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FIRST COMMUNITY CORP /SC/ - Quarter Report: 2008 June (Form 10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(MARK ONE)

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period ended June 30, 2008

 

or

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) 

 

 

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from                 to                

 

Commission File No. 000-28344

 

FIRST COMMUNITY CORPORATION

(Exact name of registrant as specified in its charter)

 

South Carolina

 

57-1010751

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of principal executive offices)   (Zip Code)

 

(803) 951-2265

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

Large accelerated filer o

 

 

 

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  On July 31, 2008, 3,200,231 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements.

 

Consolidated Balance Sheets

 

Consolidated Statements of Income (Loss)

 

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Item 4. Controls and Procedures.

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Item 3. Defaults Upon Senior Securities.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

Item 5. Other Information.

 

Item 6. Exhibits.

 

INDEX TO EXHIBITS

 

SIGNATURES

 

EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

 

EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

EX-32 SECTION 1350 CERTIFICATIONS

 

 

2



Table of Contents

 

PART I -

FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

11,250,628

 

$

9,439,159

 

Interest-bearing bank balances

 

479,130

 

48,196

 

Federal funds sold and securities purchased under agreements to resell

 

5,243,429

 

4,194,276

 

Investment securities - available for sale

 

153,970,131

 

160,908,253

 

Investment securities - held to maturity (market value of $70,988,194 and $6,360,733 at June 30, 2008 and December 31, 2007, respectively)

 

74,290,961

 

6,316,570

 

Trading securities

 

2,626,046

 

2,876,086

 

Other investments, at cost

 

7,235,095

 

5,156,595

 

Loans

 

319,112,162

 

310,028,490

 

Less, allowance for loan losses

 

3,744,337

 

3,530,328

 

Net loans

 

315,367,825

 

306,498,162

 

Property, furniture and equipment - net

 

19,652,188

 

19,701,466

 

Bank owned life insurance

 

10,100,088

 

9,919,728

 

Goodwill

 

27,761,219

 

27,761,219

 

Intangible assets

 

1,722,219

 

1,983,280

 

Other assets

 

10,869,516

 

10,809,810

 

Total assets

 

$

640,568,475

 

$

565,612,800

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing demand

 

$

73,301,908

 

$

79,508,510

 

NOW and money market accounts

 

97,400,584

 

88,038,360

 

Savings

 

24,985,824

 

24,272,030

 

Time deposits less than $100,000

 

151,265,301

 

122,435,709

 

Time deposits $100,000 and over

 

90,600,105

 

91,599,759

 

Total deposits

 

437,553,722

 

405,854,368

 

Securities sold under agreements to repurchase

 

23,347,100

 

23,334,200

 

Federal Home Loan Bank Advances

 

95,065,109

 

49,299,478

 

Federal Home Loan Bank Advances, at fair value

 

2,486,566

 

1,532,541

 

Junior subordinated debt

 

15,464,000

 

15,464,000

 

Other borrowed money

 

128,419

 

190,386

 

Other liabilities

 

5,331,252

 

5,942,207

 

Total liabilities

 

579,376,168

 

501,617,180

 

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 3,200,231 and 3,211,011 at June 30, 2008 and December 31, 2007, respectively

 

3,200,231

 

3,211,011

 

Additional paid in capital

 

48,458,846

 

48,616,512

 

Retained earnings

 

11,281,506

 

14,564,054

 

Accumulated other comprehensive income (loss)

 

(1,748,276

)

(2,395,957

)

Total shareholders’ equity

 

61,192,307

 

63,995,620

 

Total liabilities and shareholders’ equity

 

$

640,568,475

 

$

565,612,800

 

 

3



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

 

 

Six

 

Six

 

 

 

Months Ended

 

Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

(Unaudited)

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

10,926,878

 

$

10,738,564

 

Taxable securities

 

5,035,765

 

3,695,437

 

Non taxable securities

 

206,944

 

217,304

 

Federal funds sold and securities purchased under resale agreements

 

150,720

 

170,389

 

Other

 

17,518

 

17,692

 

Total interest income

 

16,337,825

 

14,839,386

 

Interest expense:

 

 

 

 

 

Deposits

 

5,741,257

 

5,683,534

 

Federal funds sold and securities sold under agreement to repurchase

 

225,574

 

562,323

 

Other borrowed money

 

1,896,965

 

1,217,178

 

Total interest expense

 

7,863,796

 

7,463,035

 

Net interest income

 

8,474,029

 

7,376,351

 

Provision for loan losses

 

364,100

 

225,500

 

Net interest income after provision for loan losses

 

8,109,929

 

7,150,851

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

1,321,270

 

1,257,317

 

Mortgage origination fees

 

330,341

 

181,238

 

Commission on sale of non deposit investment products

 

158,237

 

143,433

 

Gain (loss) on sale of securities

 

(28,582

)

73,694

 

Fair value gain (loss) adjustments

 

172,930

 

(92,368

)

Other-than-temporary-impairment write-down on securities

 

(6,162,383

)

 

Other

 

729,395

 

679,432

 

Total non-interest income

 

(3,478,792

)

2,242,746

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

3,907,322

 

3,609,506

 

Occupancy

 

559,804

 

571,332

 

Equipment

 

642,243

 

632,670

 

Marketing and public relations

 

300,586

 

278,826

 

Amortization of intangibles

 

261,060

 

334,819

 

Other

 

1,756,246

 

1,712,514

 

Total non-interest expense

 

7,427,261

 

7,139,667

 

Net income before tax

 

(2,796,124

)

2,253,930

 

Income taxes (benefit)

 

(437,089

)

635,264

 

Net income (loss)

 

$

(2,359,035

)

$

1,618,666

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(0.74

)

$

0.50

 

Diluted earnings (loss) per common share

 

$

(0.73

)

$

0.49

 

 

4



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

 

 

 

Three

 

Three

 

 

 

Months Ended

 

Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2008

 

2007

 

 

 

(Unaudited)

 

(Unaudited)

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

5,404,847

 

$

5,514,993

 

Taxable securities

 

2,906,228

 

1,839,976

 

Non taxable securities

 

100,388

 

108,283

 

Federal funds sold and securities purchased under resale agreements

 

65,482

 

67,257

 

Other

 

7,007

 

10,511

 

Total interest income

 

8,483,952

 

7,541,020

 

Interest expense:

 

 

 

 

 

Deposits

 

2,858,277

 

2,850,587

 

Federal funds sold and securities sold under agreement to repurchase

 

77,923

 

295,027

 

Other borrowed money

 

1,061,130

 

627,752

 

Total interest expense

 

3,997,330

 

3,773,366

 

Net interest income

 

4,486,622

 

3,767,654

 

Provision for loan losses

 

209,100

 

112,000

 

Net interest income after provision for loan losses

 

4,277,522

 

3,655,654

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

657,560

 

644,782

 

Mortgage origination fees

 

144,682

 

77,081

 

Commission on sale of non deposit investment products

 

70,107

 

65,981

 

Gain on sale of securities

 

 

69,405

 

Fair value gain (loss) adjustments

 

24,220

 

(72,308

)

Other-than-temporary-impairment write-down on securities

 

(6,162,383

)

 

Other

 

365,190

 

349,015

 

Total non-interest income

 

(4,900,624

)

1,133,956

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

2,006,385

 

1,778,050

 

Occupancy

 

281,233

 

288,411

 

Equipment

 

317,445

 

321,453

 

Marketing and public relations

 

97,620

 

104,596

 

Amortization of intangibles

 

122,881

 

167,410

 

Other

 

954,448

 

854,083

 

Total non-interest expense

 

3,780,012

 

3,514,003

 

Net income before tax

 

(4,403,114

)

1,275,607

 

Income taxes (benefit)

 

(920,797

)

382,620

 

Net income (loss)

 

$

(3,482,317

)

$

892,987

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

(1.09

)

$

0.28

 

Diluted earnings (loss) per common share

 

$

(1.08

)

$

0.27

 

 

5



Table of Contents

 

FIRST COMMUNITY CORPORATION

Consolidated Statement of Changes in Shareholder’s Equity and Comprehensive Income (Loss)

Six Months ended June 30, 2008 and June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Shares

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Issued

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2006

 

3,264,608

 

$

3,264,608

 

$

49,695,346

 

$

12,033,065

 

$

(1,785,368

)

$

63,207,651

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

1,618,666

 

 

 

1,618,666

 

Cumulative adjustment to initially apply FASB Statement No. 159

 

 

 

 

 

 

 

(559,678

)

559,678

 

 

 

Accumulated other comprehensive income net of income tax benefit of $394,385

 

 

 

 

 

 

 

 

 

(732,430

)

 

 

Less: reclassification adjustment for gains included in net income, net of tax of $25,793

 

 

 

 

 

 

 

 

 

(47,901

)

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

(780,331

)

(780,331

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

838,335

 

Dividends paid ($0.13 per share)

 

 

 

 

 

 

 

(421,424

)

 

 

(421,424

)

Common stock repurchased

 

(82,513

)

(82,513

)

(1,367,679

)

 

 

 

 

(1,450,192

)

Options exercised

 

54,230

 

54,230

 

660,692

 

 

 

 

 

714,922

 

Dividend reinvestment plan

 

4,983

 

4,983

 

77,385

 

 

 

 

 

82,368

 

Balance, June 30, 2007

 

3,241,308

 

$

3,241,308

 

$

49,065,744

 

$

12,670,629

 

$

(2,006,021

)

$

62,971,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

3,211,011

 

$

3,211,011

 

$

48,616,512

 

$

14,564,054

 

$

(2,395,957

)

$

63,995,620

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 

 

 

(2,359,035

)

 

 

(2,359,035

)

Accumulated other comprehensive income (loss) net of income tax benefit of $2,202,637

 

 

 

 

 

 

 

 

 

(4,090,612

)

 

 

Less: reclassification adjustment for losses included in net income, net of tax of $1,452,672

 

 

 

 

 

 

 

 

 

4,738,293

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

647,681

 

647,681

 

Comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,711,354

)

Cumulative adjustment to initially apply EITF 06-4

 

 

 

 

 

 

 

(410,644

)

 

 

(410,644

)

Dividends paid ($0.16 per share)

 

 

 

 

 

 

 

(512,869

)

 

 

(512,869

)

Common stock repurchased

 

(17,700

)

(17,700

)

(248,711

)

 

 

 

 

(266,411

)

Options exercised

 

100

 

100

 

823

 

 

 

 

 

923

 

Dividend reinvestment plan

 

6,820

 

6,820

 

90,222

 

 

 

 

 

97,042

 

Balance, June 30, 2008

 

3,200,231

 

$

3,200,231

 

$

48,458,846

 

$

11,281,506

 

$

(1,748,276

)

$

61,192,307

 

 

6



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six months ended June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(2,359,035

)

$

1,618,666

 

Adjustments to reconcile net income (loss) to net cash provided in operating activities:

 

 

 

 

 

Depreciation

 

525,430

 

551,006

 

Premium amortization (discount accretion)

 

(382,721

)

(359,346

)

Provision for loan losses

 

364,100

 

225,500

 

Amortization of intangibles

 

261,060

 

334,818

 

(Gain) loss on sale of securities

 

28,582

 

(73,694

)

Other-than-temporary-impairment write-down on securities

 

6,162,383

 

 

Net (increase) decrease in fair value option instruments and derivatives

 

(172,930

)

90,379

 

(Increase) decrease in other assets

 

(994,990

)

243,618

 

Increase (decrease) in other liabilities

 

(1,021,600

)

(139,941

)

Net cash provided in operating activities

 

2,410,279

 

2,491,006

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of investment securities available-for-sale

 

(47,620,255

)

(9,522,961

)

Maturity of investment securities available-for-sale

 

39,845,376

 

12,439,958

 

Proceeds from sale of securities available-for-sale

 

7,470,328

 

6,358,924

 

Purchase of investment securities held-to-maturity

 

(71,110,383

)

 

Maturity of investment securities held-to-maturity

 

3,172,341

 

148,686

 

Purchase of securities held-for-trading

 

 

(3,098,097

)

Maturity of securities held-for-trading

 

237,209

 

40,005

 

Proceeds from sale of securities held-for-trading

 

 

3,463,665

 

Proceeds from sale of interest rate floor agreement

 

600,000

 

 

Increase in loans

 

(9,740,895

)

(26,886,526

)

Purchase of property and equipment

 

(476,152

)

(106,222

)

Net cash used in investing activities

 

(77,622,431

)

(17,162,568

)

Cash flows from financing activities:

 

 

 

 

 

Increase (decrease) in deposit accounts

 

32,274,138

 

(12,168,931

)

Increase (decrease) in securities sold under agreements to repurchase

 

12,900

 

5,490,620

 

Increase (decrease) in other borrowings

 

(61,967

)

19,006

 

Advances from the FHLB

 

63,900,000

 

25,000,000

 

Repayment of advances FHLB

 

(19,440,048

)

(13,008,621

)

Advances from FHLB, fair value option

 

2,500,000

 

1,500,000

 

Repurchase of common stock

 

(266,411

)

(1,450,192

)

Proceeds from exercise of stock options

 

923

 

714,922

 

Dividends paid

 

(512,869

)

(421,424

)

Dividend reinvestment plan

 

97,042

 

82,368

 

Net cash provided from financing activities

 

78,503,708

 

5,757,748

 

Net increase (decrease) in cash and cash equivalents

 

3,291,556

 

(8,913,814

)

Cash and cash equivalents at beginning of period

 

13,681,631

 

27,814,971

 

Cash and cash equivalents at end of period

 

16,973,187

 

18,901,157

 

Supplemental disclosure:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

8,134,419

 

$

6,721,984

 

Income taxes

 

$

613,025

 

$

100,000

 

Non-cash investing and financing activities:

 

 

 

 

 

Unrealized gain (loss) on securities available-for-sale

 

$

(973,730

)

$

(1,228,303

)

 

7



Table of Contents

 

Notes to Consolidated Financial Statements

 

Note 1   - Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated balance sheets, the consolidated statements of income (loss), the consolidated statements of changes in shareholders’ equity, and the consolidated statements of cash flows of First Community Corporation (“the Company”) present fairly in all material respects the Company’s financial position at June 30, 2008 and December 31, 2007, the Company’s results of operations for the six and three months ended June 30, 2008 and 2007, and the Company’s cash flows for the six months ended June 30, 2008 and 2007. The results of operations for the six and three months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

 

In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All such adjustments are of a normal, recurring nature.  All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements and notes thereto are presented in accordance with the instructions for Form 10-Q.  The information included in the Company’s 2007 Annual Report on Form 10-K should be referred to in connection with these unaudited interim financial statements.

 

Note 2 – Earnings Per Share

 

The following reconciles the numerator and denominator of the basic and diluted earnings per share computation:

 

 

 

Six months ended 
June 30,

 

Three months ended 
June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

Numerator (Included in basic and diluted earnings per share)

 

$

(2,359,035

)

$

1,618,666

 

$

(3,482,317

)

$

892,987

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average common shares Outstanding for:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

3,202,136

 

3,242,435

 

3,198,598

 

3,232,892

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

Stock options - Treasury Stock method

 

31,506

 

54,632

 

30,058

 

55,591

 

Diluted earnings per share

 

3,233,642

 

3,297,067

 

3,228,656

 

3,288,573

 

 

 

 

 

 

 

 

 

 

 

The average market price used in calculating assumed number of Shares

 

$

13.98

 

$

17.06

 

$

13.73

 

$

17.05

 

 

Note 3 –SFAS No. 159 (“SFAS 159”) “The Fair Value Option for Financial assets and Financial Liabilities”

 

The Company adopted the provisions of SFAS 159 effective January 1, 2007 which became effective in February 2007.  SFAS 159 generally permits the measurement of selected eligible financial instruments at fair value at specified election dates.  This election can generally be applied on an instrument by instrument basis.  Following the initial measurement date, ongoing unrealized gains or losses on these securities as well as other financial instruments for which fair value reporting is elected are reported in earnings at each subsequent reporting date.

 

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The following tables reflect the changes in fair values for the three-month and six-month periods ended June 30, 2008 and 2007 and where these changes are included in the income statement:

 

Description

 

Non-interest

income:fair value

adjustment gain (loss)

six months ended

6/30/2008

 

Non-interest 

income:fair value

adjustment gain (loss)

three months ended

6/30/2008

 

Trading securities

 

$

(12,831

)

$

(37,035

)

Interest rate cap/floor

 

171,125

 

4,662

 

Federal Home Loan Bank Advance

 

14,636

 

56,593

 

Total

 

$

172,930

 

$

24,220

 

 

Description

 

Non-interest

income:fair value

adjustment gain (loss)

six months ended

6/30/2007

 

Non-interest

income:fair value

adjustment gain (loss)

three months ended

6/30/2007

 

Trading securities

 

$

(36,944

)

$

(29,388

)

Interest rate cap/floor

 

(54,464

)

(41,960

)

Federal Home Loan Bank Advance

 

(960

)

(960

)

Total

 

$

(92,368

)

$

(72,308

)

 

There were no gains or losses on sale of trading securities in six or three months ended June 30, 2008.  During the six and three months ended June 30, 2007 a gain on sale of trading securities in the amount of $69,405 is included in “gain (loss) on sale of securities”   in the consolidated statement of income.

 

In connection with the adoption of SFAS 159, the Company was required to adopt SFAS No. 157, “Fair Value Measurement” (“SFAS 157”).   SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  The following table summarizes quantitative disclosures about the fair value measurement for each category of assets carried at fair value as of June 30, 2008.

 

Description

 

June 30, 2008

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Trading securities

 

$

2,626,046

 

$

 

$

2,626,046

 

$

 

Available for sale securities

 

153,970,131

 

922,095

 

152,538,748

 

509,288

 

Interest rate cap/floor

 

6,082

 

 

 

6,082

 

Federal Home Loan Bank Advances

 

(2,486,566

)

 

 

(2,486,566

)

Total

 

$

154,115,693

 

$

922,095

 

$

155,164,794

 

$

(1,971,196

)

 

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs. The aggregate carrying amount of impaired loans at June 30, 2008 and 2007 was $814,000 and $661,000, respectively.

 

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The following table reconciles the changes in Level 3 financial instruments for the six months ended June 30, 2008 and 2007:

 

 

 

Available
for
Sale
securities

 

Interest rate
Cap/Floor

 

Federal
Home Loan
Bank
Advances

 

Beginning Balance, December 31, 2007

 

$

509,288

 

$

457,650

 

$

(1,532,541

)

Gain (loss) recognized

 

 

171,125

 

14,636

 

Payment

 

 

(622,693

)

1,531,339

 

Issuances

 

 

 

(2,500,000

)

Balance, June 30, 2008

 

$

509,288

 

$

6,082

 

$

(2,486,566

)

 

 

 

Available

for

Sale

securities

 

Interest rate

Cap/Floor

 

Beginning Balance, December 31, 2006

 

$

509,443

 

$

371,632

 

Gain (loss) recognized

 

 

(54,464

)

Payment

 

 

(43,726

)

Issuances

 

 

 

Ending Balance, June 30, 2007

 

$

509,443

 

$

273,442

 

 

Note 4 - Recently Issued Accounting Pronouncements

 

The following is a summary of recent authoritative pronouncements:

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009.   Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its financial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”).  SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improving the transparency of financial reporting.  It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and

 

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accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 is effective for the Company on January 1, 2009. This pronouncement does not impact accounting measurements but will result in additional disclosures if the Company is involved in material derivative and hedging activities at that time.

 

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP 140-3”).  This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset.  This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under Statement 140.  FSP 140-3 will be effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years and earlier application is not permitted. Accordingly, this FSP is effective for the Company on January 1, 2009.  The Company is currently evaluating the impact, if any, the adoption of FSP 140-3 will have on its financial position, results of operations and cash flows.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”).  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”.  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and early adoption is prohibited.  Accordingly, this FSP is effective for the Company on January 1, 2009.  The Company does not believe the adoption of FSP 142-3 will have a material impact on its financial position, results of operations or cash flows.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).  SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162 will have no effect on the Company’s financial position, results of operations or cash flows.

 

The FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”). This FSP specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  FSP No. APB 14-1 provides guidance for initial and subsequent measurement as well as derecognition provisions.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted.  The adoption of FSP No. APB 14-1 will have no material effect on the Company’s financial position, results of operations or cash flows.

 

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (“FSP EITF 03-6-1”).  This FSP provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be included in the earnings per share computation.  FSP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period earnings per share data presented must be adjusted retrospectively. Early application is not permitted.  The adoption of FSP EITF 03-6-1 will have no material effect on the Company’s financial position, results of operations or cash flows.

 

Effective January 1, 2007, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale

 

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investment securities) or on a nonrecurring basis (for example, impaired loans).

 

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds

Level 2

 

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

 

FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis.

 

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 or cash flows.

 

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Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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, the following:

 

·                  increases in competitive pressure in the banking and financial services industries;

·                  changes in the interest rate environment which could reduce anticipated or actual margins;

·                  changes in political conditions or the legislative or regulatory environment;

·                  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;

·                  changes occurring in business conditions and inflation;

·                  changes in technology;

·                  changes in deposit flows;

·                  the adequacy of our level of allowance for loan loss;

·                  the rate of delinquencies and amounts of charge-offs;

·                  the rates of loan growth;

·                  adverse changes in asset quality and resulting credit risk-related losses and expenses;

·                  changes in monetary and tax policies;

·                  loss of consumer confidence and economic disruptions resulting from terrorist activities;

·                  changes in the securities markets; and

·                  other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

 

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.

 

Overview

 

The following discussion describes our results of operations for the three-month and six-month periods ended June 30, 2008 as compared to the three-month and six-month periods ended June 30, 2007, and also analyzes our financial condition as of June 30, 2008 as compared to December 31, 2007.  Like most community banks, we derive most of our income from interest we receive on our loans and investments.  Our 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.

 

Of course, 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.

 

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 non-interest income, as well as our non-interest expense, in the following discussion.

 

The following 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.

 

Critical Accounting Policies

 

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial

 

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Table of Contents

 

statements. Our significant accounting policies are described in the notes to our unaudited consolidated financial statements as of June 30, 2008 in this report and our notes included in the consolidated financial statements in our 2007 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

 

Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgment and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgment and assumptions we make, actual results could differ from these judgments and estimates that could have a material impact on the carrying values of our assets and liabilities and our results of operations.

 

We believe the allowance for loan losses is the critical accounting policy that requires the most significant judgment and estimates used in preparation of our consolidated financial statements. Some of the more critical judgments supporting the amount of our allowance for loan losses include judgments about the credit worthiness of borrowers, the estimated value of the underlying collateral, the assumptions about cash flow, determination of loss factors for estimating credit losses, the impact of current events, and conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses incurred by us may be different from management’s estimates provided in our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a more complete discussion of our processes and methodology for determining our allowance for loan losses.

 

Comparison of Results of Operations for Six Months Ended June 30, 2008 to the Six Months Ended June 30, 2007:

 

Net Income
 

Our net loss for the six months ended June 30, 2008 was $2.4 million, or $.73 diluted loss per share, as compared to net income of $1.6 million, or $.49 diluted earnings per share, for the six months ended June 30, 2007.  The net loss for the six months ended June 30, 2008 included a charge to recognize an “other-than-temporary-impairment”  in the amount of $6.2 million on our investment in a preferred stock issue of the Federal Home Loan Mortgage Corporation (“Freddie Mac”), a government sponsored enterprise (“GSE”) reflecting a write down of its carrying value from $14.3 million to $8.1 million.  The decision to recognize the unrealized mark-to-market loss on this investment grade security as an other-than-temporary impairment (“OTTI”) is based on the significant decline in the market value of the security caused by recent events, potential deterioration of Freddie Mac’s financial condition, and current lack of clarity about the impact of the announced plan (which has been approved by the House and Senate and signed into law by the President), that provides support for Freddie Mac as well as other GSE’s.  The preferred stock issue is an investment grade security (AA- by S&P and A1 by Moody’s) purchased in 2003 and acquired by First Community Corporation in the 2004 merger with Dutchfork Bankshares.  The security is included in the available-for-sale securities portfolio, and the quarterly dividend continues to be paid as agreed under the terms of the preferred stock issue.  Prior to this charge, impairment was recorded as an unrealized mark-to-market loss on securities available-for-sale and reflected as a reduction to equity through other comprehensive income.  In connection with this charge we established a valuation reserve for a portion of the related deferred tax benefit.  The charge results in a deferred capital loss and the tax benefit may be limited to the extent we recognize capital gains in the future.  We had operating earnings for the six months ended June 30, 2008 of $2.4 million or $0.74 per share as compared to $1.6 million or $0.47 per share for the six months ended June 30, 2007.

 

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Another significant decision that impacted our results for the six and three months ended June 30, 2008 was the implementation of a leverage strategy whereby we acquired approximately $63.2 million in certain non-agency mortgage backed securities and collateralized mortgage obligations.   We initiated this strategy because we believe the pricing levels of these securities and related funding opportunities provided the ability to realize significant spread not typically available in leverage strategies.  The weighted average yield on the investment securities purchased was approximately 6.82%. All of the mortgage assets acquired were classified as prime or ALT-A securities and represent the senior or super-senior tranches of the securities.  The assets acquired as part of this strategy have been classified as held-to-maturity in the investment portfolio.  The securities were acquired on the open market through securities dealers. Prior to initiating each transaction, we performed a thorough analysis, evaluating the associated credit risk, interest rate risk, liquidity and capital risk as well as related funding options.  The funding for this strategy was provided through Federal Home Loan Bank Advances in the amount of $36.0 million and brokered certificate of deposits in the amount of $23.0 million.  The weighted average cost of funding was approximately 4.28%.  We believe this opportunity existed as a result of the ongoing volatility in this market sector and the economic value of these securities was not reflected at the pricing levels.

 

The increase in operating earnings is primarily due to an increase in net interest income resulting primarily from an increase in the level of average earning assets for the six months ended June 30, 2008, as compared to the same period in 2007, reflecting the continued growth of our bank including the above mentioned leverage strategy.  Average earning assets were $526.1 million during the six months ended June 30, 2008, as compared to $461.9 million during the six months ended June 30, 2007, an increase of $64.2 million.  This increase in average earning assets was the primary factor responsible for the increase in net interest income of $1.1 million in the first six months of 2008 as compared to the first six months of 2007.  As a result of the OTTI charge, we had a non-interest income loss during the first six months of 2008 of $3.5 million.  Non-interest income (excluding the OTTI charge) was $2.7 million for the six months ended June 30, 2008 as compared to $2.2 million for the same period in 2007.  This increase of $441,000, or 19.7%, also contributed to the increase in operating income in the first six months of 2008 as compared to the same period in 2007.   Non-interest expense increased by $288,000, or 4.0%, in the first six months of 2008, as compared to the same period in 2007.

 

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the six-month periods ended June 30, 2008 and 2007, along with average balances and the related interest income and interest expense amounts.

 

Net interest income was $8.5 million for the six months ended June 30, 2008 as compared to $7.4 million for the six months ended June 30, 2007.  This increase was primarily due to an increase in the level of earning assets.  The yield on earning assets decreased by 23 basis points during the six months ended June 30, 2008 as compared to the same period in 2007.   The cost of interest-bearing liabilities also decreased by 31 basis points during these two periods.  Interest rates decreased significantly during the last quarter of 2007 and first quarter of 2008.  The larger decline in our funding cost as compared to our earning asset yields results from our balance sheet mix being slightly liability sensitive.  The net interest margin on a taxable equivalent basis remained flat at 3.31% for the six months ended June 30, 2008 as compared to the same period in 2007.

 

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Table of Contents

 

Reconciliations

 

The following is a reconciliation for both the six- and three-month periods ended June 30, 2008 and 2007, of net income (loss) as reported for generally accepted accounting principles (GAAP) and the non-GAAP measure referred to throughout our discussion of “operating earnings”.

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

Net income (loss), As Reported (GAAP)

 

$

(3,482

)

$

893

 

$

(2,359

)

$

1,619

 

Add: Income tax expense (benefit)

 

(921

)

383

 

(437

)

635

 

 

 

(4,403

)

1,276

 

(2,796

)

2,254

 

Non-operating items:

 

 

 

 

 

 

 

 

 

(Gain) loss on sale of securities

 

 

(69

)

28

 

(74

)

Other-than-temporary-impairment charge

 

6,162

 

 

6,162

 

 

Pre-tax operating earnings (loss)

 

1,759

 

1,207

 

3,394

 

2,180

 

Related income tax expense

 

521

 

362

 

1,013

 

614

 

Operating earnings, (net income, excluding non operating items)

 

$

1,238

 

$

845

 

$

2,381

 

$

1,566

 

 

The following is a reconciliation for both the six-and three-month periods ended June 30, 2008 and 2007, of non-interest income (loss) as reported for generally accepted accounting principles (GAAP) and the non-GAAP measure referred to throughout our discussion regarding non-interest income (loss).

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

(Dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

Non-interest income (loss), As Reported (GAAP)

 

$

(4,901

)

$

1,134

 

$

(3,479

)

$

2,243

 

Non-operating items:

 

 

 

 

 

 

 

 

 

(Gain) loss on sale of securities

 

 

(69

)

28

 

(74

)

Other-than-temporary-impairment charge

 

6,162

 

 

6,162

 

 

Operating non-interest income

 

$

1,261

 

$

1,065

 

$

2,711

 

$

2,169

 

 

Our management believes that the non-GAAP measures above are useful because they enhance the ability of investors and management to evaluate and compare our operating results from period to period in a meaningful manner.  These non-GAAP measures should not be considered as an alternative to any measure of performance as promulgated under GAAP, and investors should consider the OTTI charge in the second quarter of 2008 when assessing the performance of the Company.   Non-GAAP measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Company’s results as reported under GAAP.

 

Provision and Allowance for Loan Losses
 

At June 30, 2008, the allowance for loan losses was $3.7 million, or 1.17% of total loans, as compared to $3.5 million, or 1.14% of total loans, at December 31, 2007.  Our provision for loan losses was $364,000 for the six months ended June 30, 2008, as compared to $226,000 for the six months ended June 30, 2007.  This provision is made based on our assessment of general loan loss risk and asset quality.  The allowance for loan losses represent 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.  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.

 

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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 consists 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.

 

Accrual of interest is discontinued on loans when management believes, 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.

 

At June 30, 2008, we had $569,000 in loans delinquent more than 90 days and still accruing interest, and loans totaling $683,000 that were delinquent 30 days to 89 days.  Due to the current loan to collateral values or other factors it is anticipated that all of the principal and interest will be collected on those loans greater than 90 days or more delinquent and still accruing interest.  We had sixteen loans in a nonaccrual status in the amount of $814,000 at June 30, 2008.  Our management continuously monitors non-performing, classified and past due loans, to identify deterioration regarding the condition of these loans. We identified five (5) loans in the amount of $676,000 that are current as to principal and interest and not included in non-performing assets that could be potential problem loans.

 

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Allowance for Loan Losses 

 

Six Month Ended

June 30,

 

(Dollars in thousands)

 

2008

 

2007

 

Average loans outstanding

 

$

313,266

 

$

289,003

 

Loans outstanding at period end

 

$

319,112

 

$

302,152

 

Non-performing assets:

 

 

 

 

 

Nonaccrual loans

 

$

814

 

$

661

 

Loans 90 days past due still accruing

 

569

 

307

 

Foreclosed real estate

 

173

 

66

 

Total non-performing loans

 

$

1,556

 

$

1,034

 

Beginning balance of allowance

 

$

3,530

 

$

3,215

 

Loans charged-off:

 

 

 

 

 

1-4 family residential mortgage

 

103

 

111

 

Multi-family residential

 

29

 

 

Non-residential real estate

 

29

 

 

Home equity

 

 

32

 

Commercial

 

1

 

22

 

Installment & credit card

 

95

 

107

 

Total loans charged-off

 

257

 

272

 

Recoveries:

 

 

 

 

 

1-4 family residential mortgage

 

37

 

2

 

Non-residential real estate

 

8

 

53

 

Home equity

 

3

 

2

 

Commercial

 

30

 

147

 

Installment & credit card

 

29

 

52

 

Total recoveries

 

107

 

256

 

Net loan charge offs

 

150

 

16

 

Provision for loan losses

 

364

 

226

 

Balance at period end

 

$

3,744

 

$

3,425

 

Net charge -offs to average loans

 

.05

%

.01

%

Allowance as percent of total loans

 

1.17

%

1.13

%

Non-performing assets as % of total assets

 

0.24

%

0.19

%

Allowance as % of non-performing loans

 

240.62

%

331.24

%

 

The following allocation of the allowance to specific components is not necessarily indicative of future losses or future allocations.  The entire allowance is available to absorb losses in the portfolio.

 

Composition of the Allowance for Loan Losses

 

 

 

June 30, 2008

 

December 31, 2007

 

 

 

 

 

% of loans
in

 

 

 

% of loans
in

 

(Dollars in thousands)

 

Amount

 

Category

 

Amount

 

Category

 

Commercial, Financial and Agricultural

 

$

191

 

8.4

%

$

129

 

8.7

%

Real Estate – Construction

 

226

 

9.1

%

343

 

9.1

%

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

Commercial

 

2,592

 

56.9

%

1,989

 

55.8

%

Residential

 

148

 

16.2

%

553

 

16.8

%

Consumer

 

380

 

9.4

%

198

 

9.6

%

Unallocated

 

207

 

N/A

 

318

 

N/A

 

Total

 

$

3,744

 

100.0

%

$

3,530

 

100.0

%

 

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Table of Contents

 

Non-interest Income and Non-interest Expense
 

As a result of the OTTI charge, we had a non-interest income loss during the first six months of 2008 of $3.5 million.  Non-interest income (excluding the OTTI charge) during the first six months of 2008 was $2.7 million as compared to $2.2 million during the same period in 2007.  During the first six months of 2008, we realized losses on sale of securities in the amount of $29,000 as compared to gains of $74,000 in the same period of 2007.  Deposit service charges increased $64,000, or 5.1%.  The increase in deposit service charges results from an increase in certain fees in the middle of the second quarter of 2007.   Mortgage origination fees increased $149,000 or 82.3% in the six months ended June 30, 2008 as compared to the same period in 2007.  This increase results from a continued emphasis on this source of revenue as well as the continued favorable mortgage interest rate environment.  In the six months ended June 30, 2008, we recognized gains on financial instruments and derivatives carried at fair value in the amount of $173,000, as compared to a loss of $92,000 in the same period of 2007.  Other non-interest income increased by $50,000 in the first six months of 2008 as compared to the same period in 2007.  The increase reflects an increase in ATM surcharge and debit card exchange fees as a result of continued increased usage by our customer base.

 

Total non-interest expense increased by $287,000 during the first six months of 2008 as compared to the same period of 2007.    This primarily relates to increased salary and employee benefits expense.  In the first six months of 2008 salaries and employee benefits increased $298,000 as compared to the same period in 2007.  At June 30, 2008 we had 143 full time equivalent employees as compared to 138 at June 30, 2007.  The increases in staffing included one addition each to our network support services, internal audit, training, branch administration and retail deposit sales staff.   Also contributing to the increase in salary and benefits are some modifications to our commercial lender, retail banker and customer service staff incentive plans.    Marketing and public relations expense increased 7.9% from $279,000 in 2007 as compared to $301,000 in the six months ended June 30, 2008.  The increase relates to planned increases in both print and media marketing in 2008 as compared to the same period of 2007.  It is anticipated that the marketing expense variance will remain the same throughout 2008 as compared to 2007.  The amortization of intangibles decreased to $261,000 in the first six months of 2008 from $335,000 in the same period of 2007.  In January 2008 we recorded the final monthly amortization of core deposit premium related to the 2001 acquisition of our Chapin Branch.  Throughout 2007 we received a credit against our FDIC insurance assessments as a result of the acquisition of Newberry Federal Savings Bank in 2004.  This credit was used up in the first quarter of 2008.  It is expected that we will be assessed FDIC total insurance premiums of approximately $240,000 for 2008.

 

The decrease in professional fees from $512,000 in the first half of 2007 to $415,000 in the comparable period of 2008 is primarily a result of consulting firm fees expensed in the first half of 2007 related to a process efficiency improvement engagement performed by an outside consulting firm.  There were only moderate variances in other non-interest expense categories in the first six months of 2008 as compared to 2007.   This reflects our continued effort to control increases in non-interest expense as we continue to increase net interest income and other sources of revenue.

 

The following is a summary of the components of other non-interest expense:

 

 

 

Six months ended

 

 

 

June 30,

 

(Dollars in thousands)

 

2008

 

2007

 

ATM/debit card processing

 

$

153

 

$

163

 

Supplies

 

94

 

117

 

Telephone

 

163

 

191

 

Correspondent services

 

53

 

81

 

FDIC/FICO insurance assessment

 

110

 

25

 

Insurance

 

101

 

116

 

Postage

 

91

 

97

 

Professional fees

 

415

 

512

 

Other

 

576

 

411

 

 

 

$

1,756

 

$

1,713

 

 
Income Tax Expense
 

In the first six months of 2008, we had an effective tax benefit rate of 15.6% as compared to an effective tax expense rate of 28.2% during the same period of 2007. The lower benefit rate in 2008 reflects the effect of establishing a

 

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$700,000 valuation reserve for the deferred tax benefit resulting from the OTTI charge of $6.2 million. Our effective tax rate is currently expected to be 30.0% to 32.0% during the remainder of 2008.

 

Comparison of Results of Operations for Three Months Ended June 30, 2008 to the Three Months Ended June 30, 2007:

 

Net Income
 

Our net loss for the second quarter of 2008 was $3.5 million, or $1.08 diluted loss per share, as a result of the OTTI charge, as compared to net income of $893,000, or $0.27 diluted earnings per share during the comparable period in 2007.  As noted above under “Reconciliations,” our operating earnings were $1.2 million, or $0.38 per diluted share, for the three months ended June 30, 2008 as compared to $845,000, or $0.26 diluted earnings per share, for the same period in 2007.  Net interest income increased by $719,000 for the three months ended June 30, 2008 from $3.8 million in 2007 to $4.5 million in 2008.  The increase in net interest income is primarily due to the increase in the level of average earning assets resulting from the implementation of the leverage strategy discussed previously as well as core internal growth. Average earning assets equaled $552.8 million during the second quarter of 2007 as compared to $464.2 million during the second quarter of 2007.

 

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended June 30, 2008 and 2007, along with average balances and the related interest income and interest expense amounts.

 

The yield on average earning assets decreased to 6.17% in the second quarter of 2008 from 6.52% in the second quarter of 2007. The cost of interest bearing liabilities also decreased to 3.32% in second quarter of 2008 as compared to 3.78% in the second quarter of 2007.  The net interest margin remained flat at 3.26% for the three months ended June 30, 2008 and 2007  On a fully taxable equivalent basis, we had a net interest margin of 3.33% and 3.34% for the three months ended June 30, 2008 and 2007, respectively.

 

Non-interest Income and Non-interest Expense
 

As a result of the OTTI charge, we had a non-interest income loss of $4.9 million for the three months ended June 30, 2008.  As reflected in the chart above under “Reconciliations,” we earned $1.3 million in non-interest income (excluding the OTTI charge) for the three months ended June 30, 2008 as compared to $1.1 million in the same period of 2007.  Deposit service charges increased by $13,000 in the three months ended June 30, 2008 as compared to the same period in 2007.  Mortgage origination fees increased by $68,000 or 87.7% during the three months ended June 30, 2008 as compared to the same period in 2007.  As previously discussed this increase results from a continued emphasis on this source of revenue as well as the continued favorable mortgage interest rate environment

 

Total non-interest expense increased by $266,000 in the second quarter of 2008 as compared to the same quarter of 2007.  This was primarily due to the staff additions and incentive plan modifications noted in the six month results.  Non-interest expense “Other” increased by $100,000 in the second quarter of 2008 as compared to the same period in 2007.  As discussed in the six month results, this increase primarily relates to an increase in FDIC insurance premium cost.  Throughout 2007 we had a credit applied to the premiums related to our acquisition of Newberry Federal Savings Bank in 2004.  In the second quarter of 2008 this premium increased expenses by approximately $56,000 as compared to the same period in 2007.  All other variances in non-interest expenses during the three months ended June 30, 2008 as compared to the same period of 2007 reflect normal fluctuations in each of the categories.

 

Financial Position

 

Assets totaled $640.6 million at June 30, 2008 as compared to $565.6 million at December 31, 2007, an increase of $75.0 million.  As previously discussed during the second quarter of 2008 we implemented a leverage strategy whereby we acquired approximately $63.2 million in certain non-agency mortgage backed securities and collateralized mortgage obligations (CMOs).  The weighted average yield on the investment securities purchased was approximately 6.82%. All of the mortgage assets acquired were classified as prime or ALT-A securities and represent the senior or super-senior tranches of the securities.  The assets acquired as part of this strategy were classified as held-to-maturity in the investment portfolio.  Prior to initiating each transaction, we performed a thorough analysis, evaluating the associated credit risk, interest rate risk, liquidity and capital risk as well as related funding options.  The funding for this strategy was provided through Federal Home Loan Bank Advances in the amount of $36.0 million and brokered certificate of deposits in the amount of $23.0 million.  The weighted average cost of funding was

 

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approximately 4.28%.

 

Due to falling interest rates during the first quarter of 2008 we had a large dollar amount of government sponsored enterprise (“GSE”) securities with call features redeemed.  These funds were reinvested in other GSE securities including certain GSE mortgage-backed securities. All of these purchased securities were placed in the available-for-sale portfolio.   In addition, we purchased approximately $6.0 million private label whole loan pools and collateralized mortgage obligations.  Due to the current volatility in this market sector and our intent to hold these private label whole loan securities to maturity we placed these securities in the held-to-maturity portfolio.  In addition, to the securities acquired in the leverage strategy we own approximately $108.1 million in other mortgage-backed securities and CMO’s that are included in our available-for-sale portfolio.  Of these $25.8 million are non-agency mortgage- backed or CMO securities and $82.3 million are securities issued by GSE’s.

 

As previously discussed we recognized an OTTI charge to write down our investment in a Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred stock issue.  The carrying value of the preferred stock prior to the write down was $14.3 million and after the write down the carrying value is $8.1 million which is 50% of the securities par value.  The decision to recognize the unrealized mark-to-market loss on this investment grade security is based on the significant decline in the market value of the security caused by recent events, potential deterioration of Freddie Mac’s financial condition, and current lack of clarity about the impact of the announced plan (which has been approved by the House and Senate and signed into law by the President), that provides support for Freddie Mac as well as other GSE’s.  The preferred stock issue is an investment grade security (AA- by S&P and A1 by Moody’s) purchased in 2003 and acquired by First Community Corporation in the 2004 merger with Dutchfork Bankshares.  With the passage of the recent plan we do not believe that there will be any further need to write-down this security but if the financial condition of Freddie Mac continues to deteriorate or the current economic cycle continues for a prolonged period there can be no assurances that further impairment charges will not be necessary.

 

With the significant volatility and uncertainty in the financial markets we have implemented procedures to insure that we are monitoring and evaluating the securities portfolio on a monthly basis.  The procedures enable us to identify deterioration or potential problems in the portfolio on a security by security basis.  The procedures include evaluating changes in credit ratings on securities and the issuers, changes in market values and reviewing the underlying collateral and credit support on individual securities.  The analysis of privately issued mortgage-backed securities and CMO’s includes stressing the securities under various continuous default scenarios to identify the potential for future credit/principal losses.  Based on our evaluation we have not identified any other securities that we consider other-than-temporarily-impaired.  Depending on how severe and prolonged the current economic cycle lasts and how severe the continued adverse impact this cycle has on the financial markets there can be no assurances that future impairment charges will not be necessary on other segments of our investment portfolio.

 

As of January 1, 2007, we elected early adoption of Statement of Financial Accounting Standards No. 159 (“SFAS 159”) “The Fair Value Option for Financial Assets and Financial Liabilities. “  We reclassified certain corporate structured securities, which did not contain an interest rate floor, from the “available-for-sale” category to the “trading” category.  Changes in the “fair value” of assets or liabilities classified under the fair value option in accordance with SFAS 159 are recognized in earnings on a going forward basis.  The change in the fair value during the first quarter of 2007 was a decrease of approximately $7,600.  Prior to adoption of SFAS 159 we had not maintained any investment securities in a trading account.  Subsequent to the adoption of SFAS 159 we have also classified certain Federal Home Loan Bank advances under the fair value option.  With the ability to classify both financial assets and liabilities under the fair value option on an instrument by instrument basis, we believe this standard can provide an opportunity to assist us in managing the impact of interest rate volatility in the future.  See Note 3 under Part I, Item 1 above for related disclosures required under SFAS 159.

 

Short-term federal funds sold and interest–bearing bank balances increased from $4.2 million at December 31, 2007 to $5.7 million at June 30, 2008.

 

Loans grew by $9.1 million during the six months ended June 30, 2008 from $310.0 million at December 31, 2007 to $319.1 million at June 30, 2008.  At June 30, 2008, loans accounted for 56.7% of earning assets, as compared to 63.3% at December 31, 2007.  The loan to deposit ratio at June 30, 2008 was 72.9%, as compared to 76.4% at December 31, 2007.

 

The following table shows the composition of the loan portfolio by category:

 

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Table of Contents

 

 

 

June 30,

 

December 31,

 

 

 

2008

 

2007

 

(In thousands)

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

26,797

 

8.4

%

$

26,912

 

8.7

%

Real estate:

 

 

 

 

 

 

 

 

 

Construction

 

28,922

 

9.1

%

28,141

 

9.1

%

Mortgage – residential

 

51,633

 

16.2

%

52,018

 

16.8

%

Mortgage – commercial

 

181,548

 

56.9

%

173,173

 

55.8

%

Consumer

 

30,212

 

9.4

%

29,784

 

9.6

%

Total gross loans

 

319,112

 

100.0

%

310,028

 

100.0

%

Allowance for loan losses

 

(3,744

)

 

 

(3,530

)

 

 

Total net loans

 

$

315,368

 

 

 

$

306,498

 

 

 

 

In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes and advances on home equity lines of credit, secured by real estate, regardless of the purpose of the loan.  Advances on home equity lines of credit are included in consumer loans. We follow the common practice of financial institutions in our market areas 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 increase in loans, investment securities and short-term overnight investments were funded through growth in deposits of $31.7 million and Federal Home Loan Bank Advances of $46.7 million.  As previously discussed the leverage strategy implemented in the second quarter of 2008 was funded by $36.0 million in Federal Home Loan Bank (“FHLB”) advances and $23.0 million in brokered certificates of deposits (“CDs”).  These FHLB advances have a weighted average life of 5.8 years and weighted average rate of 3.94%.  The brokered CDs had a weighted average life of 5.9 years and weighted average rate of 4.82%.  We have not relied on brokered CDs to fund any of our assets in the past.  These CDs have a call feature whereby we have the option to call the CD as of any quarter end until maturity.  The flexibility to call these CDs provides us some protection in a declining rate environment whereby if the cash flows from the acquired assets accelerate we can then call the CDs.  If rates drop we also have the option to call the CDs and refinance at possibly lower rates.

 

Excluding the brokered CDs, deposits grew $8.7 million in the six months ended June 30, 2008 which funded the previously mentioned loan growth.  With an overall decline in deposits in 2007 we have refocused on core deposit growth both through our marketing and officer calling efforts in the first half of 2008 and beyond.

 

Market Risk Management
 

The effective management of market risk is essential to achieving our strategic financial objectives.  Our most significant 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 assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income.  The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.

 

A monitoring technique employed by the ALCO is the measurement of 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 simulation 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.

 

We are currently liability sensitive within one year.  However, neither the “gap” analysis nor asset/liability modeling

 

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Table of Contents

 

are precise indicators of our interest sensitivity position due to the many factors that affect net interest income including changes in the volume and mix of earning assets and interest-bearing liabilities.  Net interest income is also impacted by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.  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.

 

During the first quarter of 2008, we sold an interest rate floor agreement that had an expiration date of August 31, 2011 for $600,000.   The floor agreement was originally purchased in August of 2006 with a floor rate of 5.0% three-month LIBOR and a notional amount of $10.0 million to protect in a falling rate environment.  In the first quarter of 2008, we made the decision that interest rates were at or near the bottom of the current interest rate cycle and therefore made the decision to sell. At June 30, 2008, we continue to hold an interest rate cap agreement with a notional amount of $10.0 million.  The cap rate of interest is 4.50% three-month LIBOR.  The fair value of the agreement at June 30, 2008 is $6,000.  This agreement was entered into to protect assets and liabilities from the negative effects of volatility in interest rates. Both the agreement that was sold and the current agreement provide for payments to our 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 current exposure to market risk of loss is limited to the market value of the cap.  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 of $44,000 during the six months of 2007. No payments were received under the terms of the cap contract during the six months ended June 30, 2008.  No payments were received under the terms of the floor contract in 2007.  In the first quarter of 2008, the bank received $22,000 in payments under the terms of the floor prior to the sale. The bank recognized an increase of $171,000 and a decrease of $54,000 in other income to reflect the increase/decrease in the fair value of the contracts for the six months ended June 30, 2008 and 2007, respectively. The cap agreement expires on August 1, 2009.

 

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Table of Contents

 

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the percentage change in net interest income at June 30, 2008, March 31, 2008 and December 31, 2007 over twelve months.

 

Net Interest Income Sensitivity

 

Change in
short-term
interest
rates

 

June 30,
2008

 

March 31,
2008

 

December
31, 2007

 

+200bp

 

-3.74

%

+ 0.52

%

- 0.67

%

+100bp

 

-2.07

%

+ 0.34

%

+ 0.35

%

Flat

 

 

 

 

-100bp

 

+2.84

%

- 3.32

%

- 2.75

%

-200bp

 

+3.28

%

- 8.29

%

- 7.07

%

 

In implementing the previously discussed leverage strategy we impacted the effect changes in interest rates will have on our net interest income.  At the current level of market interest rates our model shows improvement in a down rate environment.  In the current rate environment a significant decline in rates is not considered likely.  In an up rate environment the model shows a decline in net interest income.  This is a result of acquiring long term assets in the leverage strategy.  Because of the spreads we were able to obtain in the leverage we felt that the economics of the strategy was reasonable since we are being adequately compensated for the additional risk taken in a rising rate environment.  This decline reflected in net interest income at June 30, 2008 in a rising rate environment assumes an immediate parallel shift in interest rates.  The ratios reflected in the table above as of June 30, 2008 remain well within the policy limits as approved in our Asset/Liability Management Policy.  At March 31, 2008 and December 31, 2007 the model indicated we would have a negative impact on net interest income in a declining rate environment despite the fact that we are and were liability sensitive.  This primarily resulted from the then 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 were and are currently at a level where we believe they cannot 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.

 

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 June 30, 2008 and March 31, 2008, the negative PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 23.54% and 20.31%, as compared to 15.39% at December 31, 2007.  As explained above the additional risk to PVE is deemed to be acceptable as we believe the spread on the leverage transaction adequately compensates for this additional risk.

 

Liquidity and Capital Resources

 

Our liquidity remains adequate to meet operating and loan funding requirements.  Interest-bearing bank balances, federal funds sold, trading securities and investment securities available-for-sale represents 25.3% of total assets at June 30, 2008.   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 and short-term liquidity needs successfully.  These needs include the ability to respond to short-term demand for funds caused by the withdrawal of deposits, maturity of repurchase agreements, extensions of credit and the payment of operating expenses.  Sources of liquidity, in addition to deposit gathering activities, include maturing loans and investments, purchase of federal funds from other financial institutions and selling securities under agreements to repurchase.  We monitor closely the level of large certificates of deposits in amounts of $100,000 or more as they tend to be more sensitive to interest rate levels, and thus less reliable sources of funding for liquidity purposes.  At June 30, 2008, the amount of certificates of deposits of $100,000 or more represented 20.7% of total deposits.  These deposits are issued to local customers many of whom have other product relationships with the bank and none are brokered deposits.  In implementing our leverage strategy, discussed previously, we funded $23.0 million of the assets acquired with brokered CDs.  The underlying CDs were in increments of less than $100,000.

 

Through the operations of our bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at

 

24



Table of Contents

 

predetermined interest rates for a specified period of time. At June 30, 2008, we had issued commitments to extend credit of $55.3 million, including $26.7 million in unused home equity lines of credit, through various types of lending arrangements. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.  We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

 

We are not aware of any trends, events or uncertainties not discussed in this report that we expect to result in a significant adverse effect on our liquidity position.  However, no assurances can be given in this regard, as rapid growth, deterioration in loan quality, and poor earnings, or a combination of these factors, could change the liquidity position in a relatively short period of time.

 

We have generally maintained a high level of liquidity and adequate capital, which along with continued retained earnings, we believe will be sufficient to fund the operations of the bank for at least the next 12 months.  We anticipate that the bank will remain a well capitalized institution for at least the next 12 months. Shareholders’ equity was 9.6% and 11.3% of total assets at June 30, 2008 and December 31, 2007, respectively. The bank maintains federal funds purchased lines in the amount of $10.0 million with several financial institutions, although these have not been utilized in 2008. The FHLB Atlanta has approved a line of credit of up to 25% of the bank’s 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 evaluate and monitor 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. The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Under the capital adequacy guidelines, regulatory capital is classified into two tiers.  These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset.  Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations.  We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.  At both the holding company and bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies.  To be considered “well-capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.

 

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Table of Contents

 

The bank’s risked-based capital ratios of Tier 1, total capital and leverage ratio were 11.6%, 12.6% and 7.5%, respectively, at June 30, 2008, as compared to 12.8%, 13.8% and 8.8%, respectively, at December 31, 2007.  The Company’s risked-based capital ratios of Tier 1, total capital and leverage ratio were 12.3%, 13.3% and 7.9%,  respectively, at June 30, 2008, as compared to 13.7%, 14.6% and 9.3%, respectively, at December 31, 2007.   This compares to required OCC and Federal Reserve regulatory capital guidelines for Tier 1 capital, total capital and leverage capital ratios of 4.0%, 8.0% and 4.0%, respectively.

 

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 

 

 

Six months ended June 30, 2008

 

Six months ended June 30, 2007

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

313,265,806

 

$

10,926,878

 

7.01

%

$

89,003,056

 

$

10,738,564

 

7.49

%

Securities:

 

200,367,722

 

5,242,709

 

5.26

%

166,247,536

 

3,912,741

 

4.75

%

Federal funds sold and securities purchased under agreements to resell

 

12,461,538

 

168,238

 

2.71

%

6,629,446

 

188,081

 

5.72

%

Total earning assets

 

526,095,066

 

16,337,825

 

6.25

%

461,880,038

 

14,839,386

 

6.48

%

Cash and due from banks

 

9,867,992

 

 

 

 

 

10,932,438

 

 

 

 

 

Premises and equipment

 

19,686,804

 

 

 

 

 

20,763,228

 

 

 

 

 

Other assets

 

49,139,858

 

 

 

 

 

50,073,794

 

 

 

 

 

Allowance for loan losses

 

(3,650,693

)

 

 

 

 

(3,328,169

)

 

 

 

 

Total assets

 

$

601,139,027

 

 

 

 

 

$

540,321,329

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

53,951,487

 

205,155

 

0.76

%

$

55,852,702

 

126,655

 

0.46

%

Money market accounts

 

37,261,505

 

429,558

 

2.32

%

41,956,312

 

659,853

 

3.17

%

Savings deposits

 

24,105,035

 

59,260

 

0.49

%

25,719,032

 

87,671

 

0.69

%

Time deposits

 

226,772,323

 

5,047,284

 

4.48

%

204,900,722

 

4,809,355

 

4.73

%

Other borrowings

 

116,026,733

 

2,122,539

 

3.68

%

72,037,227

 

1,779,501

 

4.98

%

Total interest-bearing liabilities

 

458,117,083

 

7,863,796

 

3.45

%

400,465,995

 

7,463,035

 

3.76

%

Demand deposits

 

73,093,927

 

 

 

 

 

72,210,177

 

 

 

 

 

Other liabilities

 

5,955,115

 

 

 

 

 

4,571,556

 

 

 

 

 

Shareholders’ equity

 

63,972,902

 

 

 

 

 

63,073,601

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

601,139,027

 

 

 

 

 

$

540,321,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

2.80

%

 

 

 

 

2.72

%

Net interest income/margin

 

 

 

$

8,474,029

 

3.24

%

 

 

$

7,376,351

 

3.22

%

Net interest income/margin FTE basis

 

190,514

 

$

8,664,543

 

3.31

%

195,132

 

$

7,571,483

 

3.31

%

 

26



Table of Contents

 

 

 

Three months ended June 30, 2008

 

Three months ended June 30, 2007

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

315,733,714

 

$

5,404,847

 

6.88

%

$

295,542,760

 

$

5,514,993

 

7.48

%

Securities:

 

224,207,973

 

3,006,616

 

5.39

%

163,622,491

 

1,948,259

 

4.78

%

Federal funds sold and securities purchased under agreements to resell

 

12,832,943

 

72,489

 

2.27

%

5,030,236

 

77,768

 

6.20

%

Total earning assets

 

552,774,630

 

8,483,952

 

6.17

%

464,195,487

 

7,541,020

 

6.52

%

Cash and due from banks

 

8,905,066

 

 

 

 

 

10,753,043

 

 

 

 

 

Premises and equipment

 

19,672,619

 

 

 

 

 

20,646,517

 

 

 

 

 

Other assets

 

48,922,805

 

 

 

 

 

49,935,622

 

 

 

 

 

Allowance for loan losses

 

(3,730,057

)

 

 

 

 

(3,394,429

)

 

 

 

 

Total assets

 

$

626,545,063

 

 

 

 

 

$

542,136,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

59,933,288

 

$

160,762

 

1.08

%

$

54,745,282

 

$

58,845

 

0.43

%

Money market accounts

 

34,601,433

 

165,859

 

1.93

%

39,901,896

 

316,686

 

3.18

%

Savings deposits

 

24,549,471

 

28,085

 

0.46

%

25,778,665

 

44,356

 

0.69

%

Time deposits

 

234,367,923

 

2,503,571

 

4.30

%

205,604,282

 

2,430,700

 

4.74

%

Other borrowings

 

130,342,247

 

1,139,053

 

3.51

%

74,344,261

 

922,779

 

4.98

%

Total interest-bearing liabilities

 

483,794,362

 

3,997,330

 

3.32

%

400,374,386

 

3,773,366

 

3.78

%

Demand deposits

 

73,438,747

 

 

 

 

 

73,987,342

 

 

 

 

 

Other liabilities

 

5,669,475

 

 

 

 

 

4,579,065

 

 

 

 

 

Shareholders’ equity

 

63,642,479

 

 

 

 

 

63,195,447

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

626,545,063

 

 

 

 

 

$

542,136,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

2.85

%

 

 

 

 

2.74

%

Net interest income/margin

 

 

 

$

4,486,622

 

3.26

%

 

 

$

3,767,654

 

3.26

%

Net interest income/margin FTE basis

 

93,882

 

$

4,580,504

 

3.33

%

97,721

 

$

3,865,375

 

3.34

%

 

27



Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not Applicable

 

Item 4. 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 June 30, 2008.  There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2008 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.

 

28



Table of Contents

 

PART II - OTHER INFORMATION
 

Item 1.  Legal Proceedings.

 

There are no material pending legal proceedings to which we or any of our subsidiaries are a party or of which any of our property is the subject.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

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.  At both the April 17, 2007 and January 15, 2008 meetings our board of directors increased the shares authorized to be repurchased by 50,000 for a total of 250,000.  The Board has not established an expiration date for this repurchase plan.  There was no share repurchase activity during the second quarter of 2008.  The maximum number of shares that may yet be repurchased under the plan is 42,487

 

Item 3.  Defaults Upon Senior Securities.

 

Not Applicable.

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

On May 21, 2008, First Community Corporation held its 2008 Annual Meeting of Shareholders.  There were two matters submitted to a vote of our shareholders at the meeting.  The following describes the matters voted upon at the annual meeting and sets forth the number of votes cast for and those withheld (there were no broker non-votes or abstentions).  The results of the 2008 Annual Meeting of Shareholders were as follows:

 

For Proposal No. 1  The following five directors were elected at the meeting:

 

VOTES

 

For

 

Against or Withheld

 

Thomas C. Brown

 

2,431,835

 

69,682

 

O.A. Ethridge D.M.D.

 

2,432,138

 

69,379

 

W. James Kitchens, Jr.

 

2,431,107

 

70,410

 

Roderick M. Todd, Jr.

 

2,432,078

 

69,439

 

Mitchell M. Willoughby

 

2,431,989

 

69,528

 

 

The terms of office of the following ten directors continued after the meeting:

 

Chimin J. Chao

 

 

 

James C. Leventis

 

 

 

Loretta R. Whitehead

 

 

 

J Thomas Johnson

 

 

 

Alexander Snipe, Jr.

 

 

 

Richard K. Bogan, MD

 

 

 

Michael C. Crapps.

 

 

 

Hinton G. Davis

 

 

 

Anita B. Easter

 

 

 

George H. Fann Jr. DMD

 

 

 

 

For Proposal No. 2  The ratification of appointment of Elliott Davis, LLC as our Independent Registered Public Accounting Firm there were 2,441,575 votes for and 59,942 votes against or withheld.

 

We did not submit any other matters to security holders for a vote during the three months ended June 30, 2008.

 

Item 5.  Other Information.

 

None.

 

29



Table of Contents

 

Item 6.  Exhibits.

 

Exhibit

 

Description

10.1

 

Employment Agreement by and between Michael C. Crapps and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 19, 2008).

10.2

 

Employment Agreement by and between Joseph G. Sawyer and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 19, 2008).

10.3

 

Employment Agreement by and between David K. Proctor and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 19, 2008).

10.4

 

Employment Agreement by and between Robin D. Brown and First Community Bank, N.A. dated June 17, 2008 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed June 19, 2008).

10.5

 

Employment Agreement by and between J. Ted Nissen and First Community Bank, N.A. dated June 17, 2008 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed June 19, 2008).

10.6

 

Employment Agreement by and between James C. Leventis and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed June 19, 2008).

31.1

 

Rule 13a-14(a) Certification of the Principal Executive Officer

31.2

 

Rule 13a-14(a) Certification of the Principal Financial Officer

32

 

Section 1350 Certifications

 

30



Table of Contents

 

SIGNATURES

 

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

 

 

 

FIRST COMMUNITY CORPORATION

 

(REGISTRANT)

 

 

 

 

Date:

August 13, 2008

 

By:

/s/ Michael C. Crapps

 

 

Michael C. Crapps

 

 

President and Chief Executive Officer

 

 

 

 

Date:

August 13, 2008

 

By:

/s/ Joseph G. Sawyer

 

 

Joseph G. Sawyer

 

 

Senior Vice President, Principal Financial Officer

 

31



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

10.1

 

Employment Agreement by and between Michael C. Crapps and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

10.2

 

Employment Agreement by and between Joseph G. Sawyer and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

10.3

 

Employment Agreement by and between David K. Proctor and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

10.4

 

Employment Agreement by and between Robin D. Brown and First Community Bank, N.A. dated June 17, 2008 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

10.5

 

Employment Agreement by and between J. Ted Nissen and First Community Bank, N.A. dated June 17, 2008 (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

10.6

 

Employment Agreement by and between James C. Leventis and the Company dated June 17, 2008 (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed June 19, 2008).

 

 

 

31.1

 

Rule 13a-14(a) Certification of the Principal Executive Officer

 

 

 

31.2

 

Rule 13a-14(a) Certification of the Principal Financial Officer

 

 

 

32

 

Section 1350 Certifications

 

32