount is available to absorb losses occurring in any
category of loans. Prior to December 31, 2003, we did not allocate the allowance
to loan losses to categories of loans but rather evaluated the allowance on
an
overall portfolio basis. The change as of December 31, 2003 to allocating the
allowance to loan losses to loan categories had no financial statement effect
on
the allowance for loan losses.
Allocation
of the Allowance for Loan Losses
|
Dollars
in thousands
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||||||
|
Amount
|
%
of
loans
in
category
|
Amount
|
%
of
loans
in
category
|
Amount
|
%
of
loans
in
category
|
Amount
|
%
of
loans
in
category
|
||||||||||||||||||
|
Commercial,
Financial and Agricultural
|
$
|
83
|
8.6
|
%
|
$
|
574
|
10.0
|
%
|
$
|
462
|
10.2
|
%
|
$
|
285
|
9.5
|
%
|
|||||||||
|
Real
Estate Construction
|
884
|
11.4
|
%
|
611
|
9.0
|
%
|
348
|
4.3
|
%
|
214
|
6.4
|
%
|
|||||||||||||
|
Real
Estate Mortgage:
|
|||||||||||||||||||||||||
|
Commercial
|
1,692
|
50.5
|
%
|
953
|
50.9
|
%
|
1,285
|
51.8
|
%
|
792
|
60.1
|
%
|
|||||||||||||
|
Residential
|
323
|
17.4
|
%
|
275
|
16.8
|
%
|
478
|
19.0
|
%
|
293
|
9.8
|
%
|
|||||||||||||
|
Consumer
|
133
|
12.1
|
%
|
213
|
13.3
|
%
|
135
|
14.7
|
%
|
85
|
14.2
|
%
|
|||||||||||||
|
Unallocated
|
100
|
N/A
|
75
|
N/A
|
56
|
N/A
|
36
|
N/A
|
|||||||||||||||||
|
Total
|
$
|
3,215
|
100.0
|
%
|
$
|
2,701
|
100.0
|
%
|
$
|
2,764
|
100.0
|
%
|
$
|
1,705
|
100.0
|
%
|
|||||||||
Accrual
of interest is discontinued on loans when we believe, after considering economic
and business conditions and collection efforts that a borrower’s financial
condition is such that the collection of interest is doubtful. A delinquent
loan
is generally placed in nonaccrual status when it becomes 90 days or more past
due. At the time a loan is placed in nonaccrual status, all interest, which
has
been accrued on the loan but remains unpaid is reversed and deducted from
earnings as a reduction of reported interest income. No additional interest
is
accrued on the loan balance until the collection of both principal and interest
becomes reasonably certain.
Noninterest
Income and Expense
Noninterest
Income.
Our
primary source of noninterest income is service charges on deposit accounts.
In
addition, we originate mortgage loans that are pre-sold and funded by the third
party acquirer, for which receive a fee. Other sources of noninterest
income
are
derived from commissions on sale of non-deposit investment products, bankcard
fees, ATM/debit card fees, commissions on check sales, safe deposit box rent,
wire transfer and official check fees. Noninterest
income for the year ended December 31, 2006 was $4.4 million as compared to
$3.3
million for 2005, an increase of $1.1 million, or
33.4%.
This increase is due
primarily to increased deposit service charges resulting from higher average
deposit account balances. In
addition, during the fourth quarter of 2005 we introduced a formalized overdraft
privilege program, which contributed to the increase in deposit service charges
in 2006 as compared 2005.
Deposit
service charges amounted to $2.4 million in 2006 as compared to $1.5 million
in
2005. Mortgage origination fees increased to $450,000 in 2006 as compared to
$362,000 in 2005. This increase resulted from continued historically low
mortgage interest rates as well as the addition of one full time and one
part-time originator in the last half of 2005 and another full time originator
was added as a result of the DeKalb acquisition in June 2006. In the first
quarter of 2006 we sold securities that resulted in a loss of $69,000. The
proceeds from the sale of the securities were used to pay down $5.0 million
in
FHLB advances resulting in a gain on the early extinguishment of debt of
$159,000. This compares to gains on the sale of securities in the amount of
$181,000 that were recognized in the first quarter of 2005 as we continued
to
restructure the investment portfolio acquired from DutchFork. A gain on the
early extinguishment of debt in the amount of $124,000 was realized in the
fourth quarter of 2005. This also resulted from the pay down of approximately
$5.0 million of the FHLB advances. Commissions on the sale of non-deposit
investment products increased to $321,000 in 2006 as compared to $230,000 in
2005. This increase results from emphasis on this source of income through
branch referrals as well as additional calling efforts. Other noninterest income
increased to $1.1 million in 2006 as compared to $931,000 in 2005. This is
a
result of all categories of other noninterest income increasing, including
loan
late charges increasing by $11,000, ATM/debit card fees and surcharges by
$147,000 and income from increases in value of bank owned life insurance of
approximately $47,000. The increases in loan late charges and ATM/debit card
fees and surcharges are a result of the continued growth of the bank. In July
2006 we purchased an additional $3.5 million in bank owned life insurance which
resulted in the increase in this source of income in 2006 as compared to 2005.
In addition, we realized an increase in the cash value of bank owned life
insurance of approximately $251,000 in 2005 as compared to $19,000 in 2004.
These policies were acquired in the DutchFork acquisition and were owned for
the
entire year of 2005 as compared to only three months in 2004.
Noninterest
income amounted to $3.3 million in 2005 as compared to $1.8 million in
2004,
an
increase of $1.5 million (85.9%).
Non-interest income in 2005 included the impact of the DutchFork acquisition
for
a full year, whereas it only impacted 2004 during the fourth quarter of that
year. Deposit
service
charges amounted to $1.5 million in 2005 as compared to $880,000 in 2004. During
the fourth quarter of 2005, we introduced a formalized overdraft privilege
program. The introduction of the overdraft privilege program as well as
increased deposit balances contributed to the increase in deposit service
charges. Mortgage origination fees increased to $362,000 in 2005 as compared
to
$268,000 in 2004. This increase resulted from an emphasis in this area and
the
addition of one full time and one part-time originator in the last half of
2005.
We had gains on the sale of securities in the amount of $188,000 in 2005 as
compared to $11,000 in 2004. Gains in the amount of $181,000 were recognized
in
the first quarter of 2005 as we continued to restructure the investment
portfolio acquired from DutchFork. A gain on the early extinguishment of debt
in
the amount of $124,000 was realized in the fourth quarter of 2005. This resulted
from the pay down of approximately $5.0 million of the FHLB advances that were
acquired in the DutchFork merger. Other noninterest income increased to $931,000
million in 2005 as compared to $402,000 in 2004. This is a result of all
categories of other noninterest income increasing, including loan late charges,
ATM/debit card fees and surcharges due to the effect of the DutchFork merger.
In
addition, we realized an increase in the cash value of bank owned life insurance
of approximately $251,000 in 2005 as compared to $19,000 in 2004. These policies
were acquired in the DutchFork acquisition and were owned for the entire year
of
2005 as compared to only three months in 2004.
Noninterest
Expense.
In the
very competitive financial services industry, we recognize the need to place
a
great deal of emphasis on expense management and continually evaluate and
monitor growth in discretionary expense categories in order to control future
increases. We have expanded our branch network over the last five years and
acquired our twelfth office located in Camden, South Carolina in June 2006
through the acquisition of DeKalb. In July 2006, construction was completed
and
we occupied our new 29,000 square foot administrative center. We believe that
the administrative center along with other initiatives continue to improve
the
support infrastructure to enable our company to effectively manage the asset
growth and expanded branch network experienced over the last five years. As
a
result of management’s expansion strategy, all categories of non-interest
expense have continued to increase over the last several years. We anticipate
that we will continue to seek de novo branch expansion as well as possible
acquisition opportunities in key markets within the midlands of South
Carolina.
Noninterest
expense increased to $13.2 million for the year
ended
December 31, 2006 from $11.8 million for the year ended December 31, 2005.
Salary and employee benefits increased $594,000 million in 2006 as compared
to
2005. We added approximately 8 employees in connection with the merger with
DeKalb. These employees were included in operations for approximately seven
months during 2006. The number of full time equivalent employees at December
31,
2006 was 137 as compared to 123 at the same time in 2005. The new employees
were
hired to support the continued growth of the bank. Occupancy expense increased
$139,000 from $807,000 in 2005 to $946,000 in 2006. The increase is primarily
a
result of the increased expense associated with the administrative center and
the Camden branch for approximately five months and seven months, respectively.
Data processing cost are primarily associated with third party processors
supporting our network of ATM machines as well as processing ATM and Debit
card
activity. The expense related to these activities increased $66,000 as a result
of the increased activity and numbers of outstanding cards. Telephone expense
increased $90,000 as result of enhancements to our data network and the addition
of the Camden branch. Professional fees increased from $415,000 in 2005 to
$833,000 in 2006. This increase results primarily from the expense associated
with the implementation of the overdraft privilege program. Expenses in 2006
related to implementing this program were approximately $290,000. Ongoing
professional expenses related to this program after 2006 are not anticipated
to
be significant. Professional fees in 2006 also include approximately $180,000
for consulting services relative to the investment portfolio. In 2005, the
expense related to investment portfolio consulting was approximately $45,000.
In
addition, the Sarbanes-Oxley Act of 2002, and the rules and regulations
promulgated by the Securities and Exchange Commission that are now applicable
to
us, have increased the scope, complexity, and cost of corporate governance,
reporting, and disclosure and as a result have increased legal and other
professional fees. The Securities and Exchange Commission has granted an
extension to non-accelerated filers to comply with the management reporting
provisions of Section 404 to December 31, 2007. The requirement for an
independent attestation report on internal controls has been extended to
December 31, 2008 for non-accelerated filers. There will be continued cost
incurred relative to complying with the requirements of Section 404 into 2007
and beyond. We continue to evaluate the best options for utilizing
consulting/outside resources for implementation and compliance with the
requirements of Section 404. Amortization of intangibles increased approximately
$42,000, which is a result of amortization of the core deposit premium
associated with the DeKalb merger. The core deposit premium acquired in this
merger amounted to $522,000 and is being amortized on a straight-line basis
over
seven years.
As
a
result of the merger with DutchFork in
October 2004, expenses associated with operating the three new offices were
included in the results of operations for the last quarter of 2004 as compared
to the full year in 2005. Noninterest expense increased to $11.8 million for
the
year
ended
December 31, 2005 from $8.0 million for the year ended December 31, 2004. Salary
and employee benefits increased $2.0 million in 2005 as compared to
2004.
We
added approximately 30 employees
in
connection with the merger with DutchFork. The
number of full time equivalent employees at December 31, 2005 was 123 as
compared to 115 at the same time in 2004. The new employees were hired to
support the continued growth of the bank.
Occupancy expense increased $318,000 from $489,000 in 2004 to $807,000 in 2005.
Equipment expense increased by $254,000,
or
25.6%,
in
2005 as
compared to
2004.
This is primarily a result of the expenses associated with the DutchFork
acquisition being included for an entire year in 2005. In addition, increased
depreciation and maintenance contract expense related to equipment purchased
to
upgrade and improve existing technology,
including an upgrade to our main processor and item processing equipment needed
to support increased volumes subsequent to the merger with DutchFork. These
additions and upgrades were made in the second and third quarter of 2004 and
therefore did not impact the full year of 2004. Noninterest expense in
2005
and
2004 included amortization of the deposit premium intangible of
$595,000
and $280,000, respectively,
related
to the merger with DutchFork in October 2004
and
the acquisition of the Chapin office in February 2001. The deposit premiums
of
$1.2 million relative to the Chapin branch acquisition and the $2.9 million
related to the
DutchFork merger are being amortized
on a
straight-line
basis over a period of seven years. Professional
fees increased by $225,000 in 2005 as compared to 2004 due to increased legal
fees, audit fees and consulting fees, most of which is attributable to the
significant growth we experienced between the two periods.
The
following table sets forth for the periods indicated the primary components
of
non-interest expense:
|
(In
thousands)
|
||||||||||
|
Year
ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Salary
and employee benefits
|
$
|
6,887
|
$
|
6,292
|
$
|
4,263
|
||||
|
Occupancy
|
946
|
807
|
489
|
|||||||
|
Equipment
|
1,241
|
1,246
|
992
|
|||||||
|
Marketing
and public relations
|
329
|
337
|
325
|
|||||||
|
Data
processing
|
265
|
199
|
127
|
|||||||
|
Supplies
|
271
|
262
|
191
|
|||||||
|
Telephone
|
381
|
291
|
206
|
|||||||
|
Correspondent
services
|
169
|
167
|
140
|
|||||||
|
Insurance
|
255
|
246
|
149
|
|||||||
|
Professional
fees
|
833
|
415
|
190
|
|||||||
|
Postage
|
168
|
164
|
111
|
|||||||
|
Amortization
of intangibles
|
637
|
595
|
280
|
|||||||
|
Other
|
861
|
817
|
514
|
|||||||
|
$
|
13,243
|
$
|
11,838
|
$
|
7,977
|
|||||
Income
Tax Expense
Income
tax expenses for the year ended December 31, 2006 were $1.5 million, or 29.3%
of
income before taxes, as compared to $1.0
million, or 25.0% of income before taxes, for the year ended December 31, 2005.
Income taxes for 2004 were $963,000, or 30.6% of income before taxes. We
recognize deferred tax assets for future deductible amounts resulting from
differences in the financial statement and tax bases of assets and liabilities
and operating loss carry forwards. A valuation allowance is then established
to
reduce the deferred tax asset to the level that it is more likely than not
that
the tax benefit will be realized. There are no valuation allowances established
for deferred taxes as of December 31, 2006 and 2005. The increase in the
effective tax rate in 2006 over the prior year is primarily a result of the
decrease in the amount of dividends received (eligible for a 70% dividend
received deduction) in 2006 versus 2005 on preferred stock held in the
available-for-sale portfolio ($614,000 in 2006 and $920,000 in 2005). These
investments were owned by DutchFork at the date of the merger. Subsequent to
the
merger and as a result of restructuring certain holdings within the
portfolio,
a
significant portion of the preferred stock holdings were sold in the fourth
quarter of 2004 and first quarter of 2005. As of December 31, 2006, we hold
preferred stock with a fair value of $14.0 million in the available for sale
portfolio and bank owned life insurance with a book value of $9.6 million.
These
holdings will continue to reduce the company’s effective tax rate in future
periods. The decrease in the effective tax rate in 2005 as compared to 2004
was
also a primarily a result of these assets being held only during the fourth
quarter of 2004.
Financial
Position
Total
assets at December 31, 2006 were $548.1 million as compared to $467.5 million
at
December 31, 2005. Average earning assets increased to $437.9 million during
2006 from $393.9 million during 2005. Asset growth included
organic
growth in loans of
$26.9
million during 2006. Loans
at
December 31, 2006 were $275.2
as
compared to $221.7 million at December 31, 2005. The increase includes $26.6
million in loans acquired in the merger with DeKalb. Investment securities
were
$176.5 at December 31, 2006 as compared to $176.4 million at December 31, 2005.
The
organic $34.6 million growth in assets was funded by an organic increase in
deposit account balances of $38.0 million. Deposits and borrowings acquired
in
the merger with DeKalb amounted to $27.3 million and $7.9 million respectively.
Securities sold under agreements to repurchase increased by $5.7 million at
December 31, 2006 as compared to December 31, 2005. Federal Home Loan Bank
Advances decreased by $4.7 million as of December 31, 2006 compared to December
31, 2005. Shareholders’
equity totaled $63.2 million
at December 31, 2006 as compared to $50.8 million at December 31, 2005. The
increase was a result of retained earnings of $2.8 million, proceeds from
issuance of stock under stock option plans and the dividend reinvestment plan
of
$1.1
million and stock issued in the DeKalb merger valued at $7.6 million. There
was
also a partial recovery of the net of tax unrealized loss on available-for-sale
securities of $1.9 million during 2006.
Earning
Assets
Loans.
Loans
typically provide higher yields than the other types of earning assets, and
thus
one of
our goals is to have loans be the largest category of our earning assets. During
2006, loans accounted for 56.9% of average earning assets as compared to 51.3%
of average earning assets in 2005.
The 5.6%
increase in the ratio during 2006 demonstrates progress towards our asset mix
goals. The growth of the loan portfolio both in total dollars and as a
percentage of total earning assets will continue to be a major focus throughout
2007 and thereafter. Associated with the higher loan yields are the inherent
credit and liquidity risks, which we attempt to control and counterbalance.
We
are committed to achieving our asset mix goals without sacrificing asset
quality. Loans averaged $249.2 million during 2006, as compared to $202.1
million in 2005.
The
following table shows the composition of the loan portfolio by
category:
|
December
31,
|
||||||||||||||||
|
(In
thousands)
|
2006
|
2005
|
2004
|
2003
|
2002
|
|||||||||||
|
|
||||||||||||||||
|
Commercial,
financial & agricultural
|
$
|
23,595
|
$
|
22,091
|
$
|
19,001
|
$
|
11,518
|
$
|
10,688
|
||||||
|
Real
estate:
|
||||||||||||||||
|
Construction
|
31,474
|
19,955
|
8,066
|
7,782
|
7,533
|
|||||||||||
|
Mortgage
- residential
|
47,950
|
37,251
|
35,438
|
11,804
|
11,055
|
|||||||||||
|
Mortgage
- commercial
|
138,886
|
112,915
|
96,811
|
72,668
|
55,290
|
|||||||||||
|
Consumer
|
33,284
|
29,456
|
27,455
|
17,237
|
15,425
|
|||||||||||
|
Total
gross loans
|
275,189
|
221,668
|
186,771
|
121,009
|
99,991
|
|||||||||||
|
Allowance
for loan losses
|
(3,215
|
)
|
(2,701
|
)
|
(2,764
|
)
|
(1,705
|
)
|
(1,525
|
)
|
||||||
|
Total
net loans
|
$
|
271,974
|
$
|
218,967
|
$
|
184,007
|
$
|
119,304
|
$
|
98,466
|
||||||
In
the
context of this discussion, a real estate mortgage loan is defined as any loan,
other than loans for construction purposes, secured by real estate, regardless
of the purpose of the loan. We follow the common practice of financial
institutions in the company’s market area of obtaining a security interest in
real estate whenever possible, in addition to any other available collateral.
This collateral is taken to reinforce the likelihood of the ultimate repayment
of the loan and tends to increase the magnitude of the real estate loan
components. Generally we limit the loan-to-value ratio to 80%. The principal
components of our loan portfolio, at year-end 2006 and 2005, were commercial
mortgage loans in the amount of $138.9 million and $112.9 million, representing
50.5% and 50.9% of the portfolio, respectively. Significant portions of these
commercial mortgage loans are made to finance owner-occupied real estate. We
continue to maintain a conservative philosophy regarding our underwriting
guidelines, and believe it will reduce the risk elements of the loan portfolio
through strategies that diversify the lending mix.
The
repayment of loans in the loan portfolio as they mature is a source of
liquidity. The following table sets forth the loans maturing within specified
intervals at December 31,
2006.
Loan
Maturity Schedule and Sensitivity to Changes in Interest
Rates
|
(In
thousands)
|
December
31, 2006
|
||||||||||||
|
One
Year
or
Less
|
Over
One
Year
Through
Five
Years
|
Over
Five
Years
|
Total
|
||||||||||
|
Commercial,
financial & agricultural
|
$
|
8,383
|
$
|
14,449
|
$
|
763
|
$
|
23,595
|
|||||
|
Real
estate - construction
|
27,919
|
3,500
|
55
|
31,474
|
|||||||||
|
All
other loan
|
37,988
|
121,643
|
60,489
|
220,120
|
|||||||||
|
$
|
74,290
|
$
|
139,592
|
$
|
61,307
|
$
|
275,189
|
||||||
|
Loans
maturing after one year with:
|
|||||||||||||
|
Fixed
interest rates
|
$
|
143,700
|
|||||||||||
|
Floating
interest rates
|
57,199
|
||||||||||||
|
$
|
200,899
|
||||||||||||
The
information presented in the above table is based on the contractual maturities
of the individual loans,
including loans,
which
may be subject to renewal at their contractual maturity. Renewal of such loans
is subject to review and credit approval, as well as modification of terms
upon
their maturity.
Investment
Securities
The
investment securities portfolio is a significant component of our total earning
assets. Total securities averaged $175.1 million in 2006, as compared to $184.1
million in 2005. This represents 40.0% and 46.7% of the average earning assets
for the year ended December 31, 2006 and 2005, respectively. At
December 31, 2006, the portfolio was 37.6% of earning assets.
At
December 31, 2006 we had mortgage backed securities including collateralized
mortgage obligations with a fair value of $79.4 million. Of these $45.5 million
were issued by government sponsored enterprises and $33.9 million are by other
issuers. We believe that none of the CMOs held at December 31, 2006 are deemed
to be invested in “high risk” tranches. Prior to acquiring a CMO, we perform a
detailed analysis of the changes in value and the impact on cash flows in a
changing interest rate environment to ensure that it meets our investment
objectives as outlined in our investment policies. At December 31, 2006, we
also
had investments in variable rate preferred stock issued by the Federal Home
Loan
Mortgage Corporation (FHLMC) with a fair value of $14.0 million, which were
acquired in the DutchFork transaction. In addition, we acquired other fixed
and
variable rate preferred stocks issued by FHLMC and FNMA in the DutchFork
transaction. During the fourth quarter of 2004, we sold approximately $33.0
million primarily fixed rate, preferred stock securities. As a result of marking
the securities to market at the date of acquisition, substantially no gain
or
loss on those transactions was recognized in 2004. In the first quarter of
2005,
we sold preferred stock securities with an approximate carrying value of $12.0
million. A gain of approximately $136,000 was realized in the first quarter
of
2005 on these sales. During 2006 we sold approximately preferred stock with
a
carrying value of approximately $17.1 million for a net gain of approximately
$9,000. At December 31, 2006, the remaining preferred stock securities owned
have an average book value of 85% of their par value. The remaining FHLMC
preferred stock securities have adjustable rates. There have been no significant
downgrades in the credit rating of the issuer. Given the adjustable rate nature
of these securities, the dividend rate will adjust to a level more in line
with
current or future interest rates at a preset time in the future. Our objective
in the management of the investment portfolio is to maintain a portfolio of
high
quality, liquid investments. This policy is particularly important as we
continue to emphasize increasing the percentage of the loan portfolio to total
earning assets. At December 31, 2006, the estimated weighted average life of
the
portfolio
was 7.1
years, duration of approximately 3.3 and a weighted average tax equivalent
yield
of approximately 4.88%. Based on our evaluation of securities that currently
have unrealized losses, and our ability and intent to hold these investments
until a recovery of fair value, we do not consider any of it investments to
be
other-than-temporarily impaired at December 31, 2006.
The
following table shows the investment portfolio composition.
(In
thousands)
|
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Securities
available-for-sale at fair value:
|
||||||||||
|
U.S.
Treasury
|
$
|
1,004
|
$
|
992
|
$
|
997
|
||||
|
U.S.
Government sponsored enterprises
|
56,660
|
57,479
|
63,755
|
|||||||
|
Mortgage-backed
securities
|
79,426
|
69,794
|
71,056
|
|||||||
|
State
and local government
|
4,481
|
253
|
-
|
|||||||
|
FHLMC
preferred stock
|
14,005
|
28,214
|
42,128
|
|||||||
|
Corporate
bonds
|
8,792
|
8,607
|
7,754
|
|||||||
|
Other
|
5,666
|
5,319
|
4,320
|
|||||||
|
170,034
|
170,658
|
190,010
|
||||||||
|
Securities
held-to-maturity (amortized cost):
|
||||||||||
|
State
and local government
|
6,429
|
5,654
|
6,006
|
|||||||
|
Other
|
60
|
60
|
10
|
|||||||
|
6,489
|
5,714
|
6,016
|
||||||||
|
Total
|
$
|
176,523
|
$
|
176,372
|
$
|
196,026
|
||||
Investment
Securities Maturity Distribution and Yields
The
following table shows, at carrying value, the scheduled maturities and average
yields of securities held at December 31, 2006.
| (In thousands) | |||||||||||||||||||||||||
|
Within
One Year
|
After
One But
Within
Five Years
|
After
Five But
Within
Ten Years
|
After
Ten Years
|
||||||||||||||||||||||
|
Held-to-maturity:
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||
|
State
and local government
|
$
|
430
|
4.60
|
%
|
$
|
4,236
|
3.91
|
%
|
$
|
1,763
|
3.83
|
%
|
$
|
-
|
|||||||||||
|
Other
|
-
|
|
10
|
5.85
|
%
|
50
|
4.05
|
%
|
|
|
|||||||||||||||
|
Total
investment securities held-to-Maturity
|
430
|
4.60
|
%
|
4,246
|
3.92
|
%
|
1,813
|
3.84
|
%
|
-
|
|
||||||||||||||
|
Available-for-sale:
|
|||||||||||||||||||||||||
|
U.S.
treasury
|
1,004
|
5.11
|
%
|
-
|
-
|
-
|
|||||||||||||||||||
|
Government
sponsored enterprises
|
25,889
|
4.30
|
%
|
25,343
|
4.20
|
%
|
5,354
|
4.85
|
%
|
74
|
3.64
|
%
|
|||||||||||||
|
Mortgage-backed
securities
|
2,087
|
3.50
|
%
|
45,698
|
4.85
|
%
|
16,443
|
5.78
|
%
|
15,199
|
5.92
|
%
|
|||||||||||||
|
State
and local government
|
-
|
-
|
1,969
|
4.04
|
%
|
2,513
|
4.20
|
%
|
|||||||||||||||||
|
FHLMC
preferred stock
|
-
|
-
|
14,005
|
4.41
|
%
|
||||||||||||||||||||
|
Corporate
|
551
|
5.09
|
%
|
1,718
|
0.30
|
%
|
4,062
|
3.93
|
%
|
2,460
|
4.59
|
%
|
|||||||||||||
|
Other
|
-
|
-
|
-
|
5,665
|
4.49
|
%
|
|||||||||||||||||||
|
Total
investment securities available-for-sale
|
29,531
|
4.29
|
%
|
72,759
|
4.51
|
%
|
27,828
|
5.30
|
%
|
39,916
|
4.99
|
%
|
|||||||||||||
|
Total
investment securities
|
$
|
29,961
|
4.29
|
%
|
$
|
77,005
|
4.48
|
%
|
$
|
29,641
|
5.21
|
%
|
$
|
39,916
|
4.99
|
%
|
|||||||||
Short-Term
Investments
Short-term
investments, which consist of federal funds sold, securities purchased under
agreements to resell and interest bearing deposits, averaged $13.5 million
in 2006, as compared to $7.7 million in 2005. At December 31, 2006, short-
term investments totaled $17.8 million. These funds are a primary source of
liquidity and are generally invested in an earning capacity on an overnight
basis.
Deposits
and Other Interest-Bearing Liabilities
Deposits.
Average
deposits were $384.4 million during 2006, compared to $338.0 million during
2005. Average interest-bearing deposits were $321.3 million in 2006, as compared
to $285.0 million in 2005.
The
following table sets forth the deposits by category:
|
(In
thousands)
|
December
31,
|
||||||||||||||||||
|
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Amount
|
%
of
Deposits
|
Amount
|
%
of
Deposits
|
Amount
|
%
of
Deposits
|
||||||||||||||
|
Demand
deposit accounts
|
$
|
73,676
|
17.8
|
%
|
$
|
57,327
|
16.4
|
%
|
$
|
49,520
|
14.7
|
%
|
|||||||
|
NOW
accounts
|
64,043
|
15.4
|
%
|
60,756
|
17.4
|
%
|
59,723
|
17.7
|
%
|
||||||||||
|
Money
market accounts
|
50,799
|
12.2
|
%
|
45,582
|
13.0
|
%
|
39,124
|
11.6
|
%
|
||||||||||
|
Savings
accounts
|
26,135
|
6.3
|
%
|
29,819
|
8.5
|
%
|
35,370
|
10.5
|
%
|
||||||||||
|
Time
deposits less than $100,000
|
119,083
|
28.7
|
%
|
100,612
|
28.8
|
%
|
100,629
|
29.9
|
%
|
||||||||||
|
Time
deposits more than $100,000
|
81,205
|
19.6
|
%
|
55,508
|
15.9
|
%
|
52,698
|
15.6
|
%
|
||||||||||
|
$
|
414,941
|
100.0
|
%
|
$
|
349,604
|
100.0
|
%
|
$
|
337,064
|
100.0
|
%
|
||||||||
Core
deposits, which exclude certificates of deposit of $100,000 or more, provide
a
relatively stable funding source for the loan portfolio and other earning
assets. Core deposits were $334.7 million and $294.1 million at December 31,
2006 and 2005, respectively. A
stable
base of deposits
is
expected to continue be the primary source of funding to meet both our
short-term and long-term liquidity needs in the future. The
maturity distribution of time deposits is shown in the following
table.
Maturities
of Certificates of Deposit and Other Time Deposit of $100,000 or more
|
(In
thousands)
|
December
31, 2006
|
|||||||||||||||
|
Within
Three
Months
|
After
Three
Through
Six
Months
|
After
Six
Through
Twelve
Months
|
After
Twelve
Months
|
Total
|
||||||||||||
|
Certificates
of deposit of $100,000 or more
|
$
|
23,599
|
$
|
20,932
|
$
|
24,864
|
$
|
11,810
|
$
|
81,205
|
||||||
There
were no other
time deposits of $100,000 or more at December 31, 2006.
Large
certificate of deposit customers tend to be extremely sensitive to interest
rate
levels, making these deposits less reliable sources of funding for liquidity
planning purposes than core deposits. Some financial institutions partially
fund
their balance sheets using large certificates of
deposits
obtained through brokers. These brokered deposits can be unreliable as long-term
funding sources. Accordingly, we do not currently accept brokered
deposits.
Borrowed
funds.
Borrowed
funds consist of securities sold under agreements to repurchase, Federal Home
Loan Bank advances and long-term debt as a result of issuing $15.0 million
in
trust preferred securities.
Short-term borrowings in the form of securities sold under agreements to
repurchase averaged $19.1 million, $11.0 and $5.9 million during 2006, 2005
and
2004, respectively. The maximum month-end balance during 2005, 2004 and 2003
was
$27.7 million, $14.9 million and $7.6 million, respectively. The average rate
paid during these periods was 3.90%, 3.38% and 0.71%, respectively. The balance
of securities sold under agreements to repurchase were $19.5 million and $13.8
million at December 31, 2006 and 2005, respectively. The repurchase agreements
all mature within one to four days and are generally originated with customers
that have other relationships with the company and tend to provide a stable
and
predictable source of funding. As a member of the Federal Home Loan Bank of
Atlanta (FHLB Atlanta),
the bank
has access to advances from the FHLB Atlanta for various terms and amounts.
During 2006 and
2005,
the average outstanding advances amounted to $31.1 million and $41.3
million, respectively.
The
following is a schedule of the maturities for Federal Home Loan Bank Advances
as
of December 31, 2006 and 2005:
|
December
31,
|
|||||||||||||
|
(In
thousands)
|
2006
|
2005
|
|||||||||||
|
Maturing
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||
|
2006
|
$
|
-
|
-
|
$
|
1,500
|
2.83
|
%
|
||||||
|
2008
|
1,954
|
3.79
|
%
|
5,251
|
3.42
|
%
|
|||||||
|
2010
|
26,853
|
3.64
|
%
|
27,306
|
3.64
|
%
|
|||||||
|
2011
|
500
|
5.35
|
%
|
467
|
1.00
|
%
|
|||||||
|
After
five years
|
450
|
1.00
|
%
|
||||||||||
|
29,758
|
3.64
|
%
|
34,524
|
3.54
|
%
|
||||||||
Purchase
premiums included in advances acquired in the merger with DutchFork reflected
in
the advances maturing in 2010 amount to $1.9 million and $2.3 million at
December 31, 2006 and 2005, respectively. The coupon rate on these advances
is
5.76%. In addition to the above borrowings,
we
issued $15.0 million in trust preferred securities on September
16,
2004. The securities accrue and pay distributions quarterly at a rate of LIBOR
plus 257 basis points. The debt may be redeemed in full anytime after September
16, 2009 with notice and matures on September 16, 2034.
Capital
Total
shareholders’ equity as of December 31, 2006 was $63.2
million as compared to $50.8 million as of December 31, 2005. This increase
was
attributable to retained net income for the year ended December 31, 2006 of
$2.8
million, a recovery in the net unrealized loss of $1.9 million net of tax effect
in the market value of investment securities available-for sale,
the
issuance of shares in the dividend reinvestment plan and upon the exercise
of
stock options valued at $1.1 million, and the issuance of 364,034 shares of
common stock valued at $7.6 million in conjunction with the acquisition of
DeKalb. Offsetting these increases was the repurchase of 70,100 shares at a
total price of $1.3 million pursuant to a stock repurchase program we instituted
during the third quarter of 2006 authorizing the repurchase of up to 150,000
shares of our common stock. During
the
first quarter of 2006 we paid a quarterly dividend of $0.05 per share. For
the
last three quarters of 2006 our dividend was $0.06 per share. In 2005 and 2004,
we paid
quarterly cash
dividends of $.05 per share. A
dividend reinvestment plan was implemented in the third quarter of 2003. The
plan allows existing shareholders the option of reinvesting cash dividends
as
well as making optional purchases of up to $5,000 in the purchase of common
stock per quarter.
Under
the
capital guidelines of the Federal Reserve and the OCC, the company and the
bank
are currently required to maintain a minimum risk-based total capital ratio
of
8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common
shareholders’ equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital
to total assets) of at least 4%, but this minimum ratio is increased by 100
to
200 basis points for other than the highest-rated institutions. The trust
preferred securities in the amount of $15.0 million that were issued on
September 16, 2004 qualify as tier 1 capital under the regulatory guidelines
and
are
included in the amounts reflected below.
The
company and the bank exceeded their regulatory capital ratios
at
December 31, 2006 and 2005, as set forth in the following table.
|
Analysis
of Capital
|
|||||||||||||||||||
|
(In
thousands)
|
Required
Amount
|
%
|
Actual
Amount
|
%
|
Excess
Amount
|
%
|
|||||||||||||
|
The
Bank:
|
|||||||||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
14,009
|
4.0
|
%
|
$
|
43,039
|
12.3
|
%
|
29,031
|
8.3
|
%
|
||||||||
|
Total
Capital
|
28,018
|
8.0
|
%
|
46,254
|
13.2
|
%
|
18,236
|
5.2
|
%
|
||||||||||
|
Tier
1 Leverage
|
20,266
|
4.0
|
%
|
43,039
|
8.5
|
%
|
22,773
|
4.5
|
%
|
||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
12,320
|
4.0
|
%
|
$
|
36,179
|
11.8
|
%
|
$
|
23,859
|
7.8
|
%
|
|||||||
|
Total
Capital
|
24,640
|
8.0
|
%
|
38,880
|
12.6
|
%
|
14,240
|
4.6
|
%
|
||||||||||
|
Tier
1 Leverage
|
17,740
|
4.0
|
%
|
36,179
|
8.2
|
%
|
18,439
|
4.2
|
%
|
||||||||||
|
The
Company:
|
|||||||||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
14,030
|
4.0
|
%
|
$
|
47,238
|
13.5
|
%
|
$
|
33,208
|
9.5
|
%
|
|||||||
|
Total
Capital
|
28,060
|
8.0
|
%
|
50,453
|
14.4
|
%
|
22,393
|
6.4
|
%
|
||||||||||
|
Tier
1 Leverage
|
20,343
|
4.0
|
%
|
47,238
|
9.3
|
%
|
26,895
|
5.3
|
%
|
||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
Risk
Based Capital
|
|||||||||||||||||||
|
Tier
1
|
$
|
12,354
|
4.0
|
%
|
$
|
40,898
|
13.2
|
%
|
$
|
28,544
|
8.2
|
%
|
|||||||
|
Total
Capital
|
24,709
|
8.0
|
%
|
43,599
|
14.1
|
%
|
18,890
|
6.1
|
%
|
||||||||||
|
Tier
1 Leverage
|
17,616
|
4.0
|
%
|
40,898
|
9.3
|
%
|
23,282
|
5.3
|
%
|
||||||||||
Liquidity
Management
Liquidity
management involves monitoring sources and uses of funds in order to meet its
day-to-day cash flow requirements while maximizing profits. Liquidity represents
our ability to convert assets into cash or cash equivalents without significant
loss and to raise additional funds by increasing liabilities. Liquidity
management is made more complicated because different balance sheet components
are subject to varying degrees of management control. For example, the timing
of
maturities of the investment portfolio is very predictable and subject to a
high
degree of control at the time investment decisions are made. However, net
deposit inflows and outflows are far less predictable and are not subject to
nearly the same degree of control. Asset liquidity is provided by cash and
assets which are readily marketable, or which can be pledged, or which will
mature in the near future. Liability liquidity is provided by access to core
funding sources, principally the ability to generate customer deposits in our
market area. In addition, liability liquidity is provided through the ability
to
borrow against approved lines of credit (federal funds purchased) from
correspondent banks and to borrow on a secured basis through securities sold
under agreements to repurchase. The bank is a member of the FHLB Atlanta and
has
the ability to obtain advances for various periods of time. These advances
are
secured by securities pledged by the bank or assignment of loans within the
bank’s portfolio.
With
the
successful completion of the common stock offering in 1995, the secondary
offering completed in 1998, the trust preferred offering completed in September
2004, the acquisition of DutchFork in October 2004 and the acquisition of DeKalb
in June 2006, the company has maintained a high level of liquidity and adequate
capital, along with continued retained earnings, sufficient to fund the
operations of the bank for at least the next 12 months. The company’s management
anticipates that the bank will remain a well capitalized institution for at
least the next 12 months. Shareholders’ equity was 11.5% of total assets at
December 31, 2006 and 10.9% at December 31, 2005.
Funds
sold and short-term interest bearing deposits are our primary source of
liquidity and averaged $13.5 million and $7.7 million during the year ended
December 31, 2006 and 2005, respectively. The bank maintains federal funds
purchased lines, in the amount of $10.0 million with several financial
institutions, although these were not utilized in 2006. The FHLB Atlanta has
approved a line of credit of up to 15% of the bank assets, which would be
collateralized
by
a
pledge against specific investment securities and or eligible loans. We
regularly review the liquidity position of the company and have implemented
internal policies establishing guidelines for sources of asset based liquidity
and limit the total amount of purchased funds used to support the balance sheet
and funding from non core sources. We believe that our existing stable base
of
core deposits along with continued growth in this deposit base will enable
us to
meet our long term liquidity needs successfully.
CONTRACTUAL
OBLIGATIONS
The
following table provides payments due by period for various contractual
obligations as of December 31, 2006
|
|
Payments
Due by Period
|
||||||||||||||||||
|
(in
thousands)
|
Within
One
Year
|
Over
One
to
Two
Years
|
Over
Two
to
Three
Years
|
Over
Three
to
Five
Years
|
After
Five
Years
|
Total
|
|||||||||||||
|
|
|
||||||||||||||||||
|
Certificate
accounts
|
$
|
168,714
|
$
|
5,521
|
$
|
14,048
|
$
|
12,005
|
$
|
-
|
$
|
200,288
|
|||||||
|
Short-term
borrowings
|
19,621
|
-
|
-
|
-
|
-
|
19,621
|
|||||||||||||
|
Long-term
debt
|
-
|
1,954
|
-
|
27,353
|
15,915
|
45,222
|
|||||||||||||
|
Purchases
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||
|
Total
contractual obligations
|
$
|
188,335
|
$
|
7,475
|
$
|
14,048
|
$
|
39,358
|
15,915
|
$
|
265,131
|
||||||||
Off-Balance
Sheet Arrangements
In
the
normal course of operations, we engage in a variety of financial transactions
that, in accordance with generally accepted accounting principles, are not
recorded in the financial statements, or are recorded in amounts that differ
from the notional amounts. These transactions involve, to varying degrees,
elements of credit, interest rate, and liquidity risk. Such transactions are
used by the company for general corporate purposes or for customer needs.
Corporate purpose transactions are used to help manage credit, interest rate,
and liquidity risk or to optimize capital. Customer transactions are used to
manage customers' requests for funding. Please
refer to Note 13 of the company’s financial statements for a discussion of our
off-balance sheet arrangements.
Impact
of Inflation
Unlike
most industrial companies, the assets and liabilities of financial institutions
such as the company and the bank are primarily monetary in nature. Therefore,
interest rates have a more significant effect on our performance than do the
effects of changes in the general rate of inflation and change in prices. In
addition, interest rates do not necessarily move in the same direction or in
the
same magnitude as the prices of goods and services. As discussed previously,
we
continually seek to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
Please
refer to “Market Risk and Interest Rate Sensitivity,” “Loan Maturity Schedule
and Sensitivity to Changes n Interest Rates,” “Investment Securities Majority
Distribution and Yields” in Item 6 for quantitative and qualitative disclosures
about market risk, which information is incorporated herein by reference.
Item
8. Financial Statements
and Supplementary Data.
Additional
information required under this Item 8 may be found under the Notes to Financial
Statements under Note 21.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
First
Community Corporation
Lexington,
South Carolina
We
have
audited the accompanying consolidated balance sheet of First Community
Corporation (the Company) as of December 31, 2006 and the related consolidated
statement of income, shareholders' equity and comprehensive income, and cash
flows for the year then ended. These consolidated financial statements are
the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of First Community Corporation
at December 31, 2006, and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Elliott Davis, LLC
Elliott
Davis, LLC
Columbia,
South Carolina
March
19,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
First
Community Corporation
Lexington,
South Carolina
I
have
audited the accompanying consolidated balance sheet of First Community
Corporation (the Company) as of December 31, 2005 and 2004 and the related
consolidated statement of income, shareholders' equity and comprehensive income,
and cash flows for the years ended December 31, 2005 and 2004. These
consolidated financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these consolidated
financial statements based on my audits.
I
conducted the audits in accordance with the standards of the Public Company
Accounting oversight Board (United States). Those standards require that I
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In
my
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of First Community Corporation
at December 31, 2005, and the results of their operations and their cash flows
for the years ended December 31, 2005 and 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/
Clifton D. Bodiford
Clifton
D. Bodiford
Certified
Public Accountant
Columbia,
South Carolina
January
13, 2006
FIRST
COMMUNITY CORPORATION
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
ASSETS
|
|
|
|||||
|
Cash
and due from banks
|
$
|
10,021,781
|
$
|
11,701,764
|
|||
|
Interest-bearing
bank balances
|
47,786
|
83,178
|
|||||
|
Federal
funds sold and securities purchased under agreements to
resell
|
17,745,404
|
1,079,204
|
|||||
|
Investment
securities - available for sale
|
170,034,478
|
170,657,770
|
|||||
|
Investment
securities - held to maturity (market value of $6,509,148 and $5,746,448
at December 31, 2006 and 2005, respectively)
|
6,488,796
|
5,713,830
|
|||||
|
Loans
|
275,188,567
|
221,667,632
|
|||||
|
Less,
allowance for loan losses
|
3,214,624
|
2,700,647
|
|||||
|
Net
loans
|
271,973,943
|
218,966,985
|
|||||
|
Property,
furniture and equipment - net
|
20,960,332
|
15,982,029
|
|||||
|
Bank
owned life insurance
|
9,606,657
|
5,811,302
|
|||||
|
Goodwill
|
27,761,219
|
24,256,020
|
|||||
|
Core
deposit intangible
|
2,652,917
|
2,767,074
|
|||||
|
Other
assets
|
10,762,430
|
10,435,937
|
|||||
|
Total
assets
|
$
|
548,055,743
|
$
|
467,455,093
|
|||
|
LIABILITIES
|
|||||||
|
Deposits:
|
|||||||
|
Non-interest
bearing demand
|
$
|
73,676,415
|
$
|
57,326,637
|
|||
|
NOW
and money market accounts
|
114,842,382
|
106,337,887
|
|||||
|
Savings
|
26,134,834
|
29,818,705
|
|||||
|
Time
deposits less than $100,000
|
119,082,462
|
100,612,256
|
|||||
|
Time
deposits $100,000 and over
|
81,205,314
|
55,508,666
|
|||||
|
Total
deposits
|
414,941,407
|
349,604,151
|
|||||
|
Securities
sold under agreements to repurchase
|
19,472,580
|
13,806,400
|
|||||
|
Federal
Home Loan Bank Advances
|
29,757,545
|
34,524,409
|
|||||
|
Junior
subordinated debt
|
15,464,000
|
15,464,000
|
|||||
|
Other
borrowed money
|
148,886
|
169,233
|
|||||
|
Other
liabilities
|
5,063,674
|
3,120,115
|
|||||
|
Total
liabilities
|
484,848,092
|
416,688,308
|
|||||
|
Commitments
and contingencies (Note 14)
|
|||||||
|
SHAREHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock, par value $1.00 per share; 10,000,000 shares authorized; none
issued and outstanding
|
|||||||
|
Common
stock, par value $1.00 per share; 10,000,000 shares authorized; issued
and
outstanding 3,264,608 in 2006 and 2,848,627 in 2005
|
3,264,608
|
2,848,627
|
|||||
|
Additional
paid in capital
|
49,695,346
|
42,352,205
|
|||||
|
Retained
earnings
|
12,033,065
|
9,240,088
|
|||||
|
Accumulated
other comprehensive income (loss)
|
(1,785,368
|
)
|
(3,674,135
|
)
|
|||
|
Total
shareholders' equity
|
63,207,651
|
50,766,785
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
548,055,743
|
$
|
467,455,093
|
|||
See
Notes to Consolidated Financial Statements
FIRST
COMMUNITY CORPORATION
Consolidated
Statements of Income
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Interest
income:
|
||||||||||
|
Loans,
including fees
|
$
|
18,612,615
|
$
|
13,607,962
|
$
|
9,063,092
|
||||
|
Investment
securities - available-for-sale
|
7,662,919
|
7,241,453
|
3,440,033
|
|||||||
|
Investment
securities - held-to-maturity
|
228,008
|
223,059
|
206,681
|
|||||||
|
Other
short term investments
|
741,406
|
271,276
|
334,518
|
|||||||
|
Total
interest income
|
27,244,948
|
21,343,750
|
13,044,324
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
9,828,817
|
5,743,340
|
2,729,459
|
|||||||
|
Securities
sold under agreement to repurchase
|
804,532
|
275,738
|
40,934
|
|||||||
|
Other
borrowed money
|
2,288,344
|
2,330,252
|
677,830
|
|||||||
|
Total
interest expense
|
12,921,693
|
8,349,330
|
3,448,223
|
|||||||
|
Net
interest income
|
14,323,255
|
12,994,420
|
9,596,101
|
|||||||
|
Provision
for loan losses
|
528,124
|
328,679
|
245,000
|
|||||||
|
Net
interest income after provision for loan losses
|
13,795,131
|
12,665,741
|
9,351,101
|
|||||||
|
Non-interest
income:
|
||||||||||
|
Deposit
service charges
|
2,390,053
|
1,462,111
|
879,585
|
|||||||
|
Mortgage
origination fees
|
450,437
|
361,856
|
267,972
|
|||||||
|
Commission
on sale of non-deposit products
|
321,308
|
229,888
|
212,748
|
|||||||
|
Gain
(loss) on sale of securities
|
(68,962
|
)
|
188,419
|
11,381
|
||||||
|
Gain
on early extinguishment of debt
|
159,416
|
124,436
|
-
|
|||||||
|
Other
|
1,148,655
|
931,207
|
402,035
|
|||||||
|
Total
non-interest income
|
4,400,907
|
3,297,917
|
1,773,721
|
|||||||
|
Non-interest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
6,886,509
|
6,292,239
|
4,263,383
|
|||||||
|
Occupancy
|
945,561
|
807,258
|
489,261
|
|||||||
|
Equipment
|
1,240,943
|
1,245,577
|
991,793
|
|||||||
|
Marketing
and public relations
|
329,173
|
337,481
|
325,395
|
|||||||
|
Amortization
of intangibles
|
636,529
|
594,741
|
279,685
|
|||||||
|
Other
|
3,203,899
|
2,561,091
|
1,627,470
|
|||||||
|
Total
non-interest expense
|
13,242,614
|
11,838,387
|
7,976,987
|
|||||||
|
Net
income before tax
|
4,953,424
|
4,125,271
|
3,147,835
|
|||||||
|
Income
taxes
|
1,452,225
|
1,032,600
|
962,850
|
|||||||
|
Net
income
|
$
|
3,501,199
|
$
|
3,092,671
|
$
|
2,184,985
|
||||
|
Basic
earnings per common share
|
$
|
1.13
|
$
|
1.09
|
$
|
1.15
|
||||
|
Diluted
earnings per common share
|
$
|
1.10
|
$
|
1.04
|
$
|
1.09
|
||||
See
Notes to Consolidated Financial Statements
FIRST
COMMUNITY CORPORATION
Consolidated
Statement of Changes in Shareholder's Equity and Comprehensive Income
(loss)
|
Shares
Issued
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income
(loss)
|
Total
|
||||||||||||||
|
Balance
December 31, 2003
|
1,597,224
|
$
|
1,597,224
|
$
|
12,862,715
|
$
|
4,909,742
|
$
|
139,133
|
$
|
19,508,814
|
||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
2,184,985
|
2,184,985
|
|||||||||||||||||
|
Accumulated
other comprehensive loss, net of income tax benefit of
$540,016
|
(1,002,887
|
)
|
|||||||||||||||||
|
Less:
reclassification adjustment for gains included in net income, net
of tax
of $3,983
|
(7,398
|
)
|
|||||||||||||||||
|
Other
comprehensive loss
|
(1,010,285
|
)
|
(1,010,285
|
)
|
|||||||||||||||
|
Comprehensive
income:
|
1,174,700
|
||||||||||||||||||
|
Cash
dividend ($0.20 per share)
|
(381,878
|
)
|
(381,878
|
)
|
|||||||||||||||
|
Stock
issued in acquisition
|
1,169,898
|
1,169,898
|
28,675,725
|
29,845,623
|
|||||||||||||||
|
Exercise
of stock options
|
15,409
|
15,409
|
205,365
|
220,774
|
|||||||||||||||
|
Dividend
reinvestment plan
|
6,371
|
6,371
|
88,285
|
|
|
94,656
|
|||||||||||||
|
Balance
December 31, 2004
|
2,788,902
|
2,788,902
|
41,832,090
|
6,712,849
|
(871,152
|
)
|
50,462,689
|
||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
3,092,671
|
3,092,671
|
|||||||||||||||||
|
Accumulated
other comprehensive loss, net of income tax benefit of
$1,443,352
|
(
2,680,511
|
)
|
|||||||||||||||||
|
Less:
reclassification adjustment for gains included in net income, net
of tax
of $65,946
|
(122,472
|
)
|
|||||||||||||||||
|
Other
comprehensive loss
|
(2,802,983
|
)
|
(2,802,983
|
)
|
|||||||||||||||
|
Comprehensive
income:
|
289,688
|
||||||||||||||||||
|
Cash
dividend ($0.20 per share)
|
(565,432
|
)
|
(565,432
|
)
|
|||||||||||||||
|
Exercise
of stock options
|
52,845
|
52,845
|
399,814
|
452,659
|
|||||||||||||||
|
Dividend
reinvestment plan
|
6,880
|
6,880
|
120,301
|
|
|
127,181
|
|||||||||||||
|
Balance
December 31, 2005
|
2,848,627
|
2,848,627
|
42,352,205
|
9,240,088
|
(3,674,135
|
)
|
50,766,785
|
||||||||||||
|
Comprehensive
income:
|
|||||||||||||||||||
|
Net
income
|
3,501,199
|
3,501,199
|
|||||||||||||||||
|
Accumulated
other comprehensive Income, net of income tax of
$1,006,146
|
1,843,666
|
||||||||||||||||||
|
Less:
reclassification adjustment for loss included in net income, net
of tax of
$23,864
|
45,101
|
||||||||||||||||||
|
Other
comprehensive income
|
1,888,767
|
1,888,767
|
|||||||||||||||||
|
Comprehensive
income:
|
5,389,966
|
||||||||||||||||||
|
Cash
dividend ($0.23 per share)
|
(708,222
|
)
|
(708,222
|
)
|
|||||||||||||||
|
Stock
issued in acquisition
|
364,034
|
364,034
|
7,212,859
|
7,576,893
|
|||||||||||||||
|
Repurchase
of common stock
|
(70,100
|
)
|
(70,100
|
)
|
(1,183,990
|
)
|
(1,254,090
|
)
|
|||||||||||
|
Exercise
of stock options
|
112,932
|
112,932
|
1,164,478
|
1,277,410
|
|||||||||||||||
|
Dividend
reinvestment plan
|
9,115
|
9,115
|
149,794
|
|
|
158,909
|
|||||||||||||
|
Balance
December 31, 2006
|
3,264,608
|
$
|
3,264,608
|
$
|
49,695,346
|
$
|
12,033,065
|
$
|
(1,785,368
|
)
|
$
|
63,207,651
|
|||||||
See
Notes to Consolidated Financial Statements
FIRST
COMMUNITY CORPORATION
Consolidated
Statements of Cash Flows
|
Year
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
3,501,199
|
$
|
3,092,671
|
$
|
2,184,985
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
1,000,804
|
926,776
|
761,277
|
|||||||
|
Premium
amortization (Discount accretion)
|
(457,553
|
)
|
(345,763
|
)
|
(93,782
|
)
|
||||
|
Provision
for loan losses
|
528,124
|
328,679
|
245,000
|
|||||||
|
Amortization
of intangibles
|
636,529
|
594,741
|
279,685
|
|||||||
|
Gain
on sale of property and equipment
|
-
|
(29,983
|
)
|
(21,707
|
)
|
|||||
|
(Gain)
loss on sale of securities
|
68,962
|
(188,418
|
)
|
(11,381
|
)
|
|||||
|
Gain
on early extinguishment of debt
|
(159,416
|
)
|
(124,436
|
)
|
-
|
|||||
|
(Increase)
decrease in other assets
|
270,084
|
(693,657
|
)
|
(425,079
|
)
|
|||||
|
Tax
benefit from exercise of stock options
|
299,715
|
-
|
51,621
|
|||||||
|
Increase
in accounts payable
|
938,634
|
591,691
|
14,681
|
|||||||
|
Net
cash provided in operating activities
|
6,627,082
|
4,152,301
|
2,985,300
|
|||||||
|
Cash
flows form investing activities:
|
||||||||||
|
Proceeds
from sale of securities available-for-sale
|
21,241,484
|
39,071,729
|
56,586,668
|
|||||||
|
Purchase
of investment securities available-for-sale
|
(34,671,451
|
)
|
(51,368,761
|
)
|
(108,265,814
|
)
|
||||
|
Maturity/call
of investment securities available-for-sale
|
27,050,486
|
27,267,768
|
36,424,205
|
|||||||
|
Purchase
of investment securities held-to-maturity
|
(800,000
|
)
|
(50,000
|
)
|
(1,052,057
|
)
|
||||
|
Maturity/call
of investment securities held-to-maturity
|
-
|
325,000
|
-
|
|||||||
|
Increase
in loans
|
(27,179,342
|
)
|
(35,288,308
|
)
|
(14,813,202
|
)
|
||||
|
Net
cash disbursed in business combination
|
(1,229,598
|
)
|
-
|
(11,131,142
|
)
|
|||||
|
Proceeds
from sale of property and equipment
|
-
|
401,733
|
23,800
|
|||||||
|
Purchase
of bank owned life insurance
|
(3,500,000
|
)
|
-
|
-
|
||||||
|
Purchase
of property and equipment
|
(3,366,410
|
)
|
(2,595,715
|
)
|
(2,427,322
|
)
|
||||
|
Net
cash used in investing activities
|
(22,454,831
|
)
|
(22,236,554
|
)
|
(44,654,864
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Increase
in deposit accounts
|
38,035,208
|
12,539,867
|
16,996,662
|
|||||||
|
Proceeds
from issuance of long term debt
|
-
|
-
|
15,000,000
|
|||||||
|
Advances
from the Federal Home Loan Bank
|
9,000,000
|
19,580,000
|
-
|
|||||||
|
Repayment
of advances from the Federal Home Loan Bank
|
(18,078,829
|
)
|
(26,752,661
|
)
|
(1,000,000
|
)
|
||||
|
Increase
(decrease) in securities sold under agreements to
repurchase
|
2,668,250
|
6,256,500
|
3,608,900
|
|||||||
|
Increase
(decrease) in other borrowings
|
(20,347
|
)
|
(15,360
|
)
|
24,517
|
|||||
|
Proceeds
from exercise of stock options
|
977,695
|
452,659
|
169,153
|
|||||||
|
Dividend
reinvestment plan
|
158,909
|
127,181
|
94,656
|
|||||||
|
Purchase
of common stock
|
(1,254,090
|
)
|
-
|
-
|
||||||
|
Cash
dividends paid
|
(708,222
|
)
|
(565,432
|
)
|
(381,878
|
)
|
||||
|
Net
cash provided from financing activities
|
30,778,574
|
11,622,754
|
34,512,010
|
|||||||
|
Net
increase (decrease) in cash and cash equivalents
|
14,950,825
|
(6,461,499
|
)
|
(7,157,554
|
)
|
|||||
|
Cash
and cash equivalents at beginning of period
|
12,864,146
|
19,325,645
|
26,483,199
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
27,814,971
|
$
|
12,864,146
|
$
|
19,325,645
|
||||
|
Supplemental
disclosure:
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
$
|
11,702,671
|
$
|
7,941,548
|
$
|
3,139,817
|
||||
|
Taxes
|
$
|
472,647
|
$
|
445,000
|
$
|
907,268
|
||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Unrealized
(loss) gain on securities available-for-sale
|
$
|
2,918,777
|
$
|
(4,312,281
|
)
|
$
|
(1,554,287
|
)
|
||
|
Transfer
of loans to foreclosed property
|
$
|
50,000
|
$
|
721,052
|
$
|
119,916
|
||||
|
Common
stock issued in acquisition
|
$
|
7,576,893
|
$
|
-
|
$
|
29,845,623
|
||||
See
Notes to Consolidated Financial Statements
FIRST
COMMUNITY CORPORATION
Notes
to Consolidated Financial Statements
Note
1 -
ORGANIZATION AND BASIS OF PRESENTATION
The
consolidated financial statements include the accounts of First Community
Corporation (the company) and its wholly owned subsidiary First Community Bank,
N.A (the bank). The Company owns all of the common stock of FCC Capital Trust
I.
All material intercompany transactions are eliminated in consolidation. The
Company was organized on November 2, 1994, as a South Carolina corporation,
and was formed to become a bank holding company. The bank opened for business
on
August 17, 1995. FCC Capital Trust I is a special purpose subsidiary
organized for the sole purpose of issuing trust preferred
securities.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use
of
Estimates
The
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. These principles require
management to make estimates and assumptions that affect the amounts reported
in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Material
estimates that are particularly susceptible to significant change relate to
the
determination of the reserve for loan losses. The estimation process includes
management’s judgment as to future losses on existing loans based on an internal
review of the loan portfolio, including an analysis of the borrower’s current
financial position, the consideration of current and anticipated economic
conditions and the effect on specific borrowers. In determining the
collectibility of loans management also considers the fair value of underlying
collateral. Various regulatory agencies, as an integral part of their
examination process, review the Company’s allowance for loan losses. Such
agencies may require the company to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination. Because of these factors it is possible that the allowance for
loan
losses could change materially.
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of cash on hand, due from banks, federal funds sold
and
securities purchased under agreements to resell. Generally federal funds are
sold for a one-day period and securities purchased under agreements to resell
mature in less than 90 days.
Investment
Securities
Investment
securities are classified as either held-to-maturity or available-for-sale.
In
determining such classification, securities that the company has the positive
intent and ability to hold to maturity are classified as held-to maturity and
are carried at amortized cost. All other securities are classified as
available-for-sale and carried at estimated fair values with unrealized gains
and losses included in shareholders’ equity on an after tax basis.
Gains
and
losses on the sale of available-for-sale securities are determined using the
specific identification method. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
judged to be other than temporary are written down to fair value and charged
to
income in the Consolidated Statement of Income.
Premiums
and discounts are recognized in interest income using the interest method over
the period to maturity.
Loans
and Allowance for Loan Losses
Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans. Interest is
recognized over the term of the loan based on the loan balance outstanding.
Fees
charged for originating loans, if any, are deferred and offset by the deferral
of certain direct expenses associated with loans originated. The net deferred
fees are recognized as yield adjustments by applying the interest
method.
The
allowance for loan losses is maintained at a level believed to be adequate
by
management to absorb potential losses in the loan portfolio. Management’s
determination of the adequacy of the allowance is based on an evaluation of
the
portfolio, past loss experience, economic conditions and volume, growth and
composition of the portfolio.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The
company considers a loan to be impaired when, based upon current information
and
events, it is believed that the company will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Loans that are
considered impaired are accounted for at fair value. The accrual of interest
on
impaired loans is discontinued when, in management’s opinion, the borrower may
be unable to meet payments as they become due, generally when a loan becomes
90
days past due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received first to principal and then to interest
income.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation
is
computed using the straight-line method over the asset’s estimated useful life.
Estimated lives range up to 39 years for buildings and up to 10 years for
furniture, fixtures and equipment.
Goodwill
and Other Intangible Assets
Goodwill
represents the cost in excess of fair value of net assets acquired (including
identifiable intangibles) in purchase transactions. Other intangible assets
represent premiums paid for acquisitions of core deposits (core deposit
intangibles). Core deposit intangibles are being amortized on a straight-line
basis over seven years. Goodwill and identifiable intangible assets are reviewed
for impairment annually or whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of
identifiable intangible assets is measured by a comparison of the carrying
amount of the asset to future undiscounted cash flows expected to be generated
by the asset. If such assets are considered impaired , the amount of impairment
is measured by the amount by which the carrying value of the asset exceeds
the
fair value of the asset based on the discounted expected future cash flows.
The
test for goodwill impairment is based on an identified reporting unit and
the determination of the carrying value of the assets and liabilities, including
the existing goodwill and intangible assets. The carrying value is compared
to
the fair value to determine whether impairment exists. No impairment losses
have
been recorded as a result of the company’s analyses during the years ended
December 31, 2006, 2005 and 2004.
Other
Real Estate Owned
Other
real estate owned includes real estate acquired through foreclosure. Other
real
estate owned is carried at the lower of cost (principal balance at date of
foreclosure) or fair value minus estimated cost to sell. Any write-downs at
the
date of foreclosure are charged to the allowance for loan losses. Expenses
to
maintain such assets, subsequent changes in the valuation allowance, and gains
or losses on disposal are included in other expenses. Other real estate owned
is
included in Other assets on the consolidated balance sheet.
Comprehensive
Income
The
Company reports comprehensive income in accordance with SFAS 130, “Reporting
Comprehensive Income.” SFAS 130 requires that all items that are required to be
reported under accounting standards as comprehensive income be reported in
a
financial statement that is displayed with the same prominence as other
financial statements. The disclosures requirements have been included in the
Company’s consolidated statements of shareholders’ equity and comprehensive
income (loss).
Mortgage
Origination Fees
Mortgage
origination fees relate to activities comprised of accepting residential
mortgage applications, qualifying borrowers to standards established by
investors and selling the mortgage loans to the investors under pre-existing
commitments. The loans are funded by the investor at closing and the related
fees received by the Company for these services are recognized at the time
the
loan is closed.
Advertising
Expense
Advertising
and public relations costs are generally expensed as incurred. External costs
incurred in producing media advertising are expensed the first time the
advertising takes place. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent.
Income
Taxes
A
deferred income tax liability or asset is recognized for the estimated future
effects attributable to differences in the tax bases of assets or liabilities
and their reported amounts in the financial statements as well as operating
loss
and tax credit carry forwards. The deferred tax asset or liability is measured
using the enacted tax rate expected to apply to taxable income in the period
in
which the deferred tax asset or liability is expected to be
realized.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Stock
Based Compensation Cost
In
December 2004, the FASB issued SFAS No. 123 (revised), "Share-Based Payment"
("SFAS 123(R)"). SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and supersedes APB Opinion No. 25, "Accounting
for
Stock Issued to Employees" ("APB 25"). SFAS 123(R) requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides service in exchange for
the
award. Public companies are required to adopt, and the Company has adopted
effective January 1, 2006, the new standard using a modified prospective method.
Under the modified prospective method, companies are allowed to record
compensation cost for new and modified awards over the related vesting period
of
such awards prospectively and record compensation cost prospectively on the
nonvested portion, at the date of adoption, of previously issued and outstanding
awards over the remaining vesting period of such awards. No change to prior
periods presented is permitted under the modified prospective
method.
At
December 31, 2006, the Company had a stock-based payment plan for directors,
officers and other key employees, which is described below. Prior to January
1,
2006, the Company, as permitted under SFAS 123, applied the intrinsic value
method under APB 25, and related interpretations in accounting for its
stock-based compensation plan.
On
January 1, 2006, the Company adopted the fair value recognition provisions
of
Financial
Accounting Standards Board (“FASB”) SFAS No. 123(R),
“Accounting for Stock-Based Compensation”, to account for compensation costs
under its stock option plan. The Company previously utilized the intrinsic
value
method under Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees (as amended)” (“APB 25”). Under the intrinsic value method
prescribed by APB 25, no compensation costs were recognized for the Company’s
stock options and warrants because the option and warrant exercise price in
its
plan equaled the market price on the date of grant. Prior to January 1, 2006,
the Company only disclosed the pro forma effects on net income and earnings
per
share as if the fair value recognition provisions of SFAS 123(R) had been
utilized.
In
adopting SFAS No. 123(R), the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the
fair
value recognition method. Under the modified prospective method, compensation
cost is recognized from the adoption date forward for all new stock options
granted and for any outstanding unvested awards as if the fair value method
had
been applied to those awards as of the date of grant. The following table
illustrates the effect on net income and earnings per share as if the fair
value
based method had been applied to all outstanding and unvested awards in each
period.
The
following summarizes required pro-forma data in accordance with SFAS 123 prior
to the company’s adoption of SFAS 123R effective January 1, 2006. The pro-forma
data includes the effects of the acceleration for the year ended December 31,
2005:
|
December
31,
|
|||||||
|
|
2005
|
2004
|
|||||
|
|
|
|
|||||
|
Net
income, pro-forma
|
$
|
2,792,578
|
$
|
2,179,236
|
|||
|
Basic
earnings/loss per common share, pro-forma
|
$
|
0.99
|
$
|
1.15
|
|||
|
Diluted
earnings loss per common share, pro-forma
|
$
|
0.94
|
$
|
1.09
|
|||
The
fair
value of each grant is estimated on the date of grant using the Black-Sholes
option pricing model. The weighted average fair value of options granted,
excluding those issued in the Dutch Fork and DeKalb acquisitions, during 2005
and 2004 was $6.87, and $7.15. Those granted in conjunction with the
acquisition in the 2004 acquisition of DutchFork had an average fair value
of
$14.32. The options granted in conjunction with the 2006 acquisition of DeKalb
had an average fair value of $8.21. In calculating the pro-forma disclosures,
the fair value of options granted is estimated as of the date of grant using
the
Black-Sholes option pricing model with the following weighted-average
assumptions:
|
|
2005
|
2004
|
|||||
|
Dividend
yield
|
1.0
|
%
|
1.0
|
%
|
|||
|
Expected
volatility
|
24.3
|
%
|
24.8
|
%
|
|||
|
Risk-free
interest rate
|
4.3
|
%
|
4.3
|
%
|
|||
|
Expected
life
|
8
Years
|
7
Years
|
|||||
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Effective
December 31, 2005, upon recommendation of the Human Resource Committee of the
Board of Directors of First Community Corporation, the Company's Board of
Directors accelerated the vesting of, and vested, all outstanding options to
acquire the Company's common stock granted in 2003, 2004 and 2005, totaling
approximately 67,000 options, that would otherwise vest at various times through
the end of fiscal 2011 (“Acceleration”). All other terms and conditions of such
options remained unchanged as a result of the Acceleration. See note 16 for
additional information relative to stock based compensation.
Earnings
Per Share
Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS is computed by dividing net income
by
the weighted number of average shares of common stock and common stock
equivalents. Common stock equivalents consist of stock options and are computed
using the treasury stock method.
Segment
Information
Statement
of Financial Accounting Standards (SFAS) No. 131 “Disclosures about Segments of
an Enterprise and Related Information” requires selected segment information of
operating segments based on a management approach. The company operates as
one
business segment.
Recently
Issued Accounting Standards
The
following is a summary of recent authoritative pronouncements that could impact
the accounting, reporting, and / or disclosure of financial information by
the
Company. In February 2006, the Financial Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting (“SFAS”) No. 155, “Accounting for
Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and
140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” This
Statement resolves issues addressed in SFAS No. 133 Implementation Issue No.
D1,
“Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets.” FAS
155
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation,
clarifies which interest only-strips and principal-only strips are not subject
to the requirements of Statement 133, establishes a requirement to evaluate
interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS
No.
155 is effective for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins after September 15, 2006.
The Company does not believe that the adoption of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash flows.
In
March
2006, the FASB issued SFAS No. 156, “Accounting
for Servicing of Financial Assets—an amendment of FASB Statement No. 140.”
This
Statement amends FASB No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” with respect to the
accounting for separately recognized servicing assets and servicing liabilities.
SFAS No. 156 requires
an entity to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class
of
separately recognized servicing assets and servicing liabilities; at its initial
adoption, permits a one-time reclassification of available-for-sale securities
to trading securities by entities with recognized servicing rights, without
calling into question the treatment of other available-for-sale securities
under
Statement 115, provided that the available-for-sale securities are identified
in
some manner as offsetting the entity’s exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value; and requires separate presentation of servicing assets
and servicing liabilities subsequently measured at fair value in the statement
of financial position and additional disclosures for all separately recognized
servicing assets and servicing liabilities.
An
entity should adopt SFAS No. 156 as of the beginning of its first fiscal year
that begins after September 15, 2006. The Company does not believe the adoption
of SFAS No. 156 will have a material impact on its financial position, results
of operations and cash flows.
In
July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in enterprises’ financial statements in accordance with
FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures and
transitions. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is currently evaluating the effects of FIN 48 and does not
believe that it will have a material impact on its financial position, results
of operations and cash flows.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This standard does not require any new fair value
measurements, but rather eliminates inconsistencies found in various prior
pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and
is
not expected to have a significant impact on the Company’s financial
statements.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans” (“SFAS
158”), which amends SFAS 87 and SFAS 106 to require recognition of the over
funded or under funded status of pension and other postretirement benefit plans
on the balance sheet. Under SFAS 158, gains and losses, prior service costs
and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date
—
the date at which the benefit obligation and plan assets are measured — is
required to be the company’s fiscal year end. SFAS 158 is effective for publicly
held companies for fiscal years ending after December 15, 2006, except for
the
measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. The Company does not have a defined benefit pension plan.
Therefore, SFAS 158 will not have an effect on the Company’s financial
conditions or results of operations.
In
September, 2006, The FASB ratified the consensuses reached by the FASB’s
Emerging Issues Task Force (“EITF”) relating to EITF 06-4 “Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements”.
EITF
06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future benefits in accordance with SFAS No. 106, “Employers'
Accounting for Postretirement Benefits Other Than Pensions”,
or
Accounting Principles Board (“APB”) Opinion No. 12, “Omnibus
Opinion—1967”.
EITF
06-4
is effective for fiscal years beginning after December 15, 2006. Entities should
recognize the effects of applying this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods.
The
Company does not believe the adoption of EITF 06-4 will have a material
impact on
its
financial position, results of operations and cash flows.
In
September 2006, the FASB ratified the consensus reached related to EITF
06-5, “Accounting
for Purchases of Life Insurance—Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases
of
Life Insurance.” EITF 06-5 states that a policyholder should consider any
additional amounts included in the contractual terms of the insurance policy
other than the cash surrender value in determining the amount that could be
realized under the insurance contract. EITF 06-5 also states that a
policyholder should determine the amount that could be realized under the life
insurance contract assuming the surrender of an individual-life by
individual-life policy (or certificate by certificate in a group policy). EITF
06-5 is effective for fiscal years beginning after December 15, 2006.
The
Company does not believe the adoption of EITF 06-5 will have a material impact
on its financial position, results of operations and cash flows.
In
September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”).
SAB 108 provides interpretive guidance on how the effects of the carryover
or
reversal of prior year misstatements should be considered in quantifying a
potential current year misstatement. Prior to SAB 108, Companies might evaluate
the materiality of financial statement misstatements using either the income
statement or balance sheet approach, with the income statement approach focusing
on new misstatements added in the current year, and the balance sheet approach
focusing on the cumulative amount of misstatement present in a company’s balance
sheet. Misstatements that would be material under one approach could be viewed
as immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
The
Company has analyzed SAB 108 and determined that upon adoption it will have
no
impact on the reported results of operations or financial
conditions.
Note
2 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115.” This statement permits, but does not require, entities
to measure many financial instruments at fair value. The objective is to
provide entities with an opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to
apply complex hedge accounting provisions. Entities electing this option
will apply it when the entity first recognizes an eligible instrument and will
report unrealized gains and losses on such instruments in current earnings.
This
statement (1) applies to all entities, (2) specifies certain election dates,
(3)
can be applied on an instrument-by-instrument basis with some exceptions, (4)
is
irrevocable, and (5) applies only to entire instruments. One exception is
demand deposit liabilities which are explicitly excluded as qualifying for
fair
value. With respect to SFAS 115, available-for-sale and held-to-maturity
securities at the effective date are eligible for the fair value option at
that
date. If the fair value option is elected for those securities at the
effective date, cumulative unrealized gains and losses at that date shall be
included in the cumulative-effect adjustment and thereafter, such securities
will be accounted for as trading securities. SFAS 159 is effective for the
Company on January 1, 2008. Earlier adoption is permitted in 2007 if the
Company also elects to apply the provisions of SFAS 157, “Fair Value
Measurement.” The Company is currently analyzing the fair value option
provided under SFAS 159.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations and cash flows.
Risk
and Uncertainties
In
the
normal course of business, the company encounters two significant types of
risks: economic and regulatory. There are three main components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject
to
interest rate risk to the degree that its interest-bearing liabilities mature
or
reprice at different speeds, or on a different basis, than its interest-earning
assets. Credit risk is the risk of default on the Company’s loan portfolio that
results from borrower’s inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate held by the
Company.
The
Company is subject to regulations of various governmental agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies, which may
subject it to further changes with respect to asset valuations, amounts of
required loan loss allowances and operating restrictions from regulators’
judgments based on information available to them at the time of their
examination.
Reclassifications
Certain
captions and amounts in the 2005 and 2004 consolidated financial statements
were
reclassified to conform with the 2006 presentation.
Note
3 -
BUSINESS COMBINATION
On
June
9, 2006, the Company acquired 100% of the outstanding shares of DeKalb
Bancshares, Inc (DeKalb), the parent company of The Bank of Camden. In addition,
The Bank of Camden was merged with and into the Company's wholly owned banking
subsidiary, First Community Bank, NA, and the Camden office is now operated
as a
branch of First Community Bank. The merger enabled First Community to increase
its market share in the Midlands of South Carolina in a community contiguous
to
its existing markets. The aggregate acquisition cost was $10,223,000, including
$2,369,000 of cash, 364,034 shares of the Company’s common stock valued at
$7,577,000, stock options valued at $585,000 and direct acquisition costs of
$277,000. The value of the 364,034 shares of common stock issued at $19.22
per
share was determined based on the average closing price of the Company’s common
shares over the two-day period before and after December 8, 2005, the date
the
terms were agreed to and announced.
The
primary intangible assets acquired in conjunction with the purchase of DeKalb
are core deposit intangible assets with an estimated useful life of
approximately seven years and goodwill. The transaction was a tax-free
reorganization for federal income tax purposes and intangible assets are not
deductible in determining taxable income.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed June 9, 2006. We obtained third party evaluations of certain
intangible assets.
|
(Dollars
in thousands)
|
||||
|
|
||||
|
Cash
and cash equivalents
|
$
|
1,015
|
||
|
Federal
funds sold
|
402
|
|||
|
Investment
securities
|
10,152
|
|||
|
Loans,
net of allowance
|
26,315
|
|||
|
Premises
and equipment
|
2,613
|
|||
|
Core
deposit intangible asset
|
522
|
|||
|
Goodwill
|
4,903
|
|||
|
Other
assets
|
524
|
|||
|
Total
assets acquired
|
46,446
|
|||
|
|
||||
|
Deposits
|
27,302
|
|||
|
Advances
from the Federal Home Loan Bank
|
4,939
|
|||
|
Other
borrowed money
|
2,977
|
|||
|
Other
liabilities
|
1,005
|
|||
|
Total
liabilities assumed
|
36,223
|
|||
|
Net
assets acquired
|
$
|
10,223
|
||
The
Company acquired a $320,000 allowance for loan losses as a result of the
acquisition of DeKalb. Statement
of Position No. 03-3 (SOP No. 03-3), “Accounting for Certain Loans or
Debt Securities Acquired in a Transfer addresses accounting for differences
between contractual cash flows and cash flows expected to be collected from
an
investor’s initial investment in loans or debt securities (loans) acquired in a
transfer or business combination if those differences are attributable, at
least
in part, to credit quality. SOP No. 03-3 prohibits the carry over or creation
of
valuation allowances in the initial accounting of all loans acquired that are
within the scope of the SOP. There were no loans acquired in the acquisition
of
DeKalb that were within the scope of SOP No. 03-3.
Note
3 -
BUSINESS COMBINATION
-
Continued
The
following unaudited presentation reflects selected information from the
"Consolidated Income Statements" on a Pro Forma basis as if the purchase
transaction had been completed as of the beginning of the years
presented:
|
For
Year Ending December 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Total
revenues
|
$
|
31,645,855
|
$
|
27,470,457
|
|||
|
Income
before cumulative effect of change in accounting principle
|
$
|
3,584,026
|
$
|
3,198,382
|
|||
|
Net
Income
|
$
|
3,584,026
|
$
|
3,198,382
|
|||
|
Basic
EPS
|
$
|
1.10
|
$
|
1.00
|
|||
|
Diluted
EPS
|
$
|
1.08
|
$
|
0.96
|
|||
Prior
to
the consummation of the merger DeKalb Bankshares had significant direct merger
related expenses. These expenses of approximately $880,000 have been excluded
in
the pro-forma results for the fiscal year ended in 2006.
On
October 1, 2004, First Community acquired DutchFork Bancshares, the holding
company for Newberry Federal Savings Bank located in Newberry, South
Carolina. The merger enabled First Community to increase its market share
in the Midlands of South Carolina. The total purchase price was $49,273,493,
including $18,342,357 in cash, 1,169,898 shares of our common stock valued
at
$27,258,623, stock options valued at $2,587,000 and direct acquisition cost
of
$1,085,513. The value of the common stock issued was determined based on
the average closing price over the six day period beginning two days before
and
ending three days after the terms of the acquisition were agreed to and
announced. The intangible assets acquired in conjunction with the purchase
are core deposit intangible and goodwill. The core deposit intangible is
being written off over a period of seven years using the straight-line
method. The transaction was a tax-free reorganization for federal income
tax purposes and intangible assets are not deductible for tax
purposes.
Note
4 -
INVESTMENT SECURITIES
The
amortized cost and estimated fair values of investment securities are summarized
below:
HELD-TO-MATURITY:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||
|
December
31, 2006:
|
|||||||||||||
|
State
and local government
|
$
|
6,428,796
|
$
|
39,449
|
$
|
19,097
|
$
|
6,449,148
|
|||||
|
Other
|
60,000
|
—
|
—
|
60,000
|
|||||||||
|
|
$
|
6,488,796
|
$
|
39,449
|
$
|
19,097
|
$
|
6,509,148
|
|||||
|
December
31, 2005:
|
|||||||||||||
|
State
and local government
|
$
|
5,653,830
|
$
|
58,316
|
$
|
25,698
|
$
|
5,686,448
|
|||||
|
Other
|
60,000
|
—
|
—
|
60,000
|
|||||||||
|
$
|
5,713,830
|
$
|
58,316
|
$
|
25,698
|
$
|
5,746,448
|
||||||
Note
4 -
INVESTMENT SECURITIES
-
Continued
AVAILABLE-FOR-SALE:
|
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|||||||||
|
|
|
|
|
|
|||||||||
|
December
31, 2006:
|
|||||||||||||
|
US
Treasury securities
|
$
|
994,534
|
$
|
10,306
|
$
|
—
|
$
|
1,004,840
|
|||||
|
Government
sponsored enterprises
|
57,420,136
|
50,285
|
810,126
|
56,660,295
|
|||||||||
|
Mortgage-backed
securities
|
80,234,695
|
247,650
|
1,056,242
|
79,426,103
|
|||||||||
|
State
and local government
|
4,438,933
|
44,820
|
2,644
|
4,481,109
|
|||||||||
|
Equity
and other securities
|
29,679,914
|
12,046
|
1,229,829
|
28,462,131
|
|||||||||
|
|
$
|
172,768,212
|
$
|
365,107
|
$
|
3,098,841
|
$
|
170,034,478
|
|||||
|
December
31, 2005:
|
|||||||||||||
|
US
Treasury securities
|
$
|
999,848
|
$
|
—
|
$
|
7,973
|
$
|
991,875
|
|||||
|
Government
sponsored enterprises
|
58,674,004
|
671
|
1,195,657
|
57,479,018
|
|||||||||
|
Mortgage-backed
securities
|
70,967,405
|
61,117
|
1,234,803
|
69,793,719
|
|||||||||
|
State
and local government
|
249,359
|
3,881
|
---
|
253,240
|
|||||||||
|
Equity
and other securities
|
45,419,667
|
19,519
|
3,299,268
|
42,139,918
|
|||||||||
|
|
$
|
176,310,283
|
$
|
85,188
|
$
|
5,737,701
|
$
|
170,657,770
|
At
December 31, 2006, equity and other investment securities available for sale
included the following recorded at fair value: Federal Home Loan Mortgage
Corporation preferred stock of $14,005,100, corporate bonds of $8,791,583,
Federal Home Loan Bank Stock of $2,349,600, Federal Reserve Bank Stock of
$1,858,194, mutual funds of $838,846, community bank stocks of $509,288 and
other common stock at $109,520. At December 31, 2005, equity and other
investments in securities available for sale included the following recorded
at
fair value: Federal Home Loan Mortgage Corporation preferred stock of
$16,125,200, Federal National Mortgage Association preferred stock of
$12,088,560, corporate bonds of $8,607,057, Federal Home Loan Bank Stock of
$2,351,200, Federal Reserve Bank Stock of $1,624,500, mutual funds of $1,233,452
and community bank stocks of $110,000. Federal Home Loan Bank and Federal
Reserve Bank Stock are carried at cost since there is no ready
market.
For
the
year ended December 31, 2006, proceeds from the sales of securities
available-for-sale amounted to $21,241,484. Gross realized gains amounted to
$58,505 and gross realized losses amounted to $127,467 in 2006. For the year
ended December 31, 2005, proceeds from the sale of securities available-for-sale
amounted to $39,071,729. Gross realized gain amounted to $294,661 and gross
realized losses amounted to $106,243 in 2005 For the year ended December
31, 2004, proceeds from the sale of securities available-for-sale amounted
to
$56,586,668. Gross realized gain amounted to $16,119 and gross realized losses
amounted to $4,738 in 2004. The tax provision (benefit) applicable to the net
realized gain (loss) was approximately ($20,200), $65,000 and $3,400 for 2006,
2005 and 2004, respectively.
The
amortized cost and fair value of investment securities at December 31, 2006,
by
contractual maturity, follow. Expected maturities differ from contractual
maturities because borrowers may have the right to call or prepay the
obligations with or without prepayment penalties.
|
|
Held-to-maturity
|
Available-for-sale
|
|||||||||||
|
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||
|
|
|
|
|
|
|||||||||
|
Due
in one year or less
|
$
|
430,395
|
$
|
430,779
|
$
|
28,770,603
|
$
|
28,526,327
|
|||||
|
Due
after one year through five years
|
4,246,252
|
4,259,417
|
75,163,715
|
73,761,597
|
|||||||||
|
Due
after five years through ten years
|
1,812,149
|
1,818,952
|
28,515,992
|
27,829,215
|
|||||||||
|
Due
after ten years
|
---
|
---
|
40,317,902
|
39,917,339
|
|||||||||
|
$
|
6,488,796
|
$
|
6,509,148
|
$
|
172,768,212
|
$
|
170,034,478
|
||||||
Note
4 -
INVESTMENT SECURITIES -
Continued
Securities
with an amortized cost of $52,857,719 and fair value of $51,778,371 at December
31, 2006, were pledged to secure FHLB Advances, public deposits, demand notes
due the U.S. Treasury and securities sold under agreements to
repurchase.
The
following table shows gross unrealized losses and fair values, aggregated by
investment category and length of time that individual securities have been
in a
continuous loss position at December 31, 2006 and 2005.
|
December
31, 2006
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||
|
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|||||||||||||
|
US
Treasury and Government sponsored enterprises
|
$
|
7,523,200
|
$
|
49,994
|
$
|
41,658,875
|
$
|
760,132
|
$
|
49,182,075
|
$
|
810,126
|
|||||||
|
Federal
agency mortgage-backed securities
|
2,246,558
|
13,318
|
26,276,885
|
688,067
|
28,523,443
|
701,385
|
|||||||||||||
|
Non-agency
mortgage-backed securities
|
4,421,937
|
41,658
|
17,480,973
|
313,199
|
21,902,910
|
354,857
|
|||||||||||||
|
FHLMC
preferred stock
|
---
|
---
|
14,005,100
|
244,275
|
14,005,100
|
244,275
|
|||||||||||||
|
Corporate
bonds
|
3,949,171
|
861,344
|
1,402,698
|
92,823
|
5,351,869
|
954,167
|
|||||||||||||
|
State
and local government
|
462,355
|
2,644
|
---
|
---
|
462,355
|
2,644
|
|||||||||||||
|
Other
|
---
|
---
|
910,966
|
31,387
|
1,410,719
|
34,031
|
|||||||||||||
|
|
18,603,221
|
968,958
|
101,735,497
|
2,129,883
|
120,338,718
|
3,098,841
|
|||||||||||||
|
Held-to-maturity
securities:
|
|||||||||||||||||||
|
State
and local government
|
630,319
|
4,358
|
1,244,491
|
14,739
|
1,874,810
|
19,097
|
|||||||||||||
|
Total
|
$
|
19,233,540
|
$
|
973,316
|
102,979,988
|
$
|
2,144,622
|
$
|
120,213,528
|
$
|
3,117,938
|
||||||||
|
December
31, 2005
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||
|
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
|||||||||||||
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|||||||||||||
|
US
Treasury and US Government agency securities
|
$
|
4,531,185
|
$
|
73,959
|
$
|
50,689,215
|
$
|
1,129,671
|
$
|
55,220,400
|
$
|
1,203,630
|
|||||||
|
Federal
agency mortgage-backed securities
|
12,631,631
|
272,280
|
20,596,312
|
562,265
|
33,227,943
|
834,545
|
|||||||||||||
|
Non-agency
mortgage-backed securities
|
11,748,240
|
160,835
|
10,332,955
|
239,423
|
22,081,195
|
400,258
|
|||||||||||||
|
FNMA
and FHLMC preferred stock
|
---
|
---
|
28,213,718
|
3,140,111
|
28,213,718
|
3,140,111
|
|||||||||||||
|
Corporate
bonds
|
499,500
|
19
|
1,872,218
|
123,314
|
2,371,718
|
123,333
|
|||||||||||||
|
Other
|
1,233,452
|
35,824
|
---
|
---
|
1,233,452
|
35,824
|
|||||||||||||
|
|
30,644,008
|
542,917
|
111,704,418
|
5,194,784
|
142,348,426
|
5,737,701
|
|||||||||||||
|
Held-to-maturity
securities:
|
|||||||||||||||||||
|
State
and local government
|
495,600
|
4,400
|
1,382,203
|
21,298
|
1,877,803
|
25,698
|
|||||||||||||
|
Total
|
$
|
31,139,608
|
$
|
547,317
|
$
|
113,086,621
|
$
|
5,216,082
|
$
|
144,226,229
|
$
|
5,763,399
|
|||||||
U.S.
Treasury and Government Sponsored Enterprises: The
unrealized losses on the Company’s investments in U.S. Treasury obligations and
Government sponsored enterprises were caused by interest rate increases. The
contractual terms of those investments do not permit the issuer to settle the
securities at a price less than the amortized cost of the investment. Because
the Company has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those investments to be other-than-temporarily impaired at December 31,
2006.
Note
4 -
INVESTMENT SECURITIES
-
Continued
Federal
Agency Mortgage-Backed Securities: The
unrealized losses on the Company’s investment in federal agency mortgage-backed
securities were caused by interest rate increases. The contractual cash flows
of
those investments are guaranteed by an agency of the U.S. government.
Accordingly, it is expected that the securities would not be settled at a price
less than the amortized cost of the Company’s investment. Because the decline in
market value is attributable to changes in interest rates and not credit
quality, and because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company
does not consider those investments to be other-than-temporarily impaired at
December 31,2006.
Non-agency
Mortgage-Backed Securities: The
unrealized losses on the Company’s investment in non-agency mortgage-backed
securities were caused by interest rate increases. The contractual cash flows
of
these investments are current and none of the obligations are deemed to be
invested in high-risk tranches. Accordingly, it is expected that the securities
would not be settled at a price less than the amortized cost of the Company’s
investment. Because the decline in market value is attributable to changes
in
interest rates and not credit quality, and because the Company has the ability
and intent to hold those investments until a recovery of fair value, which
may
be maturity, the Company does not consider those investments to be
other-than-temporarily impaired at December 31,2006.
FHLMC
Preferred Stock: All of the agency preferred stock securities held by the
Company are adjustable rate securities. The securities reprice over a five
year
period. The current cost basis of these securities are at a discount to the
stated par value. The rating agencies have rated these securities Aa3 (Moody’s)
AA- (S&P). Given the adjustable rate nature of the securities the dividend
rates will adjust to a level more in line with current or future interest rates
at a preset time in the future. Based on the evaluation by the Company and
the
ability and intent to hold these securities for a reasonable period of time
sufficient for a recovery of fair value, the Company does not consider these
securities to be other-than-temporarily impaired at December 31, 2006.
Corporate
Bonds: The Company’s unrealized loss on investments in corporate bonds relates
to bonds with five different issuers. The unrealized losses were caused by
increases in interest rates. Each of these bonds is rated A or better (S&P)
and there have been no downgrades during the last twelve months. The Company
has
the ability and intent to hold these investments until a recovery of fair value,
which may be maturity. The Company does not consider those investments to be
other-than-temporarily impaired at December 31, 2006.
State
and
Local Governments and Other: The unrealized losses on these investments are
attributable to increases in interest rates, rather than credit quality. The
Company has the ability and intent to hold these investments until a recovery
of
fair value and does not consider them to be other-than-temporarily impaired
at
December 31, 2006.
Note
5 -
LOANS
Loans
summarized by category are as follows:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Commercial,
financial and agricultural
|
$
|
23,595,321
|
$
|
22,090,454
|
|||
|
Real
estate - construction
|
31,473,364
|
19,955,124
|
|||||
|
Real
estate - mortgage
|
|||||||
|
Commercial
|
138,885,778
|
112,914,726
|
|||||
|
Residential
|
47,949,770
|
37,251,173
|
|||||
|
Consumer
|
33,284,334
|
29,456,155
|
|||||
|
|
$
|
275,188,567
|
$
|
221,667,632
|
|||
Activity
in the allowance for loan losses was as follows:
|
|
December
31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Balance
at the beginning of year
|
$
|
2,700,647
|
$
|
2,763,988
|
$
|
1,705,082
|
||||
|
Allowance
purchased in acquisition
|
320,000
|
—
|
994,878
|
|||||||
|
Provision
for loan losses
|
528,124
|
328,679
|
245,000
|
|||||||
|
Charged
off loans
|
(444,702
|
)
|
(521,278
|
)
|
(293,479
|
)
|
||||
|
Recoveries
|
110,555
|
129,258
|
112,507
|
|||||||
|
Balance
at end of year
|
$
|
3,214,624
|
$
|
2,700,647
|
$
|
2,763,988
|
||||
Note
5 -
LOANS
-
Continued
At
December 31, 2006, the bank had $449,000 loans in a non accrual status.
Loans classified impaired at December 31, 2006 and 2005 totaled $449,000 and
$101,000. These loans were recorded at or below fair value. The
average recorded investment in loans classified as impaired for the years ended
December 31, 2006 and 2005 amounted to approximately $205,000 and $316,000,
respectively.
Loans
outstanding to bank directors, executive officers and their related business
interests amounted to $8,105,209 and $4,182,129 at December 31, 2006 and 2005,
respectively. Repayments on these loans during the year ended December 31,
2006 were $3,676,438 and loans made amounted to $6,958,901. Loans acquired
in
the DeKalb acquisition amounted to $640,617. Repayments on these loans during
the year ended December 31, 2005 were $332,642 and loans made amounted to
$2,195,918. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and generally do not involve
more
than the normal risk of collectibility.
Note
6 -
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
|
|
|
|||||
|
Land
|
$
|
5,775,465
|
$
|
5,146,966
|
|||
|
Premises
|
14,133,715
|
7,862,983
|
|||||
|
Equipment
|
5,944,366
|
4,734,620
|
|||||
|
Construction
in progress
|
—
|
2,227,941
|
|||||
|
|
25,853,546
|
19,972,510
|
|||||
|
Accumulated
depreciation
|
4,893,214
|
3,990,481
|
|||||
|
|
$
|
20,960,332
|
$
|
15,982,029
|
|||
Provision
for depreciation included in operating expenses for the years ended December
31,
2006, 2005 and 2004 amounted to $1,000,804, $926,776 and $761,277,
respectively.
Note
7 -
GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS
Intangible
assets (excluding goodwill) consisted of the following:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Core
deposit premiums, gross carrying amount
|
$
|
4,650,658
|
$
|
4,148,273
|
|||
|
Accumulated
amortization
|
(1,997,741
|
)
|
(1,381,199
|
)
|
|||
|
Net
|
$
|
2,652,917
|
$
|
2,767,074
|
|||
Amortization
of the core deposit intangibles amounted to $636,542, $594,741 and $276,685
for
the years ended December 31, 2006, 2005 and 2004, respectively. Amortization
of
the intangibles is scheduled to be as follows:
|
2007
|
$
|
669,637
|
||
|
2008
|
506,822
|
|||
|
2009
|
491,524
|
|||
|
2010
|
491,524
|
|||
|
2011
|
387,306
|
|||
|
Thereafter
|
106,104
|
|||
|
|
$
|
2,652,917
|
Note
7 -
GOODWILL, CORE DEPOSIT INTANGIBLE AND OTHER ASSETS
-
Continued
Goodwill
at December 31, 2006 and 2005 amounted to $27,761,219 and $24,256,020,
respectively. This represents $4,902,943 acquired in the DeKalb acquisition
in
2006, $22,822,441 acquired in the DutchFork acquisition in 2004 and $35,835
resulting from a branch acquisition in 2003. The goodwill from each of these
acquisitions is tested for impairment annually in accordance with SFAS 142.
The
fair value is estimated using a cash flow approach based upon the present value
of the expected cash flows by separately grouping the offices acquired in each
of these transactions. These valuations indicated that no impairment charge
was
required during the year ended December 31, 2006. However, in 2006 the Company
identified $1,397,744 that related to the DutchFork acquisition and therefore
management reclassed this amount to a deferred tax asset.
With
the
acquisition of DutchFork Bancshares the company acquired certain bank-owned
life
insurance policies that provide benefits to various former and existing
employees and officers. In addition, during 2006 the bank acquired an additional
$3,500,000 in bank-owned life insurance that provides benefits to various
existing officers. The carrying value of these policies at December 31,
2006 and 2005 was $9,606,657 and $5,811,302, respectively and are included
in
other assets.
Note
8 -
DEPOSITS
At
December 31, 2006, the scheduled maturities of Certificates of Deposits are
as
follows:
|
2007
|
$
|
168,714,477
|
||
|
2008
|
5,520,480
|
|||
|
2009
|
14,048,103
|
|||
|
2010
|
7,444,290
|
|||
|
2011
|
4,560,426
|
|||
|
|
$
|
200,287,776
|
Note
9 -
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED MONEY
Securities
sold under agreements to repurchase generally mature within one to four days
from the transaction date. The weighted average interest rate at December
31, 2006 and 2005, was 3.90% and 3.38%, respectively. The maximum month-end
balance during 2006 and 2005 was $27,699,000 and $14,858,500 respectively.
Securities sold under agreements to repurchase are collateralized by securities
with a fair market value of 100% of the agreement.
Other
borrowed money at December 31, 2006 and 2005 consisted of $148,886 and $169,233,
respectively which was due under the treasury tax and loan note program.
At
December 31, 2006 and 2005, the Company had unused short-term lines of credit
totaling $20,000,000.
Note
10 -
ADVANCES FROM FEDERAL HOME LOAN BANK AND LONG-TERM DEBT
Advances
from the Federal Home Loan Bank of Atlanta at December 31, 2006 consisted of
the
following:
|
|
2006
|
2005
|
|||||||||||
|
Maturing
|
Weighted
Average
Rate
|
Amount
|
Weighted
Average
Rate
|
Amount
|
|||||||||
|
2006
|
—
|
$
|
—
|
2.83
|
%
|
$
|
1,500,000
|
||||||
|
2008
|
3.79
|
%
|
1,954,408
|
3.42
|
%
|
5,251,345
|
|||||||
|
2010
|
3.64
|
%
|
26,852,972
|
3.64
|
%
|
27,305,787
|
|||||||
|
2011
|
5.35
|
%
|
500,000
|
—
|
|||||||||
|
More
than five years
|
1.00
|
%
|
450,165
|
467,277
|
|||||||||
|
3.64
|
%
|
$
|
29,757,545
|
3.54
|
%
|
$
|
34,524,409
|
||||||
As
collateral for its advances, the Company has pledged in the form of blanket
liens, eligible single-family loans, in the amount of $33,732,000 at December
31, 2006. In addition, securities with a fair value of
$6,126,136 have been pledged as collateral for advances as of December 31,
2006. At December 31, 2005 loans in the amount of $70,397,000 and
securities with a fair value of $8,050,723 were pledged as collateral for
advances. In addition, the Company’s investment in Federal Home Loan Bank
stock is pledged for advances. Advances are subject to prepayment
penalties. The average advances during 2006 and 2005 were $31,073,406 and
$41,290,862, respectively. The average interest rate for 2006 and 2005 was
3.61% and 3.49%, respectively. The maximum outstanding amount at any month
end
was $43,347,349 and $46,613,103 for 2006 and 2005.
Purchase
premiums included in advances acquired in the acquisition of DutchFork reflected
in the advances maturing in 2010 amount to $1,852,972 at December 31, 2006.
At
December 31, 2005 the premium on the advances were $251,345 for 2008 maturities
and $2,305,787 for the 2010 maturity. The coupon rate on the $25,000,000
advance maturing in 2010 is 5.76%. Advances of $2,000,000 acquired in the DeKalb
merger maturing in 2008 reflect a discount of $45,592 at December 31, 2006.
The
coupon rate on this advance is 3.79%.
Note
11 -
JUNIOR SUBORDINATED DEBENTURES
On
September 16, 2004, FCC Capital Trust I (Trust I), a wholly owned subsidiary
of
the Company, issued and sold floating rate securities having an aggregate
liquidation amount of $15,000,000. The Trust I securities accrue and pay
distributions quarterly at a rate per annum equal to LIBOR plus 257 basis
points. The distributions are cumulative and payable in arrears. The
company has the right, subject to events of default, to defer payments of
interest on the Trust I securities for a period not to exceed 20 consecutive
quarters, provided no extension can extend beyond the maturity date of September
16, 2034. The Trust I securities are mandatorily redeemable upon maturity
at September 16, 2034. If the Trust I securities are redeemed on or after
September 16, 2009, the redemption price will be 100% of the principal amount
plus accrued and unpaid interest. The Trust I securities may be redeemed in
whole but not in part, at any time prior to September 16, 2009 following the
occurrence of a tax event, a capital treatment event or an investment company
event. Currently these securities qualify under risk-based capital
guidelines as Tier 1 capital, subject to certain limitations. The company
has no current intention to exercise its right to defer payments of interest
on
the Trust I securities.
Note
12 -
INCOME TAXES
Income
tax expense for the years ended December 31, 2006, 2005 and 2004 consists of
the
following:
|
|
Year
ended December 31
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Current
|
|
|
|
|||||||
|
Federal
|
$
|
1,301,617
|
$
|
137,642
|
$
|
651,304
|
||||
|
State
|
213,102
|
83,545
|
104,072
|
|||||||
|
|
1,514,719
|
221,187
|
722,376
|
|||||||
|
Deferred
|
||||||||||
|
Federal
|
(62,494
|
)
|
737,272
|
197,474
|
||||||
|
State
|
—
|
74,145
|
10,000
|
|||||||
|
|
(62,494
|
)
|
811,413
|
207,474
|
||||||
|
Income
tax expense
|
$
|
1,452,225
|
$
|
1,032,600
|
$
|
962,850
|
||||
Note
12 -
INCOME TAXES - Continued
Reconciliation
from expected federal tax expense to effective income tax expense for the
periods indicated are as follows:
|
|
Year
ended December 31
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Expected
federal income tax expense
|
$
|
1,684,160
|
$
|
1,402,592
|
$
|
1,101,742
|
||||
|
|
||||||||||
|
State
income tax net of federal benefit
|
140,647
|
104,075
|
37,584
|
|||||||
|
Tax
exempt interest
|
(99,764
|
)
|
(73,999
|
)
|
(64,126
|
)
|
||||
|
Nontaxable
dividends
|
(146,347
|
)
|
(321,912
|
)
|
(101,821
|
|||||
|
Increase
in cash surrender value life insurance
|
(112,416
|
)
|
(87,883
|
)
|
(18500
|
|||||
|
Other
|
(14,055
|
)
|
9,727
|
7,971
|
||||||
|
|
$
|
1,452,225
|
$
|
1,032,600
|
$
|
962,850
|
||||
The
following is a summary of the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities:
|
|
December
31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Assets:
|
|
|
|||||
|
Allowance
for loan losses
|
$
|
1,092,972
|
$
|
971,980
|
|||
|
Excess
tax basis of deductible intangible assets
|
188,328
|
165,998
|
|||||
|
Premium
on purchased FHLB Advances
|
630,010
|
920,329
|
|||||
|
Net
operating loss carry forward
|
3,626,451
|
4,353,842
|
|||||
|
Excess
tax basis of assets acquired
|
1,030,356
|
488,534
|
|||||
|
Unrealized
loss on available-for sale-securities
|
983,611
|
2,046,309
|
|||||
|
Compensation
expense deferred for tax purposes
|
132,290
|
144,915
|
|||||
|
Other
|
168,987
|
676,360
|
|||||
|
Total
deferred tax asset
|
7,853,005
|
9,768,267
|
|||||
|
Liabilities:
|
|||||||
|
Tax
depreciation in excess of book depreciation
|
103,752
|
149,713
|
|||||
|
Excess
tax basis of non-deductible intangible assets
|
836,232
|
862,174
|
|||||
|
Excess
financial reporting basis of assets acquired
|
1,305,574
|
948,074
|
|||||
|
Income
tax bad debt reserve recapture adjustment
|
—
|
1,196,952
|
|||||
|
Other
|
63,243
|
66,946
|
|||||
|
Total
deferred tax liabilities
|
2,308,801
|
3,223,859
|
|||||
|
Net
deferred tax asset recognized
|
$
|
5,544,204
|
$
|
6,544,408
|
|||
At
December 31, 2006, the Company has net operating loss carry forwards acquired
in
the acquisitions of DutchFork and DeKalb for federal income tax purposes of
approximately $10,666,033 available to offset future taxable income through
2025. There was no valuation allowance for deferred tax assets at either
December 31, 2006 or 2005. No valuation allowance has been established as
it is management’s belief that realization of the deferred tax asset is more
likely than not. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which the temporary differences become deductible. Management considers
the scheduled reversal of deferred income tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. The
amount of these deferred tax assets considered to be realizable could be reduced
in the near term if estimates of future taxable income during the carry forward
period are reduced. The net deferred asset is included in other assets on
the consolidated balance sheets.
A
portion
of the change in the net deferred tax asset relates to unrealized gains and
losses on securities available-for-sale. The change in the tax benefit
related to unrealized gains on available for sale securities of $1,062,698
has
been recorded directly to shareholders’ equity. During the year ended
December 31, 2006 it was determined that certain differences recognized in
the
DutchFork acquisition as well as temporary differences related to state taxes
should not be classified as “temporary differences”. The primary difference
related to the deferred tax liability established for bad debt reserve
recapture. Temporary differences in the amount of $1,397,444 were reclassified
from the net deferred tax asset to goodwill in the year ended December 31,
2006.
The balance of the change in the net deferred tax asset results from current
period deferred tax benefit of $62,494.
Note
13 -
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement
of Financial Accounting Standards No. 107, “Disclosure about Fair Value of
Financial Instruments” (SFAS 107), requires the Company to disclose estimated
fair values for its financial instruments. Fair value estimates, methods,
and assumptions are set forth below.
Cash
and
short term investments - The carrying amount of these financial instruments
(cash and due from banks, federal funds sold and securities purchased under
agreements to resell) approximates fair value. All mature within 90 days
and do not present unanticipated credit concerns.
Investment
Securities - Fair values are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans
-
The fair value of loans are estimated by discounting the future cash flows
using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. As discount rates
are based on current loan rates as well as management estimates, the fair values
presented may not be indicative of the value negotiated in an actual
sale.
Accrued
Interest Receivable - The fair value approximates the carrying
value.
Interest
rate cap/floor - The fair value approximates the carrying value.
Deposits
- The fair value of demand deposits, savings accounts, and money market accounts
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposits is estimated by discounting the future
cash flows using rates currently offered for deposits of similar remaining
maturities.
Federal
Home Loan Bank Advances - Fair value is estimated based on discounted cash
flows
using current market rates for borrowings with similar terms.
Short
Term Borrowings - The carrying value of short term borrowings (securities sold
under agreements to repurchase and demand notes to the U.S. Treasury)
approximates fair value.
Junior
Subordinated Debentures - The fair values of junior subordinated debentures
is
estimated by using discounted cash flow analyses based on incremental borrowing
rates for similar types of instruments.
Accrued
Interest Payable - The fair value approximates the carrying value.
Commitments
to Extend Credit - The fair value of these commitments is immaterial because
their underlying interest rates approximate market.
Note
13 -
FAIR VALUE OF FINANCIAL INSTRUMENTS -
Continued
The
carrying amount and estimated fair value of the Company’s financial instruments
are as follows:
|
|
December
31, 2006
|
December
31, 2005
|
|||||||||||
|
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||
|
Financial
Assets:
|
|
|
|
|
|||||||||
|
Cash
and short term investments
|
$
|
10,069,567
|
$
|
10,069,567
|
$
|
12,864,146
|
$
|
12,864,146
|
|||||
|
Held-to-maturity
securities
|
6,488,796
|
6,509,148
|
5,713,830
|
5,746,448
|
|||||||||
|
Available-for-sale
securities
|
170,034,478
|
170,034,478
|
170,657,770
|
170,657,770
|
|||||||||
|
Loans
receivable
|
275,188,567
|
271,352,722
|
221,667,632
|
218,651,290
|
|||||||||
|
Allowance
for loan losses
|
3,214,624
|
—
|
2,700,647
|
—
|
|||||||||
|
Net
loans
|
271,973,943
|
271,352,722
|
218,966,985
|
218,651,290
|
|||||||||
|
Accrued
interest
|
2,545,560
|
2,545,560
|
2,001,957
|
2,001,957
|
|||||||||
|
Interest
rate cap/floor
|
371,632
|
371,632
|
192,898
|
192,898
|
|||||||||
|
Financial
liabilities:
|
|||||||||||||
|
Non-interest
bearing demand
|
$
|
73,676,415
|
$
|
73,676,415
|
$
|
57,326,637
|
$
|
57,326,637
|
|||||
|
NOW
and money market accounts
|
114,842,382
|
114,842,382
|
106,337,887
|
106,337,887
|
|||||||||
|
Savings
|
26,134,834
|
26,134,834
|
29,818,705
|
29,818,705
|
|||||||||
|
Certificates
of deposit
|
200,287,776
|
201,341,483
|
156,120,922
|
156,541,947
|
|||||||||
|
Total
deposits
|
414,941,407
|
415,995,114
|
349,604,151
|
350,025,176
|
|||||||||
|
Federal
Home Loan Bank Advances
|
29,757,545
|
28,238,223
|
34,524,409
|
32,590,242
|
|||||||||
|
Short
term borrowings
|
19,621,466
|
19,621,466
|
13,975,633
|
13,975,633
|
|||||||||
|
Junior
subordinated debentures
|
15,464,000
|
15,464,000
|
15,464,000
|
15,464,000
|
|||||||||
|
Accrued
interest payable
|
3,726,963
|
3,726,963
|
2,053,833
|
2,053,833
|
|||||||||
Note
14 -
COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES
The
Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess
of
the amount recognized in the consolidated balance sheets.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit is represented
by
the contractual amount of these instruments. The Bank uses the same credit
policies in making commitments as for on-balance sheet instruments. At
December 31, 2006 and 2005, the Bank had commitments to extend credit including
unused lines of credit of $56,643,000 and $38,700,000 respectively.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require a payment of a fee. Since commitments may expire without being
drawn upon, the total commitments do not necessarily represent future cash
requirements. The Bank evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management’s credit evaluation
of the party. Collateral held varies but may include inventory, property
and equipment, residential real estate and income producing commercial
properties.
The
primary market area served by the Bank is Lexington, Richland, Newberry and
Kershaw Counties within the Midlands of South Carolina. Management closely
monitors its credit concentrations and attempts to diversify the portfolio
within its primary market area. The Company considers concentrations of credit
risk to exist when pursuant to regulatory guidelines, the amounts loaned to
multiple borrowers engaged in similar business activities represent 25% or
more
of the bank’s risk based capital, or approximately $11.6 million. Based on this
criteria, the Bank had three such concentrations at December 31, 2006, including
$32.9 million (12.0% of total loans) to lessors of residential properties,
$35.5
million (12.9% of total loans) of lessors of non-residential properties and
$13.3 million (4.8% of total loans) to religious organizations. Although
the Bank’s loan portfolio, as well as existing commitments, reflect the
diversity of its primary market area, a substantial portion of its debtor’s
ability to honor their contracts is dependent upon the economic stability of
the
area.
Note
14 -
COMMITMENTS, CONCENTRATIONS OF CREDIT RISK AND CONTINGENCIES -
Continued
The
nature of the business of the company and bank may at times result in a certain
amount of litigation. The bank is involved in certain litigation that is
considered incidental to the normal conduct of business. Management
believes that the liabilities, if any, resulting from the proceedings will
not
have a material adverse effect on the consolidated financial position,
consolidated results of operations or consolidated cash flows of the
company.
At
December 31, 2006, the Bank has entered into the following interest rate cap
and
floor agreements:
|
Notional
Amount
|
Description
|
Cap/Floor
Rate
|
Contract
Date
|
Expiration
Date
|
Fair
Value
12/31/2006
|
|||||
|
$10,000,000
|
Interest
Rate Cap
|
4.50%
|
September
6, 2005
|
August
31, 2009
|
$
180,461
|
|||||
|
$10,000,000
|
Interest
Rate Floor
|
5.00%
|
July
24, 2006
|
August
1, 2011
|
191,171
|
|||||
|
$
371,632
|
The
fair
value of the cap contract at December 31, 2005 was $192,898. These agreements
were entered into to protect assets and liabilities from the negative effects
of
volatility in interest rates. The agreements provide for a payment to the Bank
of the difference between the cap/floor rate of interest and the market rate
of
interest. The Bank’s exposure to credit risk is limited to the ability of the
counterparty to make potential future payments required pursuant to the
agreement. The Bank’s exposure to market risk of loss is limited to the market
value of the cap and floor. Any gain or loss on the value of this contract
is
recognized in earnings on a current basis. The Bank has received payments under
the terms of the cap contract in the amount $49,248 during the year ended
December 31, 2006. No payments were received under the terms of the cap contract
in 2005 and no payments have been received under the terms of the floor contract
in 2006. The Bank recognized $18,409 and $37,897 in other income to reflect
the
increase in the value of the contracts for the years ended December 31, 2006
and
2005, respectively.
Note
15 -
OTHER EXPENSES
A
summary
of the components of other non-interest expense is as follows:
|
|
December
31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Data
processing
|
$
|
264,689
|
$
|
199,347
|
$
|
127,031
|
||||
|
Supplies
|
271,362
|
262,251
|
190,972
|
|||||||
|
Telephone
|
380,806
|
291,911
|
205,908
|
|||||||
|
Correspondent
services
|
169,312
|
167,442
|
140,182
|
|||||||
|
Insurance
|
254,810
|
246,132
|
149,482
|
|||||||
|
Postage
|
167,574
|
164,260
|
110,798
|
|||||||
|
Professional
fees
|
833,435
|
414,726
|
189,525
|
|||||||
|
Other
|
861,911
|
815,022
|
513,572
|
|||||||
|
|
$
|
3,203,899
|
$
|
2,561,091
|
$
|
1,627,470
|
||||
Note
16 -
STOCK OPTIONS
The
Company has adopted a Stock Option Plan whereby shares have been reserved for
issuance by the Company upon the grant of stock options or restricted stock
awards. At December 31, 2006 the Company has 160,542 shares reserved for
future grants. The plan provides for the grant of options to key employees
and
Directors as determined by a Stock Option Committee made up of at least two
members of the Board of Directors. Options are exercisable for a period of
ten
years from date of grant.
Stock
option transactions for the years ended December 31, 2006, 2005 and 2004 are
summarized as follows:
|
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||
|
Balance
December 31, 2003
|
150,763
|
9.91
|
|||||||||||
|
Exercised
|
(15,409
|
)
|
9.01
|
||||||||||
|
Granted
|
3,000
|
22.17
|
|||||||||||
|
Granted
in acquisition
|
180,685
|
9.23
|
|||||||||||
|
Forfeited
|
(1,602
|
)
|
13.67
|
||||||||||
|
Outstanding
December 31, 2004
|
317,437
|
9.66
|
|||||||||||
|
Exercised
|
(52,845
|
)
|
8.57
|
||||||||||
|
Granted
|
63,500
|
20.20
|
|||||||||||
|
Outstanding
December 31, 2005
|
328,092
|
$
|
11.87
|
||||||||||
|
Exercised
|
(112,932
|
)
|
8.66
|
||||||||||
|
Forfeited
|
(6,116
|
)
|
19.05
|
||||||||||
|
Granted
in acquisition
|
71,227
|
13.32
|
|||||||||||
|
Outstanding
December 31, 2006
|
280,271
|
$
|
13.38
|
5.21
|
$
|
936,143
|
|||||||
|
Exercisable
at December 31, 2006
|
280,271
|
$
|
13.38
|
5.21
|
$
|
936,143
|
|||||||
Stock
options outstanding and exercisable as of December 31, 2006, are as
follows:
|
Range
of Exercise Prices
Low/High
|
Number
of Option Shares
Outstanding
and
Exercisable
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
|
$ 9.23
/ $ 13.63
|
145,186
|
4.14
|
$
9.96
|
|
$14.00
/ $ 16.70
|
70,585
|
4.85
|
14.14
|
|
$19.00
/ $ 22.50
|
64,500
|
8.02
|
20.24
|
|
280,271
|
5.21
|
$
13.38
|
The
options granted in conjunction with the 2006 acquisition of DeKalb had an
average fair value of $8.21. There were no other options granted in 2006. The
total intrinsic value of share options exercised during the year ended December
31, 2006, 2005 and 2004 was approximately $1,059,488, $588,780 and $196,407,
respectively. The total fair value of options granted, excluding shares granted
in conjunction with acquisitions, in 2005 and 2004 was $429,383 and $21,468,
respectively.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires companies to
measure all employee stock-based compensation awards using a fair value method
and record such expense in its financial statements. In addition, the adoption
of SFAS No. 123(R) required additional accounting and disclosures related to
the
income tax and cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) was effective beginning as of the first annual
reporting period beginning after December 15, 2005. The board of directors
upon
the recommendation of the Human Resources Committee approved accelerating the
vesting of 67,000 unvested stock options. The acceleration vesting was effective
as of December 31, 2005. All of the other terms and conditions applicable to
the
outstanding stock options at that time remained unchanged. The decision to
accelerate vesting of these options resulted in avoiding recognition of pre-tax
compensation expense by the Company upon the adoption of SFAS 123R for the
previously issued options. In the Company’s view, the future compensation
expense outweighed the incentive and retention value associated with the stock
options. The future pre-tax compensation expense that was avoided using
estimated Black-Scholes value calculations, and based upon the effective date
of
January 1, 2006, was approximately $123,000, $76,000 and $45,000 in fiscal
years
2006, 2007 and 2008, respectively. The acceleration meets the criteria for
variable accounting under FIN No. 44. Under the provisions of FIN No. 44 the
acceleration did not result in any pre-tax charge to earnings in the year ended
December 31, 2005.
Note
17 -
EMPLOYEE BENEFIT PLAN
The
Company maintains a 401 (k) plan, which covers substantially all
employees. Participants may contribute up to the maximum allowed by the
regulations. During the year ended December 31, 2006, 2005 and 2004 the
plan expense amounted to $110,830, $102,130 and $137,177, respectively. The
Company matches 50% of an employee’s contribution up to a 6.00% participant
contribution.
The
Company acquired various single premium life insurance policies from DutchFork
that are funding fringe benefits to certain employees and officers. A Salary
Continuation Plan was established payable to two key individuals upon attainment
of age 63. The plan provides for monthly benefits of $2,500 each for seventeen
years. Other plans acquired were supplemental life insurance covering certain
key employees. No expense is accrued relative to these benefits, as the life
insurance covers the anticipated payout with the Company receiving the
remainder, thereby recovering its investment in the policies. In 2006, the
Company established a salary continuation plan which covers six additional
key
officers. The plan provides for monthly benefits upon normal retirement age
of
varying amounts for a period of fifteen years. Additional single premium life
insurance policies were purchased in 2006 in the amount of $3,500,000 designed
to offset the funding of these additional fringe benefits. The cash surrender
value at December 31, 2006 of all bank owned life insurance was $9,606,657.
Expenses accrued for the anticipated benefits under the Salary Continuation
Plans for the year ended December 31, 2006, 2005 and 2004 amounted to $186,440,
$95,427, 9,360, respectively. .
Note
18 -
EARNINGS PER SHARE
The
following reconciles the numerator and denominator of the basic and diluted
earnings per share computation:
|
|
Year
ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Numerator
(Included in basic and diluted earnings per share)
|
$
|
3,501,199
|
$
|
3,092,671
|
$
|
2,184,985
|
||||
|
|
||||||||||
|
Denominator
|
||||||||||
|
Weighted
average common shares outstanding for:
|
||||||||||
|
Basic
earnings per share
|
3,096,866
|
2,834,404
|
1,903,209
|
|||||||
|
Dilutive
securities:
|
||||||||||
|
Stock
options - Treasury stock method
|
77,319
|
134,104
|
102,536
|
|||||||
|
Diluted
earnings per share
|
3,174,185
|
2,968,508
|
2,005,745
|
|||||||
The
average market price used in calculating the assumed number of shares issued
for
the years ended December 31, 2006, 2005 and 2004 was $17.92, $19.15 and $21.67,
respectively.
Note
19 -
CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The
Company and Bank are subject to various federal and state regulatory
requirements, including regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions that, if undertaken, could have a direct
material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the Company’s assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company’s and Bank’s capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk
weighting, and other factors. The Company and Bank are required to
maintain minimum Tier 1 capital, total risked based capital and Tier 1 leverage
ratios of 4%, 8% and 3%, respectively.
At
December 31, 2006, the most recent notification from the Comptroller of the
Currency categorized the bank as well capitalized under the regulatory framework
for prompt corrective action. To be well capitalized the bank must
maintain minimum Tier 1 capital, total risk-based capital and Tier 1 leverage
ratios of 6%, 10% and 5%, respectively. There are no conditions or events
since that notification that management believes have changed the bank’s
well-capitalized status.
Note
19 -
CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
-
Continued
The
actual capital amounts and ratios as well as minimum amounts for each regulatory
defined category for the Bank and the Company are as follows:
|
|
Actual
|
Required
to be Categorized
Adequately
Capitalized
|
Required
to be
Categorized
Well
Capitalized
|
||||||||||||||||
|
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||
|
December
31, 2006
|
|||||||||||||||||||
|
First
Community Corporation
|
|||||||||||||||||||
|
Tier
1 Capital
|
$
|
47,238,000
|
13.48
|
%
|
$
|
14,030,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Total
Risked Based Capital
|
50,453,000
|
14.40
|
%
|
28,060,000
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
Tier
1 Leverage
|
47,238,000
|
9.29
|
%
|
20,343,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
Community Bank, NA
|
|||||||||||||||||||
|
Tier
1 Capital
|
$
|
43,039,000
|
12.30
|
%
|
$
|
14,009,000
|
4.00
|
%
|
$
|
21,014,000
|
6.00
|
%
|
|||||||
|
Total
Risked Based Capital
|
46,254,000
|
13.22
|
%
|
28,018,000
|
8.00
|
%
|
35,023,000
|
10.00
|
%
|
||||||||||
|
Tier
1 Leverage
|
43,039,000
|
8.49
|
%
|
20,267,000
|
4.00
|
%
|
25,334,000
|
5.00
|
%
|
||||||||||
|
|
|||||||||||||||||||
|
December
31, 2005
|
|||||||||||||||||||
|
First
Community Corporation
|
|||||||||||||||||||
|
Tier
1 Capital
|
$
|
40,898,000
|
13.24
|
%
|
$
|
12,354,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||
|
Total
Risked Based Capital
|
43,599,000
|
14.12
|
%
|
24,709,000
|
8.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
Tier
1 Leverage
|
40,898,000
|
9.29
|
%
|
17,616,000
|
4.00
|
%
|
N/A
|
N/A
|
|||||||||||
|
First
Community Bank, NA
|
|||||||||||||||||||
|
Tier
1 Capital
|
$
|
36,179,000
|
11.75
|
%
|
$
|
12,320,000
|
4.00
|
%
|
$
|
18,479,000
|
6.00
|
%
|
|||||||
|
Total
Risked Based Capital
|
38,880,000
|
12.62
|
%
|
24,640,000
|
8.00
|
%
|
30,799,000
|
10.00
|
%
|
||||||||||
|
Tier
1 Leverage
|
36,179,000
|
8.16
|
%
|
17,740,000
|
4.00
|
%
|
22,176,000
|
5.00
|
%
|
||||||||||
Under
applicable federal law, the Comptroller of the Currency restricts a national
bank’s total dividend payments in any calendar year to net profits of that year
combined with retained net profits for the two preceding years At December
31,
2006 there was $8,212,000 of retained net profits free of such restriction.
Note
20 -
PARENT COMPANY FINANCIAL INFORMATION
The
balance sheets, statements of operations and cash flows for First Community
Corporation (Parent Only) follow:
Condensed
Balance Sheets
|
|
At
December 31,
|
||||||
|
|
2006
|
2005
|
|||||
|
Assets:
|
|
|
|||||
|
Cash
on deposit
|
$
|
2,713,340
|
$
|
3,511,344,
|
|||
|
Securities
purchased under agreement to resell
|
122,144
|
66,842
|
|||||
|
Investment
securities available-for-sale
|
1,221,675
|
1,360,000
|
|||||
|
Investment
in bank subsidiary
|
74,037,238
|
61,048,462
|
|||||
|
Other
|
846,291
|
494,154
|
|||||
|
Total
assets
|
$
|
78,940,688
|
$
|
66,480,802
|
|||
|
Liabilities:
|
|||||||
|
Junior
subordinated debentures
|
$
|
15,464,000
|
$
|
15,464,000
|
|||
|
Other
|
269,037
|
250,017
|
|||||
|
Total
liabilities
|
15,733,037
|
15,714,017
|
|||||
|
|
|||||||
|
Shareholders’
equity
|
63,207,651
|
50,766,785
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
78,940,688
|
$
|
66,480,802
|
|||
Note
20 -
PARENT COMPANY FINANCIAL INFORMATION - Continued
Condensed
Statements of Operations
|
|
Year
ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Income:
|
||||||||||
|
Interest
income
|
$
|
54,994
|
$
|
51,323
|
$
|
72,795
|
||||
|
Dividend
income from bank subsidiary
|
1,314,000
|
1,327,125
|
366,000
|
|||||||
|
Equity
in undistributed earnings of subsidiary
|
3,421,593
|
2,715,875
|
2,073,865
|
|||||||
|
Total
income
|
4,790,587
|
4,094,323
|
2,512,660
|
|||||||
|
Expenses:
|
||||||||||
|
Interest
expense
|
1,160,895
|
885,344
|
214,813
|
|||||||
|
Other
|
128,493
|
116,308
|
112,862
|
|||||||
|
Total
expense
|
1,289,388
|
1,001,652
|
327,675
|
|||||||
|
Income
before taxes
|
3,501,199
|
3,092,671
|
2,184,985
|
|||||||
|
Income
taxes
|
—
|
—
|
—
|
|||||||
|
Net
Income
|
$
|
3,501,199
|
$
|
3,092,671
|
$
|
2,184,985
|
||||
Condensed
Statements of Cash Flows
|
|
Year
ended December 31,
|
|||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
Cash
flows from operating activities:
|
|
|
|
|||||||
|
Net
Income
|
$
|
3,501,199
|
$
|
3,092,671
|
$
|
2,184,985
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
||||||||||
|
Increase
in equity in undistributed earnings of subsidiary
|
(3,421,593
|
)
|
(2,715,875
|
)
|
(2,073,865
|
)
|
||||
|
Other-net
|
(3,493
|
)
|
120,200
|
84,600
|
)
|
|||||
|
Net
cash provided by operating activities
|
56,113
|
496,996
|
195,720
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Purchase
of investment security available-for-sale
|
—
|
—
|
(110,000
|
)
|
||||||
|
Maturity
of investment security available-for-sale
|
—
|
—
|
—
|
|||||||
|
Investment
in bank subsidiary
|
—
|
—
|
(2,897,905
|
)
|
||||||
|
Net
cash received (disbursed) in business combination
|
26,893
|
—
|
(11,131,142
|
)
|
||||||
|
Net
cash provided (used) by investing activities
|
26,893
|
—
|
(14,139,047
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Dividends
paid
|
(708,222
|
)
|
(565,432
|
)
|
(381,878
|
)
|
||||
|
Proceeds
from issuance of junior subordinated debentures
|
—
|
—
|
15,000,000
|
|||||||
|
Purchase
of common stock
|
(1,254,090
|
)
|
—
|
—
|
||||||
|
Proceeds
from issuance of common stock
|
1,136,604
|
579,840
|
315,430
|
|||||||
|
Net
cash used in financing activities
|
(825,708
|
)
|
14,408
|
14,933,552
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
(742,702
|
)
|
511,404
|
990,225
|
||||||
|
Cash
and cash equivalents, beginning of period
|
3,578,186
|
3,066,782
|
2,076,557
|
|||||||
|
Cash
and cash equivalents, end of period
|
$
|
2,835,484
|
$
|
3,578,186
|
$
|
3,066,782
|
||||
Note
21 -
QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following provides quarterly financial data for 2006 and 2005.
|
2006
|
Fourth
Quarter
|
Third
Quarter
|
Second
Quarter
|
First
Quarter
|
|||||||||
|
Interest
Income
|
$
|
7,481,601
|
$
|
7,288,462
|
$
|
6,537,866
|
$
|
5,937,017
|
|||||
|
Net
interest income
|
3,775,215
|
3,750,622
|
3,469,979
|
3,327,439
|
|||||||||
|
Provision
for loan losses
|
139,400
|
140,395
|
128,629
|
119,700
|
|||||||||
|
Gain
(loss) on sale of securities
|
78
|
342
|
-
|
(69,382
|
)
|
||||||||
|
Income
before income taxes
|
1,198,756
|
1,278,586
|
1,286,296
|
1,189,786
|
|||||||||
|
Net
income
|
860,686
|
902,906
|
901,321
|
836,286
|
|||||||||
|
Net
income per share, basic
|
0.26
|
0.28
|
0.30
|
0.29
|
|||||||||
|
Net
income per share , diluted
|
0.26
|
0.27
|
0.29
|
0.28
|
|||||||||
|
2005
|
|||||||||||||
|
Interest
Income
|
$
|
5,801,814
|
$
|
5,434,136
|
$
|
5,244,425
|
$
|
4,864,375
|
|||||
|
Net
interest income
|
3,358,686
|
3,206,394
|
3,259,560
|
3,169,780
|
|||||||||
|
Provision
for loan losses
|
111,679
|
79,000
|
72,000
|
66,000
|
|||||||||
|
Gain
on sale of securities
|
-
|
-
|
7,322
|
181,097
|
|||||||||
|
Income
before income taxes
|
1,122,369
|
994,783
|
950,223
|
1,057,896
|
|||||||||
|
Net
income
|
853,924
|
751,658
|
706,823
|
780,266
|
|||||||||
|
Net
income per share, basic
|
0.30
|
0.26
|
0.25
|
0.28
|
|||||||||
|
Net
income per share , diluted
|
0.29
|
0.25
|
0.24
|
0.26
|
|||||||||
Item
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
On
May
16, 2006, we dismissed Clifton D. Bodiford, CPA as our independent registered
public accounting firm and engaged Elliott Davis, LLC as our independent
registered public accounting firm.
The
reports of Clifton D. Bodiford, CPA on our financial statements for the fiscal
years ended December 31, 2005 and 2004 did not contain an adverse opinion or
a
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope, or accounting principles, nor was there any event of the type
requiring disclosure under Item 304(a)(1)(v) of Regulation S-K. In connection
with its audits for the fiscal years ended December 31, 2005 and 2004 and during
the subsequent interim period preceding our dismissal of Clifton D. Bodiford,
CPA , there were no disagreements with Clifton D. Bodiford, CPA on any matter
of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure that, if not resolved to the satisfaction of Clifton D.
Bodiford, CPA, would have caused Clifton D. Bodiford, CPA to make reference
to
the subject matter of the disagreement(s) in connection with its report.
Item
9A. Controls and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our
disclosure controls and procedures as defined in Exchange Act Rule
13a-15(e). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our current disclosure controls
and
procedures are effective as of December 31, 2006. There have been no
significant changes in our internal controls over financial reporting during
the
fourth fiscal quarter ended December 31, 2006 that have materially affected,
or
are reasonably likely to materially affect, our internal controls over financial
reporting.
The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under
all
potential future conditions, regardless of how remote.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers, and Corporate
Governance.
The
information required by Item 10 is hereby incorporated by reference from our
proxy statement for our 2007 annual meeting of shareholders to be held on May
16, 2007.
We
have
adopted a Code of Ethics that applies to our directors, executive officers
(including our principal executive officer and principal financial officer)
and
employees in accordance with the Sarbanes-Oxley Corporate Responsibility Act
of
2002. The Code of Ethics is available on our web site at:
www.firstcommunitysc.com.
Item
11. Executive Compensation.
The
information required by Item 11 is hereby incorporated by reference from our
proxy statement for our 2007 annual meeting of shareholders to be held on May
16, 2007.
Item
12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The
following table sets forth equity compensation plan information at December
31,
2006. All information has been adjusted for any stock splits and stock
dividends effected during the periods presented.
|
|
Equity
Compensation Plan Information
|
|||||||||
|
Plan
Category
|
Number
of securities
to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
|
Weighted-average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(c)
(excluding
securities
reflected
in column(a))
|
|||||||
|
|
(a)
|
(b)
|
|
|||||||
|
|
|
|
|
|||||||
|
Equity
compensation plans approved by security holders(1)
|
100,281
|
$
|
18.04
|
156,500
|
||||||
|
|
||||||||||
|
Total(2)
|
100,281
|
$
|
18.04
|
156,500
|
||||||
_________________________
|
(1)
|
The
number of shares of common stock available for issuance under the
1999
Stock Incentive Plan automatically increases on the first trading
day each
calendar year beginning January 1, 2000, by an amount equal to 3%
of the
shares of common stock outstanding.
|
|
(2)
|
The
total does not include 111,191 shares with a weighted average exercise
price of $9.23 issuable under the First Community Corporation / DutchFork
Bancshares, Inc. Stock Incentive Plan. The total does not include
68,799 shares with a weighted average exercise price of $13.32 issuable
under the First Community Corporation / DeKalb Bankshares, Inc. Stock
Incentive Plan. These plans, and the outstanding awards, were assumed
by
us in connection with the merger with DutchFork Bancshares, Inc. and
DeKalb Bankshares, Inc. We are not authorized to make any additional
awards under these plans.
|
The
additional information required by this Item 12 is set forth under “Security
Ownership of Certain Beneficial Owners and Management” and hereby incorporated
by reference from our proxy statement for our 2007 annual meeting of
shareholders to be held on May 16, 2007.
Item
13. Certain Relationships and Related Transactions,
and Director Independence.
The
information required by Item 13 is hereby incorporated by reference from our
proxy statement for our 2007 annual meeting of shareholders to be held on May
16, 2007.
Item
14. Principal Accounting Fees and
Services
The
information required by Item 14 is hereby incorporated by reference from our
proxy statement for our 2007 annual meeting of shareholders to be held on May
16, 2007.
Item
15. Exhibits,
Financial Statement Schedules
(a)(1)
Financial Statements
The
following consolidated financial statements are located in Item 8 of this
report.
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Consolidated
Balance Sheets as of December 31, 2006 and
2005
|
|
·
|
Consolidated
Statements of Income for the years ended December 31, 2006, 2005
and
2004
|
|
·
|
Consolidated
Statements of Changes in shareholders’ Equity and Comprehensive Income for
the years ended December 31, 2006, 2005 and
2004
|
|
·
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2005
and
2004
|
|
·
|
Notes
to the Consolidated Financial
Statements
|
|
(2)
|
Financial
Statement Schedules
|
These
schedules have been omitted because they are not required, are not applicable
or
have been included in our consolidated financial statements.
|
(3)
|
Exhibits
|
The
following exhibits are required to be filed with this Report on Form 10-K by
Item 601 of Regulation S-K.
|
2.1
|
Agreement
and Plan of Merger between First Community Corporation and DeKalb
Bankshares, Inc. dated January 19, 2006 (incorporated
by reference to Exhibit 2.1 of the company’s Form 8-K filed on January 20,
2006).
|
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the company’s Registration Statement No. 33-86258
on Form S-1).
|
|
|
|
|
3.2
|
Bylaws
(incorporated by reference to Exhibit 3.2 to the company’s
Registration Statement No. 33-86258 on
Form S-1).
|
|
|
|
|
4.1
|
Provisions
in the company’s Articles of Incorporation and Bylaws defining the rights
of holders of the company’s Common Stock (incorporated
by reference to Exhibit 4.1 to the company’s Registration Statement
No. 33-86258 on Form S-1).
|
|
|
|
|
10.1
|
Employment Agreement
dated January 16, 2007, by and between Michael C. Crapps and the
Company
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on January 19, 2007).*
|
|
10.2
|
Employment
Agreement dated June 1, 1994, by and between James C. Leventis and
the Company (incorporated by reference to Exhibit 10.2 to the company’s
Registration Statement No. 33-86258 on Form S-1).*
|
|
|
|
|
10.3
|
1996
Stock Option Plan and Form of Option Agreement (incorporated by reference
to Exhibit 10.6 to the company’s annual report for fiscal year ended
December 31, 1995 on Form 10-KSB).*
|
|
|
|
|
10.4
|
First
Community Corporation 1999 Stock Incentive Plan and Form of Option
Agreement (Incorporated by reference to the Company’s 1998 Annual Report
and Form 10-KSB).*
|
|
|
|
|
10.5
|
Employment
Agreement dated September 2, 2002 by and between David K. Proctor
and the
Company (incorporated by reference to Exhibit 10.4 to the company’s
2002 annual report and Form 10-KSB).*
|
|
|
|
|
10.6
|
Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
Company (incorporated by reference to Exhibit 10.5 to the company’s
2002 annual report and Form 10-KSB).*
|
|
|
|
|
10.7
|
First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan
(incorporated by reference to the company's Form 10-K for the period
ended
December 31, 2005).*
|
|
|
|
|
10.8
|
Agreement
between First Community Bank and Summerfield Associates, Inc. dated
June
28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form
8-K filed on August 15, 2005).
|
|
|
|
|
10.9
|
Divided
Reinvestment Plan dated July 7, 2003 (incorporated by reference to
Form
S-3/D filed with the SEC on July 14, 2003, File No.
333-107009).*
|
|
|
|
|
10.10
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
P.
Sligh dated April 12, 2004 (incorporated by reference to Exhibit
10.6 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
|
|
|
10.11
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
Thomas
Johnson dated April 12, 2004 (incorporated by reference to Exhibit
10.7 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
|
|
|
10.12
|
Amendment
No. 1 to the Employment, Consulting, and Noncompete Agreement between
First Community Bank N.A., and Steve P. Sligh dated September 14,
2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
filed on September 15, 2005).
|
|
|
|
|
10.13
|
Form
of Salary Continuation Agreement dated August 2, 2006 (incorporated
by
reference to Exhibit 10.1 to the company's Form 8-K filed on August
3,
2006).
|
|
10.14
|
Form
of Non-Employee Director Deferred Compensation Plan approved September
30,
2006 (incorporated by reference to the company's Form 8-K filed October
4,
2006).
|
|
|
|
|
16
|
Letter
to SEC from Clifton D. Bodiford, CPA (incorporated by reference as
Exhibit
16 to the company's Form 8-K as filed May 19, 2006).
|
|
|
|
|
21.1
|
Subsidiaries
of the company.
|
|
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Clifton D. Bodiford,
CPA
|
|
|
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm - Elliott Davis,
LLC.
|
|
|
|
|
24.1
|
Power
of Attorney (contained on the signature page hereto).
|
|
|
|
|
31.1
|
Rule
13a-14(a) Certification of the Chief Executive Officer.
|
|
|
|
|
31.2
|
Rule
13a-14(a) Certification of the Chief Financial Officer.
|
|
|
|
|
32
|
Section
1350 Certifications.
|
_________________________
|
*
|
Management
contract of compensatory plan or arrangement required to be filed
as an
Exhibit to this Annual Report on
Form 10-K.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Date:
March 20, 2007
|
FIRST
COMMUNITY CORPORATION
|
||
|
|
By:
|
/s/
Michael C. Crapps
|
|
|
|
|
Michael
C. Crapps
|
|
|
|
|
President
and Chief Executive Officer
|
|
KNOW
ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Michael C. Crapps, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and
in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with all exhibits thereto,
and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto attorney-in-fact and agent full power and authority
to
do and perform each and every act and thing requisite or necessary to be done
in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that attorney-in-fact
and agent, or his substitute or substitutes, may lawfully do or cause to be
done
by virtue hereof.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of
the registrant and in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
Richard K. Bogan
|
|
Director
|
|
March
20, 2007
|
|
|
Richard
K. Bogan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Thomas C. Brown
|
|
|
Director
|
|
March
20, 2007
|
|
Thomas
C. Brown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Chimin J. Chao
|
|
|
Director
|
|
March
20, 2007
|
|
Chimin
J. Chao
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Michael C. Crapps
|
|
|
Director,
President,
|
|
March
20, 2007
|
|
Michael
C. Crapps
|
|
&
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Hinton G. Davis
|
Director
|
March
20, 2007
|
|||
|
Hinton
G. Davis
|
|||||
|
/s/
Anita B. Easter
|
|
|
Director
|
|
March
20, 2007
|
|
Anita
B. Easter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
O. A. Ethridge
|
|
|
Director
|
|
March
20, 2007
|
|
O.
A. Ethridge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
George H. Fann, Jr.
|
|
|
Director
|
|
March
20, 2007
|
|
George
H. Fann, Jr.
|
|
|
|
|
|
|
/s/
J. Thomas Johnson
|
Director,
Vice Chairman of the Board,
|
March
20, 2007
|
|||
|
J.
Thomas Johnson
|
&
Executive Vice President
|
||||
|
|
|
|
|
|
|
|
/s/
W. James Kitchens, Jr.
|
|
|
Director
|
|
March
20, 2007
|
|
W.
James Kitchens, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
James C. Leventis
|
|
|
Director,
Chairman of the
|
|
March
20, 2007
|
|
James
C. Leventis
|
|
Board,
& Secretary
|
|
|
|
|
/s/Alexander
Snipes, Jr.
|
Director
|
March
20, 2007
|
|||
|
Alexander
Snipes, Jr.
|
|||||
|
/s/Richard
M. Todd, Jr.
|
Director
|
March
20, 2007
|
|||
|
Richard
M. Todd, Jr.
|
|||||
|
/s/
Loretta R. Whitehead
|
Director
|
March
20, 2007
|
|||
|
Loretta
R. Whitehead
|
|||||
|
/s/
Mitchell M. Willoughby
|
Director
|
March
20, 2007
|
|||
|
Mitchell
M. Willoughby
|
|||||
|
/s/
Joseph G. Sawyer
|
Chief
Financial Officer
|
|
March
20, 2007
|
||
|
Joseph
G. Sawyer
|
and
Principal Accounting Officer
|
|
|
Exhibit
List
The
following exhibits are required to be filed with this Report on Form 10-K by
Item 601 of Regulation S-K.
|
2.1
|
Agreement
and Plan of Merger between First Community Corporation and DeKalb
Bankshares, Inc. dated January 19, 2006 (incorporated by reference
to
Exhibit 2.1 of the company’s Form 8-K filed on January 20,
2006).
|
|
3.1
|
Amended
and Restated Articles of Incorporation (incorporated by reference
to
Exhibit 3.1 to the company’s Registration Statement No. 33-86258
on Form S-1).
|
|
|
|
|
3.2
|
Bylaws
(incorporated by reference to Exhibit 3.2 to the company’s
Registration Statement No. 33-86258 on
Form S-1).
|
|
|
|
|
4.1
|
Provisions
in the company’s Articles of Incorporation and Bylaws defining the rights
of holders of the company’s Common Stock (incorporated
by reference to Exhibit 4.1 to the company’s Registration Statement
No. 33-86258 on Form S-1).
|
|
|
|
|
10.1
|
Employment Agreement
dated January 16, 2007, by and between Michael C. Crapps and the
Company
(incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed on January 19, 2007).*
|
|
10.2
|
Employment
Agreement dated June 1, 1994, by and between James C. Leventis and
the Company (incorporated by reference to Exhibit 10.2 to the company’s
Registration Statement No. 33-86258 on Form S-1).*
|
|
|
|
|
10.3
|
1996
Stock Option Plan and Form of Option Agreement (incorporated by reference
to Exhibit 10.6 to the company’s annual report for fiscal year ended
December 31, 1995 on Form 10-KSB).*
|
|
|
|
|
10.4
|
First
Community Corporation 1999 Stock Incentive Plan and Form of Option
Agreement (Incorporated by reference to the Company’s 1998 Annual Report
and Form 10-KSB).*
|
|
|
|
|
10.5
|
Employment
Agreement dated September 2, 2002 by and between David K. Proctor
and the
Company (incorporated by reference to Exhibit 10.4 to the company’s
2002 annual report and Form 10-KSB).*
|
|
|
|
|
10.6
|
Employment
Agreement dated June 12, 2002 by and between Joseph G. Sawyer and the
Company (incorporated by reference to Exhibit 10.5 to the company’s
2002 annual report and Form 10-KSB).*
|
|
10.7
|
First
Amendment to the First Community Corporation 1999 Stock Incentive
Plan
(incorporated by reference to the company's Form 10-K for the period
ended
December 31, 2005).*
|
|
10.8
|
Agreement
between First Community Bank and Summerfield Associates, Inc. dated
June
28, 2005 (incorporated by reference to Exhibit 10.1 of the company’s Form
8-K filed on August 15, 2005).
|
|
10.9
|
Divided
Reinvestment Plan dated July 7, 2003 (incorporated by reference to
Form
S-3/D filed with the SEC on July 14, 2003, File No.
333-107009).*
|
|
10.10
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and Steve
P.
Sligh dated April 12, 2004 (incorporated by reference to Exhibit
10.6 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
|
|
|
10.11
|
Employment,
Consulting, and Noncompete Agreement between First Community Bank,
N.A.,
Newberry Federal Savings Bank, DutchFork Bancshares, Inc., and J.
Thomas
Johnson dated April 12, 2004 (incorporated by reference to Exhibit
10.7 to
the company’s Registration Statement No. 333-116242 on Form
S-4).
|
|
|
|
|
10.12
|
Amendment
No. 1 to the Employment, Consulting, and Noncompete Agreement between
First Community Bank N.A., and Steve P. Sligh dated September 14,
2005 (incorporated by reference to Exhibit 10.1 to the company’s Form 8-K
filed on September 15, 2005).
|
|
10.13
|
Form
of Salary Continuation Agreement dated August 2, 2006 (incorporated
by
reference to Exhibit 10.1 to the company's Form 8-K filed on August
3,
2006).
|
|
10.14
|
Form
of Non-Employee Director Deferred Compensation Plan approved September
30,
2006 (incorporated by reference to the company's Form 8-K filed October
4,
2006).
|
|
16
|
Letter
to SEC from Clifton D. Bodiford, CPA (incorporated by reference as
Exhibit
16 to the company's Form 8-K as filed May 19, 2006).
|
|
21.1
|
Subsidiaries
of the company.
|
|
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Clifton D. Bodiford,
CPA
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm - Elliott Davis,
LLC.
|
|
24.1
|
Power
of Attorney (contained on the signature page hereto).
|
|
|
|
|
31.1
|
Rule
13a-14(a) Certification of the Chief Executive Officer.
|
|
|
|
|
31.2
|
Rule
13a-14(a) Certification of the Chief Financial Officer.
|
|
|
|
|
32
|
Section
1350 Certifications.
|
_________________________
|
*
|
Management
contract of compensatory plan or arrangement required to be filed
as an
Exhibit to this Annual Report on
Form 10-K.
|