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FIRST COMMUNITY CORP /SC/ - Quarter Report: 2012 September (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 September 30, 2012

 

o         Transition report pursuant to Section 13 or 15(d) of the Exchange Act

 

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 of Incorporation)

 

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

 

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of Principal Executive Offices)

 

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o  No

 

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

 

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 equity, as of the latest practicable date:  On November 13, 2012, 5,224,282 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

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Shareholders’ Equity

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 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

 

SIGNATURES

INDEX TO EXHIBITS

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

 

 

 

September 30,

 

 

 

 

 

2012

 

December 31,

 

(Dollars in thousands, except par value)

 

(Unaudited)

 

2011

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

10,485

 

$

10,599

 

Interest-bearing bank balances

 

9,284

 

5,512

 

Federal funds sold and securities purchased under agreements to resell

 

610

 

381

 

Investment securities - available for sale

 

210,734

 

201,032

 

Other investments, at cost

 

4,540

 

5,637

 

Loans held for sale

 

8,685

 

3,725

 

Loans

 

323,534

 

324,311

 

Less, allowance for loan losses

 

4,695

 

4,699

 

Net loans

 

318,839

 

319,612

 

Property, furniture and equipment - net

 

17,297

 

17,483

 

Bank owned life insurance

 

10,779

 

10,974

 

Other real estate owned

 

5,570

 

7,351

 

Intangible assets

 

211

 

365

 

Goodwill

 

571

 

571

 

Other assets

 

8,734

 

10,645

 

Total assets

 

$

606,339

 

$

593,887

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing demand

 

$

92,738

 

$

83,572

 

NOW and money market accounts

 

147,655

 

136,483

 

Savings

 

41,358

 

34,048

 

Time deposits less than $100,000

 

117,149

 

128,616

 

Time deposits $100,000 and over

 

75,565

 

81,866

 

Total deposits

 

474,465

 

464,585

 

Securities sold under agreements to repurchase

 

15,651

 

13,616

 

Federal Home Loan Bank advances

 

38,491

 

43,862

 

Junior subordinated debt

 

17,917

 

17,913

 

Other liabilities

 

5,537

 

6,015

 

Total liabilities

 

552,061

 

545,991

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; issued and outstanding
750 at September 30, 2012
11,350 at December 31, 2011

 

750

 

11,137

 

Common stock, par value $1.00 per share; 10,000,000 shares authorized; issued and outstanding
5,224,282 at September 30,2012
3,307,531 at December 31, 2011

 

5,224

 

3,308

 

Common stock warrants issued

 

560

 

560

 

Additional paid in capital

 

61,381

 

49,165

 

Restricted stock

 

(197

)

 

Accumulated deficit

 

(15,729

)

(17,603

)

Accumulated other comprehensive income

 

2,289

 

1,329

 

Total shareholders’ equity

 

54,278

 

47,896

 

Total liabilities and shareholders’ equity

 

$

606,339

 

$

593,887

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Nine

 

Nine

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

(Dollars in thousands, except per share data)

 

(Unaudited)

 

(Unaudited)

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

13,804

 

$

14,376

 

Taxable securities

 

3,194

 

4,803

 

Non taxable securities

 

475

 

51

 

Federal funds sold and securities purchased under resale agreements

 

30

 

28

 

Other

 

31

 

30

 

Total interest income

 

17,534

 

19,288

 

Interest expense:

 

 

 

 

 

Deposits

 

2,473

 

3,557

 

Federal funds sold and securities sold under agreement to repurchase

 

26

 

29

 

Other borrowed money

 

1,746

 

2,001

 

Total interest expense

 

4,245

 

5,587

 

Net interest income

 

13,289

 

13,701

 

Provision for loan losses

 

416

 

1,110

 

Net interest income after provision for loan losses

 

12,873

 

12,591

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

1,159

 

1,376

 

Mortgage origination fees

 

2,993

 

1,152

 

Investment advisory fees and non-deposit commissions

 

492

 

531

 

Gain (loss) on sale of securities

 

(62

)

274

 

Loss on sale of other assets

 

(8

)

(109

)

Fair value loss adjustments

 

(57

)

(185

)

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

 

(200

)

(54

)

Loss on early extinguishment of debt

 

(121

)

(74

)

Other

 

1,524

 

1,480

 

Total non-interest income

 

5,720

 

4,391

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

8,179

 

7,002

 

Occupancy

 

1,032

 

953

 

Equipment

 

877

 

858

 

Marketing and public relations

 

367

 

361

 

FDIC assessments

 

497

 

681

 

Other real estate expense

 

559

 

638

 

Amortization of intangibles

 

153

 

466

 

Other

 

2,679

 

2,807

 

Total non-interest expense

 

14,343

 

13,766

 

Net income before tax

 

4,250

 

3,216

 

Income taxes

 

1,303

 

963

 

Net income

 

$

2,947

 

$

2,253

 

Preferred stock dividends and accretion

 

557

 

502

 

Preferred stock redemption costs

 

119

 

 

Net income available to common shareholders

 

$

2,271

 

$

1,751

 

Basic earnings per common share

 

$

0.60

 

$

0.53

 

Diluted earnings per common share

 

$

0.60

 

$

0.53

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three

 

Three

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

(Dollars in thousands, except per share data)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

4,548

 

$

4,747

 

Taxable securities

 

853

 

1,600

 

Non taxable securities

 

226

 

18

 

Federal funds sold and securities purchased under resale agreements

 

13

 

7

 

Other

 

10

 

10

 

Total interest income

 

5,650

 

6,382

 

Interest expense:

 

 

 

 

 

Deposits

 

738

 

1,114

 

Federal funds sold and securities sold under agreement to repurchase

 

8

 

11

 

Other borrowed money

 

575

 

629

 

Total interest expense

 

1,321

 

1,754

 

Net interest income

 

4,329

 

4,628

 

Provision for loan losses

 

115

 

360

 

Net interest income after provision for loan losses

 

4,214

 

4,268

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

395

 

440

 

Mortgage origination fees

 

1,393

 

698

 

Investment advisory fees and non-deposit commissions

 

183

 

218

 

Gain (loss) on sale of securities

 

(35

)

133

 

Loss on sale of other assets

 

(22

)

(18

)

Fair value loss adjustments

 

(20

)

(60

)

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

 

 

(50

)

Loss on early extinguishment of debt

 

 

(74

)

Other

 

508

 

401

 

Total non-interest income

 

2,402

 

1,688

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

2,874

 

2,493

 

Occupancy

 

352

 

336

 

Equipment

 

307

 

287

 

Marketing and public relations

 

73

 

64

 

FDIC assessment

 

117

 

176

 

Other real estate expense

 

173

 

134

 

Amortization of intangibles

 

51

 

156

 

Other

 

876

 

912

 

Total non-interest expense

 

4,823

 

4,558

 

Net income before tax

 

1,793

 

1,398

 

Income taxes

 

573

 

441

 

Net income

 

$

1,220

 

$

957

 

Preferred stock dividends and accretion

 

220

 

167

 

Preferred stock redemption costs

 

119

 

 

Net income available to shareholders

 

$

881

 

$

790

 

Basic earnings per common share

 

$

0.19

 

$

0.24

 

Diluted earnings per common share

 

$

0.19

 

$

0.24

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Nine months ended September 30,

 

(Dollars in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

2,947

 

$

2,253

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain during the period on available-for-sale securities, net of tax expense of $418 and $1,806, respectively

 

787

 

3,427

 

 

 

 

 

 

 

Less: Reclassification adjustment for (gain)loss included in net income, net of tax (expense)benefit of $21 and $96, respectively

 

41

 

(178

)

 

 

 

 

 

 

Reclassification adjustment for other-than-temporary-impairment on securities net of tax benefit of $68 and $19, respectively

 

132

 

35

 

Other comprehensive income

 

960

 

3,284

 

Comprehensive income

 

$

3,907

 

$

5,537

 

 

 

 

Three months ended September 30,

 

(Dollars in thousands)

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

1,220

 

$

957

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain during the period on available-for-sale securities, net of tax expense of $420 and $1,035, respectively.

 

791

 

2,007

 

 

 

 

 

 

 

Less: Reclassification adjustment for (gain)loss included in net income, net of tax (expense)benefit of $12 and $47, respectively.

 

23

 

(86

)

 

 

 

 

 

 

Reclassification adjustment for other-than-temporary-impairment on securities net of tax benefit of $0 and $18, respectively.

 

 

32

 

Other comprehensive income

 

814

 

1,953

 

Comprehensive income

 

$

2,034

 

$

2,910

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

Nine Months ended September 30, 2012 and September 30, 2011

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

 

 

Common

 

Additional

 

Nonvested

 

 

 

Other

 

 

 

 

 

Preferred

 

Shares

 

Common

 

Stock

 

Paid-in

 

Restricted

 

Accumulated

 

Comprehensive

 

 

 

(Dollars and shares in thousands)

 

Stock

 

Issued

 

Stock

 

Warrants

 

Capital

 

Stock

 

Deficit

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

$

11,035

 

3,270

 

$

3,270

 

$

509

 

$

48,956

 

$

 

$

(19,732

)

$

(2,241

)

$

41,797

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,253

 

 

 

2,253

 

Other comprehensive income net of tax expense of $1,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,284

 

3,284

 

Issuance of restricted stock

 

 

 

23

 

23

 

 

 

133

 

(65

)

 

 

 

 

91

 

Amortization of compensation on restricted stock

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

 

 

26

 

Dividends: Common ($0.12 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(393

)

 

 

(393

)

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

(426

)

 

 

(426

)

Accretion

 

76

 

 

 

 

 

 

 

 

 

 

 

(76

)

 

 

 

Dividend reinvestment plan

 

 

 

11

 

11

 

 

 

57

 

 

 

 

 

 

 

68

 

Balance, September 30, 2011

 

$

11,111

 

3,304

 

$

3,304

 

$

509

 

$

49,146

 

$

(39

)

$

(18,374

)

$

1,043

 

$

46,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

11,137

 

3,308

 

$

3,308

 

$

560

 

$

49,165

 

$

 

$

(17,603

)

$

1,329

 

$

47,896

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,947

 

 

 

2,947

 

Other comprehensive income net of tax expense of $329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

960

 

960

 

Issuance of restricted stock

 

 

 

33

 

33

 

 

 

239

 

(272

)

 

 

 

 

 

Amortization compensation restricted stock

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

75

 

Issuance of common stock

 

 

 

1,875

 

1,875

 

 

 

11,917

 

 

 

 

 

 

 

13,792

 

Dividends: Common ($0.12 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(397

)

 

 

(397

)

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

(475

)

 

 

(475

)

Redemption of preferred stock

 

(10,535

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,535

)

Accretion and redemption costs

 

148

 

 

 

 

 

 

 

 

 

 

 

(201

)

 

 

(53

)

Dividend reinvestment plan

 

 

 

8

 

8

 

 

 

60

 

 

 

 

 

 

 

68

 

Balance, September 30, 2012

 

$

750

 

5,224

 

$

5,224

 

$

560

 

$

61,381

 

$

(197

)

$

(15,729

)

$

2,289

 

$

54,278

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended September 30,

 

(Dollars in thousands)

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

2,947

 

$

2,253

 

Adjustments to reconcile net income to net cash provided in operating activities:

 

 

 

 

 

Depreciation

 

639

 

634

 

Premium amortization

 

2,096

 

1,369

 

Provision for loan losses

 

416

 

1,110

 

Writedowns of other real estate owned

 

266

 

243

 

Loss on sale of other real estate owned

 

8

 

109

 

Amortization of intangibles

 

153

 

466

 

Gain (loss) on sale of securities

 

62

 

(274

)

Loss on early extinguishment of debt

 

121

 

74

 

Other-than-temporary-impairment on securities

 

200

 

54

 

Net decrease in fair value option instruments and derivatives

 

57

 

185

 

Decrease in other assets

 

1,628

 

520

 

Increase (decrease) in other liabilities

 

(529

)

292

 

Net cash provided in operating activities

 

8,064

 

7,035

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of investment securities available-for-sale and other investments

 

(89,195

)

(91,464

)

Maturity of investment securities available-for-sale

 

29,017

 

28,919

 

Proceeds from sale of securities available-for-sale and other investments

 

50,748

 

47,792

 

Increase in loans

 

(6,658

)

(4,535

)

Proceeds from sale of other real estate owned

 

3,487

 

2,141

 

Purchase of property and equipment

 

(452

)

(211

)

Proceeds from sale of land

 

 

9

 

Net cash used in investing activities

 

(13,053

)

(17,349

)

Cash flows from financing activities:

 

 

 

 

 

Increase in deposit accounts

 

9,879

 

17,815

 

Increase in securities sold under agreements to repurchase

 

2,036

 

4,241

 

Decrease in other borrowings

 

 

(20

)

Advances from the FHLB

 

1,500

 

1,500

 

Repayment of advances FHLB

 

(6,992

)

(20,945

)

Proceeds from sale Common Stock

 

13,792

 

 

Redemption of Preferred Stock

 

(10,535

)

 

Dividends paid: Common Stock

 

(397

)

(393

)

Preferred Stock

 

(475

)

(426

)

Dividend reinvestment plan

 

68

 

68

 

Net cash provided from financing activities

 

8,876

 

1,840

 

Net increase (decrease) in cash and cash equivalents

 

3,887

 

(8,474

)

Cash and cash equivalents at beginning of period

 

16,492

 

26,461

 

Cash and cash equivalents at end of period

 

$

20,379

 

$

17,987

 

Supplemental disclosure:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

4,645

 

$

5,967

 

Income taxes

 

$

 

$

 

Non-cash investing and financing activities:

 

 

 

 

 

Unrealized gain on securities

 

$

960

 

$

3,284

 

Transfer of loans to foreclosed property

 

$

1,980

 

$

3,694

 

 

See Notes to Consolidated Financial Statements

 

8



Table of Contents

 

Notes to Consolidated Financial Statements (unaudited)

 

Note 1 - Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated balance sheets, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of First Community Corporation (“the Company”), present fairly in all material respects the Company’s financial position at September 30, 2012 and December 31, 2011, the Company’s results of operations for the nine months and three months ended September 30, 2012, and the Company’s cash flows for the nine months ended September 30, 2012 and 2011. The results of operations for the nine months and three months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

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 2011 Annual Report on Form 10-K should be referred to in connection with these unaudited interim financial statements.

 

Note 2 — Earnings Per Common Share

 

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

 

 

 

Nine months

 

Three months

 

 

 

Ended September 30,

 

Ended September 30,

 

(In thousands, except price per share)

 

2012

 

2011

 

2012

 

2011

 

Numerator (Net income available to common shareholders)

 

$

2,271

 

$

1,751

 

$

881

 

$

790

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

3,780

 

3,280

 

4,693

 

3,294

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

Deferred compensation

 

 

 

2

 

 

Warrants – Treasury stock method

 

27

 

 

31

 

 

Diluted earnings per share

 

3,807

 

3,280

 

4,726

 

3,294

 

The average market price used in calculating assumed number of shares

 

$

7.84

 

$

6.45

 

$

8.27

 

$

6.19

 

 

At September 30, 2012, there were 75,022 outstanding options at an average exercise price of $19.69 and warrants for 196,000 shares at $8.69.  None of these options or warrants has an exercise price below the average market price for the three-month and nine-month periods ended September 30, 2012, therefore they are not deemed to be dilutive.  In the fourth quarter of 2011, we issued $2.5 million in 8.75% subordinated notes maturing December 16, 2019.  Interest is payable quarterly and the notes may be prepaid at anytime without penalty.  Warrants for 107,500 shares of common stock at $5.90 per share were issued in connection with the issuance of the subordinated debt.  These warrants expire December 16, 2019 and are included in dilutive securities in the table above.

 

On July 27, 2012, the Company closed its public offering of common stock.  This offering resulted in the issuance of a total of 1,875,000 shares of common stock at $8.00 per share, including 244,565 shares granted to the underwriters to cover overallotments.

 

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Note 3—Investment Securities

 

The amortized cost and estimated fair values of investment securities are summarized below:

 

AVAILABLE-FOR-SALE:

 

(Dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

September 30, 2012:

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

1,525

 

$

19

 

$

 

$

1,544

 

Mortgage-backed securities

 

121,162

 

1,813

 

509

 

122,466

 

Small Business Administration pools

 

50,170

 

850

 

89

 

50,931

 

State and local government

 

32,531

 

1,303

 

7

 

33,827

 

Corporate and other securities

 

1,932

 

35

 

1

 

1,966

 

 

 

$

207,320

 

$

4,020

 

$

606

 

$

210,734

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

31

 

$

3

 

$

 

$

34

 

Mortgage-backed securities

 

141,103

 

2,876

 

2,348

 

141,631

 

Small Business Administration pools

 

35,889

 

634

 

44

 

36,479

 

State and local government

 

19,617

 

871

 

 

20,488

 

Corporate and other securities

 

2,432

 

54

 

86

 

2,400

 

 

 

$

199,072

 

$

4,438

 

$

2,478

 

$

201,032

 

 

During the nine months ended September 30, 2012 and September 30, 2011, the Company received proceeds of $49.5 million and $47.8 million, respectively, from the sale of investment securities available-for-sale.  Gross realized gains amounted to $2.0 million and gross realized losses amounted to $2.1 million for the nine months ended September 30, 2012.  For the nine months ended September 30, 2011, gross realized gains amounted to $2.3 million and gross realized losses amounted to $2.0 million.  During the three months ended September 30, 2012 and September 30, 2011, the Company received proceeds of $470 thousand and $10.7 million, respectively, from the sale of investment securities available-for-sale.  Gross realized losses amounted to $35 thousand for the three months ended September 30, 2012.  There were no realized gains for the three months ended September 30, 2012.  For the three months ended September 30, 2011, gross realized gains amounted to $588 thousand and gross realized losses amounted to $455 thousand.

 

At September 30, 2012, corporate and other securities available-for-sale included the following at fair value: corporate bonds at $1.0 million, mutual funds at $897.2 thousand, foreign debt of $59.6 thousand and Federal Home Loan Mortgage Corporation (the “FHLMC” or “Freddie Mac”) preferred stock of $9.2 thousand.  At December 31 2011, corporate and other securities available-for-sale included the following at fair value: corporate bonds at $1.4 million, mutual funds at $904.9 thousand foreign debt of $59.0 thousand and FHLMC preferred stock of $20.9 thousand.

 

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Note 3—Investment Securities — continued

 

During the nine and three months ended September 30, 2012 and 2011, the Company recorded other-than-temporary-impairment (OTTI) losses on available-for-sale securities as follows:

 

 

 

Nine months
ended
September 30,
2012

 

Three months
ended
September 30,
2012

 

(Dollars in thousands)

 

Available-for-
sale securities

 

Available-for-
sale securities

 

Total OTTI charge realized and unrealized

 

$

415

 

$

 

OTTI recognized in other comprehensive income (non-credit component)

 

215

 

 

Net impairment losses recognized in earnings (credit component)

 

$

200

 

$

 

 

 

 

Nine months
ended
September 30,
2011

 

Three months
ended
September 30,
2011

 

(Dollars in thousands)

 

Available-for-
sale securities

 

Available-for-
sale securities

 

Total OTTI charge realized and unrealized

 

$

262

 

$

191

 

OTTI recognized in other comprehensive income (non-credit component)

 

208

 

141

 

Net impairment losses recognized in earnings (credit component)

 

$

54

 

$

50

 

 

During 2012 and 2011, OTTIs occurred for which only a portion was attributed to credit loss and recognized in earnings.  The remainder was reported in other comprehensive income.  The following is an analysis of amounts relating to credit losses on debt securities recognized in earnings during the nine months ended September 30, 2012 and 2011.

 

 

 

2012

 

2011

 

 

 

Available
for

 

Available
for

 

(Dollars in thousands) 

 

Sale

 

Sale

 

 

 

 

 

 

 

Balance at beginning of period

 

$

930

 

$

2,143

 

 

 

 

 

 

 

Other-than-temporary-impairment not previously recognized

 

173

 

50

 

 

 

 

 

 

 

Additional increase for which an other-than-temporary impairment was previously recognized related to credit losses

 

27

 

4

 

Other-than-temporary-impairment previously recognized on securities sold

 

(679

)

 

 

 

 

 

 

 

Realized losses during the period

 

(159

)

(1,284

)

Balance related to credit losses on debt securities at end of period

 

$

292

 

$

736

 

 

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Note 3—Investment Securities — continued

 

For the nine months ended September 30, 2012, there were two non-agency mortgage backed securities with OTTI in which $200 thousand of OTTI representing credit losses was recognized in earnings.  For the nine months ended September 30, 2011, there was one trust preferred security and one non-agency mortgage backed security in which $54 thousand of OTTI representing credit losses was recognized in earnings.  There was no OTTI recognized in earnings for the three months ended September 30, 2012.  For the three months ended September 30, 2011, there was $50 thousand of OTTI recognized in earnings for one non-agency mortgage backed security.  During the third quarter of 2011, the trust preferred security was sold and an additional $455 thousand loss was recorded in earnings.  In evaluating the non-agency mortgage backed securities, relevant assumptions such as prepayment rate, default rate and loss severity on a loan level basis are used in determining the expected recovery of the contractual cash flows. The assumptions are that all loans greater than 60 days delinquent will be resolved across a two-year period at loss severities based on location and category. The balance of the underlying portfolio cash flows are evaluated using ongoing assumptions for loss severities, prepayment rates and default rates. The ongoing assumptions for average prepayment rate, default rate and severity used in the valuations were approximately 5.4%, 3.3%, and 52.4%, respectively. The underlying collateral on substantially all of these securities is fixed rate residential first mortgages located throughout the United States. The underlying collateral includes various percentages of owner-occupied, as well as, investment related single-family, 1-4 family and condominium residential properties. The securities were purchased at various discounts to par value. Based on the assumptions used in valuing the securities, the Company believes the existing discount and remaining subordinated collateral provide coverage against future credit losses on the downgraded securities for which no OTTI has been recognized.

 

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Note 3—Investment Securities — continued

 

The following table shows gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2012 and December 31, 2011.

 

September 30, 2012

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

(Dollars in thousands)

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Small Business Administration Pools

 

$

7,297

 

$

80

 

$

2,692

 

$

9

 

$

9,989

 

$

89

 

Government Sponsored Enterprise mortgage-backed securities

 

15,470

 

148

 

6,157

 

55

 

21,627

 

203

 

Non-agency mortgage-backed securities

 

805

 

131

 

1,939

 

175

 

2,744

 

306

 

Corporate bonds and other

 

 

 

49

 

1

 

49

 

1

 

State and local government

 

1,335

 

7

 

 

 

1,335

 

7

 

Total

 

$

24,907

 

$

366

 

$

10,837

 

$

240

 

$

35,744

 

$

606

 

 

December 31, 2011

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

(Dollars in thousands)

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Sponsored Enterprise mortgage-backed securities

 

$

25,113

 

$

163

 

$

3,269

 

$

24

 

$

28,382

 

$

187

 

Small Business Administration pools

 

6,108

 

38

 

2,203

 

6

 

8,311

 

44

 

Non-agency mortgage-backed securities

 

574

 

3

 

13,275

 

2,158

 

13,849

 

2,161

 

Corporate bonds and other

 

940

 

60

 

524

 

26

 

1,464

 

86

 

Total

 

$

32,735

 

$

264

 

$

19,271

 

$

2,214

 

$

52,006

 

$

2,478

 

 

Government Sponsored Enterprise, Mortgage-Backed Securities: Beginning in 2008 and continuing through 2012, the bond markets and many institutional holders of bonds have come under a great deal of stress partially as a result of increasing delinquencies in the sub-prime mortgage lending market. At September 30, 2012, the Company’s wholly-owned subsidiary, First Community Bank (the “Bank”), owns mortgage-backed securities (“MBSs”) including collateralized mortgage obligations (“CMOs”) with a book value of $117.8 million and approximate fair value of $119.6 million issued by government sponsored entities (“GSEs”). Current economic conditions have impacted MBSs issued by GSEs such as the FHLMC and the Federal National Mortgage Association (the “FNMA” or “Fannie Mae”). These entities have experienced increasing delinquencies in the underlying loans that make up the MBSs and CMOs. As of September 30, 2012 and December 31, 2011, all of the MBSs issued by GSEs are classified as “Available for Sale”. Unrealized losses on these investments are not considered to be “other than temporary” and we have the intent and ability to hold these until they mature or recover the current book value. The contractual cash flows of the investments are guaranteed by the GSE. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider the investments to be OTTI at September 30, 2012.

 

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Note 3—Investment Securities — continued

 

Non-agency mortgage —backed securities: The Company also holds private label mortgage-backed securities (“PLMBSs”), including CMOs, at September 30, 2012 with an amortized cost of $3.4 million and approximate fair value of $2.9 million.  Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.

 

During the nine months ended September 30, 2012, the Company identified two PLMBS with a fair value of $2.5 million that it considered other-than-temporarily-impaired.  As prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-65, the Company has recognized an impairment charge in earnings of $199.8 thousand (credit component) during the nine months ended September 30, 2012.  The $199.8 thousand represents the estimated credit losses on these securities for the nine months ended September 30, 2012. One of the securities identified as other-than-temporarily-impaired during the nine months ended September 30, 2012 was subsequently sold after the impairment was recognized.  During the three months ended September 30, 2012, no OTTI charges were recorded in earnings for the PLMBS portfolio.  For the three and nine months ended September 30, 2011, $50 thousand and $54 thousand in OTTI charges were recorded in earnings for the PLMBS portfolio, respectively.

 

The following table summarizes as of September 30, 2012 the number of CUSIPs, par value, carrying value and fair value of the non-agency MBSs/CMOs by credit rating. The credit rating reflects the lowest credit rating by any major rating agency.

 

(Dollars in thousands)

 

Credit
Rating

 

Number
of
CUSIPs

 

Par
Value

 

Amortized
Cost

 

Fair
Value

 

AAA

 

3

 

$

189

 

$

189

 

$

188

 

AA

 

2

 

309

 

309

 

314

 

A1

 

1

 

384

 

384

 

376

 

A3

 

1

 

329

 

329

 

320

 

BBB

 

1

 

255

 

255

 

254

 

Baa1

 

1

 

77

 

76

 

76

 

Baa2

 

1

 

130

 

130

 

129

 

Below Investment Grade

 

4

 

2,070

 

1,698

 

1,281

 

Total

 

14

 

$

3,743

 

$

3,370

 

$

2,938

 

 

During the nine months ended September 30, 2012, the Company sold eight below investment grade non-agency MBSs with a total book value of approximately $11.2 million. The loss on the sale of these securities was approximately $2.1 million and has been offset by gains of the approximate same amount from the sale of certain agency MBSs and municipal securities. These sales served to significantly reduce the level of below investment grade securities held in the portfolio.

 

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Table of Contents

 

Note 3—Investment Securities — continued

 

Corporate Bonds: All of the corporate bonds held by the Company are reviewed on a quarterly basis to identify downgrades by rating agencies as well as deterioration of the underlying collateral or the issuer’s ability to service the debt obligation.  The Company owns one corporate bond as of September 30, 2012 which is rated above investment grade.  The Company does not consider this investment to be OTTI at September 30, 2012.

 

Small Business Administration Pools: These pools are guaranteed pass-thru with the full faith and credit of the United States government.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider the investments to be OTTI at September 30, 2012.

 

State and Local Governments and Other: The unrealized losses on these investments are attributable to increases in interest rates, rather than credit quality. Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider the investments to be OTTI at September 30, 2012.

 

The amortized cost and fair value of investment securities at September 30, 2012 by contractual maturity are as follows. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties.  MBSs are based on average life at estimated prepayment speeds.

 

 

 

Available-for-sale

 

(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Due in one year or less

 

$

22,623

 

$

22,675

 

Due after one year through five years

 

97,789

 

99,385

 

Due after five years through ten years

 

59,240

 

60,872

 

Due after ten years

 

27,668

 

27,802

 

 

 

$

207,320

 

$

210,734

 

 

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Table of Contents

 

Note 4—Loans

 

Loans summarized by category as of September 30, 2012 and December 31, 2011 are as follows:

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2012

 

2011

 

Commercial, financial and agricultural

 

$

19,469

 

$

20,608

 

Real estate:

 

 

 

 

 

Construction

 

11,739

 

11,767

 

Mortgage-residential

 

36,861

 

38,337

 

Mortgage-commercial

 

223,595

 

220,288

 

Consumer:

 

 

 

 

 

Home equity

 

26,778

 

27,976

 

Other

 

5,092

 

5,335

 

Total

 

$

323,534

 

$

324,311

 

 

At September 30, 2012 and December 31, 2011, there were $8.7 million and $3.7 million, respectively, of residential mortgage loans held for sale at fair value.  These loans are originated with firm purchase commitments from various investors at the time the loans are closed.  Generally, funds are received and the loans transferred to the investors within three to fourteen business days.

 

Activity in the allowance for loan losses for the nine months and three months ended September 30, 2012 and 2011 was as follows:

 

 

 

Nine months ended

 

 

 

September
30,

 

September
30,

 

(Dollars in thousands)

 

2012

 

2011

 

Balance at the beginning of period

 

$

4,699

 

$

4,911

 

Provision for loan losses

 

416

 

1,110

 

Charged off loans

 

(496

)

(1,368

)

Recoveries

 

76

 

55

 

Balance at end of period

 

$

4,695

 

$

4,708

 

 

 

 

Three months ended

 

 

 

September
30,

 

September
30,

 

(Dollars in thousands)

 

2012

 

2011

 

Balance at the beginning of period

 

$

4,742

 

$

4,716

 

Provision for loan losses

 

115

 

360

 

Charged off loans

 

(189

)

(388

)

Recoveries

 

27

 

20

 

Balance at end of period

 

$

4,695

 

$

4,708

 

 

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Table of Contents

 

Note 4—Loans-continued

 

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the nine months ended September 30, 2012 and the year ended December 31, 2011 is as follows:

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2011

 

$

331

 

$

 

$

514

 

$

1,475

 

$

521

 

$

57

 

$

1,801

 

$

4,699

 

Charge-offs

 

88

 

 

112

 

245

 

 

51

 

 

496

 

Recoveries

 

32

 

 

10

 

 

3

 

31

 

 

76

 

Provisions

 

67

 

 

80

 

(146

)

(147

)

16

 

546

 

416

 

Ending balance September 30, 2012

 

$

342

 

$

 

$

492

 

$

1,084

 

$

377

 

$

53

 

$

2,347

 

$

4,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

342

 

 

492

 

1,084

 

377

 

53

 

2,347

 

4,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance-total

 

$

19,469

 

$

11,739

 

$

36,861

 

$

223,595

 

$

26,778

 

$

5,092

 

$

 

$

323,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

15

 

$

 

$

477

 

$

9,041

 

$

 

$

11

 

$

 

$

9,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

19,454

 

$

11,739

 

$

38,384

 

$

214,554

 

$

26,778

 

$

5,081

 

$

 

$

313,990

 

 

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Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

681

 

$

905

 

$

465

 

$

1,404

 

$

325

 

$

88

 

$

1043

 

$

4,911

 

Charge-offs

 

265

 

 

186

 

861

 

285

 

99

 

 

1,696

 

Recoveries

 

31

 

 

5

 

 

5

 

23

 

 

64

 

Provisions

 

(116

)

(905

)

230

 

932

 

476

 

45

 

758

 

1,420

 

Ending balance December 31, 2011

 

$

331

 

$

 

$

514

 

$

1,475

 

$

521

 

$

57

 

$

1,801

 

$

4,699

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

1

 

$

 

$

 

$

1

 

$

 

$

 

$

 

$

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

330

 

 

514

 

1,474

 

521

 

57

 

1,801

 

4,697

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance-total

 

$

20,608

 

$

11,767

 

$

38,337

 

$

220,288

 

$

27,976

 

$

5,335

 

$

 

$

324,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

45

 

$

 

$

622

 

$

8,667

 

$

 

$

19

 

$

 

$

9,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

20,563

 

$

11,767

 

$

37,715

 

$

211,621

 

$

27,976

 

$

5,316

 

$

 

$

314,958

 

 

Loans outstanding to bank directors, executive officers and their related business interests amounted to $10.5 million and $10.4 million at September 30, 2012 and September 30, 2011, respectively. Repayments on these loans during the nine months ended September 30, 2012 were $438 thousand and loans made amounted to $112 thousand. Repayments on these loans during the nine months ended September 30, 2011 were $1.3 million and loans made amounted to $808 thousand during the same period.  Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability.

 

18



Table of Contents

 

Note 4—Loans-continued

 

The detailed activity in the allowance for loan losses as of and for the three months ended September 30, 2012 and the three months ended September 30, 2011 is as follows:

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance June 30, 2012

 

$

249

 

$

 

599

 

$

1,313

 

$

445

 

$

45

 

$

2,091

 

$

4,742

 

Charge-offs

 

26

 

 

82

 

67

 

 

14

 

 

189

 

Recoveries

 

7

 

 

1

 

 

1

 

18

 

 

27

 

Provisions

 

112

 

 

(26

)

(162

)

(69

)

4

 

256

 

115

 

Ending balance September 30, 2012

 

$

342

 

$

 

$

492

 

$

1,084

 

$

377

 

$

53

 

$

2,347

 

$

4,695

 

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance June 30, 2011

 

$

362

 

$

379

 

$

514

 

$

1,697

 

$

425

 

$

51

 

$

1,288

 

$

4,716

 

Charge-offs

 

85

 

 

 

164

 

115

 

24

 

 

388

 

Recoveries

 

13

 

 

2

 

 

1

 

4

 

 

20

 

Provisions

 

26

 

5

 

(62

)

50

 

180

 

17

 

144

 

360

 

Ending balance September 30, 2011

 

$

316

 

$

384

 

$

454

 

$

1,583

 

$

491

 

$

48

 

$

1,432

 

$

4,708

 

 

19



Table of Contents

 

Note 4—Loans-continued

 

The following table presents at September 30, 2012 and December 31, 2011 loans individually evaluated and considered impaired under FAS ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2012

 

2011

 

Total loans considered impaired

 

$

9,544

 

$

9,353

 

Loans considered impaired for which there is a related allowance for loan loss:

 

 

 

 

 

Outstanding loan balance

 

 

148

 

Related allowance

 

 

2

 

Loans considered impaired and previously written down to fair value

 

9,544

 

9,205

 

Average impaired loans

 

10,530

 

9,926

 

 

The following tables are by loan category and present at September 30, 2012 and December 31, 2011 loans individually evaluated and considered impaired under FAS ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

(Dollars in thousands)

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

September 30, 2012

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

15

 

$

46

 

$

 

$

92

 

$

1

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

477

 

505

 

 

563

 

2

 

Mortgage-commercial

 

9,041

 

9,536

 

 

9,853

 

266

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

11

 

11

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

 

 

 

 

 

Mortgage-commercial

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

15

 

$

46

 

$

 

$

92

 

$

1

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

477

 

505

 

 

563

 

2

 

Mortgage-commercial

 

9,041

 

9,536

 

 

9,853

 

266

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

11

 

11

 

 

22

 

 

 

 

$

9,544

 

$

10,098

 

$

 

$

10,530

 

$

269

 

 

The Company determined that all specific reserves for impaired loans were confirmed losses and were charged-off against outstanding loan balances during the nine months ended September 30, 2012.

 

20



Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

(Dollars in thousands)

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

December 31, 2011

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

12

 

$

19

 

$

 

$

21

 

$

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

622

 

650

 

 

656

 

4

 

Mortgage-commercial

 

8,552

 

8,975

 

 

9,066

 

382

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

19

 

19

 

 

30

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

33

 

33

 

1

 

36

 

2

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

 

 

 

 

 

Mortgage-commercial

 

115

 

115

 

1

 

117

 

8

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

45

 

52

 

 

57

 

2

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

622

 

650

 

 

656

 

4

 

Mortgage-commercial

 

8,667

 

9,090

 

 

9,183

 

390

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

19

 

19

 

 

30

 

1

 

 

 

$

9,353

 

$

9,811

 

$

2

 

$

9,926

 

$

397

 

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a quarterly basis.  The Company uses the following definitions for risk ratings:

 

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

 

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

21



Table of Contents

 

Note 4—Loans-continued

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  As of September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below.  As of September 30, 2012 and December 31, 2011, no loans were classified as doubtful.

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

 

September 30, 2012

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

Commercial, financial & agricultural

 

$

19,228

 

$

33

 

$

208

 

$

 

$

19,469

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

6,988

 

2,522

 

2,229

 

 

11,739

 

Mortgage – residential

 

34,845

 

1,257

 

759

 

 

36,861

 

Mortgage – commercial

 

205,592

 

4,149

 

13,854

 

 

223,595

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

26,110

 

575

 

93

 

 

26,778

 

Other

 

5,072

 

3

 

17

 

 

5,092

 

Total

 

$

297,835

 

$

8,539

 

$

17,160

 

$

 

$

323,534

 

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

 

December 31, 2011

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

Commercial, financial & agricultural

 

$

19,827

 

$

499

 

$

282

 

$

 

$

20,608

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

6,764

 

 

5,003

 

 

11,767

 

Mortgage – residential

 

37,063

 

305

 

969

 

 

38,337

 

Mortgage – commercial

 

200,984

 

8,009

 

11,295

 

 

220,288

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

27,692

 

38

 

246

 

 

27,976

 

Other

 

5,311

 

5

 

19

 

 

5,335

 

Total

 

$

297,641

 

$

8,856

 

$

17,814

 

$

 

$

324,311

 

 

At September 30, 2012 and December 31, 2011, non-accrual loans totaled $4.9 million and $5.4 million, respectively.

 

Troubled debt restructurings that are still accruing included in impaired loans at September 30, 2012 and December 31, 2011 amounted to $4.6 million and $3.9 million, respectively.  Troubled debt restructurings in nonaccrual status at September 30, 2012 and December 31, 2011 amounted to $1.9 million and $3.8 million, respectively.

 

There were no loans greater than ninety days delinquent and still accruing interest at September 30, 2012.  Loans greater than ninety days delinquent and still accruing interest at December 31, 2011 amounted to $25 thousand.

 

22



Table of Contents

 

Note 4—Loans-continued

 

The following tables are by loan category and present loans past due and on non-accrual status as of September 30, 2012 and December 31, 2011:

 

(Dollars in thousands)
September 30, 2012

 

30-59
Days
Past Due

 

60-89
Days Past
Due

 

Greater
than 90
Days and
Accruing

 

Nonaccrual

 

Total
Past Due

 

Current

 

Total
Loans

 

Commercial

 

$

150

 

$

49

 

$

 

$

15

 

$

214

 

$

19,255

 

$

19,469

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

11,739

 

11,739

 

Mortgage-residential

 

357

 

330

 

 

477

 

1,164

 

35,697

 

36,861

 

Mortgage-commercial

 

1,391

 

981

 

 

4,420

 

6,792

 

216,803

 

223,595

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

77

 

 

 

 

77

 

26,701

 

26,778

 

Other

 

44

 

15

 

 

11

 

70

 

5,022

 

5,092

 

Total

 

$

2,019

 

$

1,375

 

$

 

$

4,923

 

$

8,317

 

$

315,217

 

$

323,534

 

 

(Dollars in thousands)
December 31, 2011

 

30-59
Days
Past Due

 

60-89
Days Past
Due

 

Greater
than 90
Days and
Accruing

 

Nonaccrual

 

Total
Past
Due

 

Current

 

Total
Loans

 

Commercial

 

$

147

 

$

123

 

$

 

$

12

 

$

282

 

$

20,326

 

$

20,608

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

11,767

 

11,767

 

Mortgage-residential

 

391

 

95

 

 

623

 

1,109

 

37,228

 

38,337

 

Mortgage-commercial

 

1,382

 

966

 

25

 

4,749

 

7,122

 

213,166

 

220,288

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

45

 

 

 

 

45

 

27,931

 

27,976

 

Other

 

42

 

18

 

 

19

 

79

 

5,256

 

5,335

 

Total

 

$

2,007

 

$

1,202

 

$

25

 

$

5,403

 

$

8,637

 

$

315,674

 

$

324,311

 

 

23



Table of Contents

 

Note 4—Loans-continued

 

As a result of adopting the amendments in Accounting Standards Update (ASU) 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they were considered TDRs under the amended guidance.  The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology.  Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35.  The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired.  At September 30, 2012 and December 31, 2011, the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $6.5 million and $7.7 million, respectively.  An allowance for loans losses of $2 thousand was associated with those loans at December 31, 2011.  There was no allowance associated with those loans as of September 30, 2012.

 

The following table, by loan category, present loans determined to be TDRs during the three month period ended September 30, 2011.  There were no loans determined to be TDRs during the three month period ended September 30, 2012

 

 

 

For the three months ended September 30, 2011

 

Troubled Debt Restructurings
(Dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Nonaccrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

648

 

$

648

 

Total nonaccrual

 

1

 

$

648

 

$

648

 

 

 

 

 

 

 

 

 

Accrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

337

 

$

315

 

Total Accrual

 

1

 

$

337

 

$

315

 

 

 

 

 

 

 

 

 

Total TDRs

 

2

 

$

985

 

$

963

 

 

The following table, by loan category, present loans determined to be TDRs during the nine month period ended September 30, 2012.

 

 

 

For the nine months ended September 30, 2012

 

Troubled Debt
Restructurings
(Dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Nonaccrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

53

 

$

40

 

Total nonaccrual

 

1

 

$

53

 

$

40

 

 

 

 

 

 

 

 

 

Accrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

2

 

$

596

 

$

596

 

Total Accrual

 

2

 

$

596

 

$

596

 

 

 

 

 

 

 

 

 

Total TDRs

 

3

 

$

649

 

$

636

 

 

During the nine months ended September 30, 2012, the Company modified three loans that were considered to be TDRs.  The payment and interest rate were lowered for two of these loans and the payment was modified to interest only for one loan.

 

24



Table of Contents

 

Note 4—Loans-continued

 

The following table, by loan category, present loans determined to be TDRs during the nine month period ended September 30, 2011.

 

 

 

For the nine months ended September 30, 2011

 

Troubled Debt Restructurings
(Dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Nonaccrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

5

 

$

765

 

$

765

 

Commercial & Industrial

 

2

 

53

 

53

 

Total nonaccrual

 

7

 

$

818

 

$

818

 

 

 

 

 

 

 

 

 

Accrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

337

 

$

315

 

Total Accrual

 

1

 

$

337

 

$

315

 

 

 

 

 

 

 

 

 

Total TDRs

 

8

 

$

1,155

 

$

1,133

 

 

During the nine months ended September 30, 2011, the Bank modified eight loans that were considered to be TDRs.  The payment and interest rate were lowered for six of these loans, the payment was lowered for one loan and for one loan the company and guarantor were released.

 

25



Table of Contents

 

Note 4—Loans-continued

 

The following tables, by loan category, present loans determined to be TDRs in the twelve month period preceding September 30, 2011 that subsequently defaulted during the three or nine month periods ended September 30, 2011.  There were no loans determined to be TDRs in the last twelve months that subsequently defaulted during the three or nine month periods ended September 30, 2012.  Defaulted loans are those loans that are greater than 89 days past due.

 

Troubled Debt
Restructurings that

 

For the three months ended
September 30, 2011

 

subsequently defaulted this
period
(Dollars in thousands)

 

Number
of
Contracts

 

Recorded
Investment

 

 

 

 

 

 

 

Mortgage-Commercial

 

3

 

61

 

Commercial and Industrial

 

1

 

14

 

Total TDRs

 

4

 

75

 

 

Troubled Debt
Restructurings that

 

For the nine months ended
September 30, 2011

 

subsequently defaulted this
period
(Dollars in thousands)

 

Number
of
Contracts

 

Recorded
Investment

 

 

 

 

 

 

 

Mortgage-Commercial

 

3

 

61

 

Commercial and Industrial

 

1

 

14

 

Total TDRs

 

4

 

75

 

 

During the three and nine months ended September 30, 2011, four loans that had previously been restructured defaulted.  A loan is considered to have defaulted when it becomes 89 days past due.

 

In the determination of the allowance for loan losses, all TDRs are reviewed to ensure that one of the three proper valuation methods (fair market value of the collateral, present value of cash flows, or observable market price) is adhered to.  Each non-accrual loan is written down to its corresponding collateral value.  All TDR accruing loans that have a loan balance which exceeds the present value of cash flow will have a specific allocation.  All nonaccrual loans are considered impaired.  Under ASC 310-10, a loan is impaired when it is probable that the Company will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement.

 

Note 5 - Recently Issued Accounting Pronouncements

 

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and or disclosure of financial information by the Company.

 

In September 2011, the Intangibles topic was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. These amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

 

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have

 

26



Table of Contents

 

Note 5 - Recently Issued Accounting Pronouncements-continued

 

the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

 

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements.

 

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in shareholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

 

In July 2012, the Intangibles topic was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that indefinite-lived intangible assets are impaired. If it is determined to be more likely than not that indefinite-lived intangible assets are impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments are not expected to have a material effect on the Company’s financial statements.

 

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.

 

27



Table of Contents

 

Note 6 — Fair Value of Financial Instruments

 

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 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. ASC 820 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 l

 

Quoted prices in active markets for identical assets or liabilities.

 

 

 

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 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.

 

FASB ASC 825-10-50 “Disclosure about Fair Value of Financial Instruments”, requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below.

 

Cash and short term investments—The carrying amount of these financial instruments (cash and due from banks, interest-bearing bank balances, federal funds sold and securities purchased under agreements to resell) approximates fair value. All mature within 90 days and do not present unanticipated credit concerns and are classified as Level 1.

 

Investment Securities—Measurement is on a recurring basis based upon quoted market prices, if available.  If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for prepayment assumptions, projected credit losses, and liquidity.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, or by dealers or brokers in active over-the-counter markets.  Level 2 securities include mortgage-backed securities issued both by government sponsored enterprises and private label mortgage-backed securities.  Generally these fair values are priced from established pricing models.  Level 3 securities include corporate debt obligations and asset—backed securities that are less liquid or for which there is an inactive market.

 

Loans Held for Sale— The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in by price with the investors on the same day that the loan was locked in with the company’s customers. Therefore, these loans present very little market risk for the Company and are classified as Level 2.  The carrying amount of these loans approximates fair value.

 

Loans—The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities and are classified as Level 2. As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.  Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs.

 

Other Real Estate Owned (OREO) — OREO is carried at the lower of carrying value or fair value on a non-recurring basis.  Fair value is based upon independent appraisals or management’s estimation of the collateral and is considered a Level 3 measurement.

 

28



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

Accrued Interest Receivable—The fair value approximates the carrying value and is classified as Level 1.

 

Interest rate swap—The fair value approximates the carrying value and is classified as Level 3.

 

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.  Deposits are classified as Level 2.

 

Federal Home Loan Bank Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms and are classified as Level 2.

 

Short Term Borrowings—The carrying value of short term borrowings (securities sold under agreements to repurchase and demand notes to the Treasury) approximates fair value.  These are classified as Level 2.

 

Junior Subordinated Debentures—The fair values of junior subordinated debentures is estimated by using discounted cash flow analyses based on incremental borrowing rates for similar types of instruments.  These are classified as Level 2.

 

Accrued Interest Payable—The fair value approximates the carrying value and is classified as Level 1.

 

Commitments to Extend Credit—The fair value of these commitments is immaterial because their underlying interest rates approximate market.

 

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of September 30, 2012 are as follows:

 

 

 

September 30, 2012

 

 

 

Carrying

 

Fair Value

 

(Dollars in thousands)

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and short term investments

 

$

20,379

 

$

20,379

 

$

20,379

 

$

 

$

 

Available-for-sale securities

 

210,734

 

210,734

 

906

 

209,828

 

 

Other investments, at cost

 

4,540

 

 

 

 

 

Loans held for sale

 

8,685

 

8,685

 

 

8,685

 

 

Loans receivable

 

323,534

 

327,786

 

 

318,242

 

9,544

 

Allowance for loan losses

 

4,695

 

 

 

 

 

Net loans

 

318,839

 

327,786

 

 

318,242

 

9,544

 

Accrued interest

 

2,074

 

2,074

 

2,074

 

 

 

Interest rate swap

 

(418

)

(418

)

 

 

(418

)

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

92,738

 

$

92,738

 

$

 

$

92,738

 

$

 

NOW and money market accounts

 

147,655

 

147,655

 

 

147,655

 

 

Savings

 

41,358

 

41,358

 

 

41,358

 

 

Time deposits

 

192,714

 

194,605

 

 

194,605

 

 

Total deposits

 

474,465

 

476,356

 

 

476,356

 

 

Federal Home Loan Bank Advances

 

38,491

 

44,619

 

 

44,619

 

 

Short term borrowings

 

15,651

 

15,651

 

 

15,651

 

 

Junior subordinated debentures

 

17,917

 

17,917

 

 

17,917

 

 

Accrued interest payable

 

1,225

 

1,225

 

1,225

 

 

 

 

29



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2011 are as follows:

 

 

 

December 31, 2011

 

(Dollars in thousands)

 

Carrying
Amount

 

Fair
 Value

 

Financial Assets:

 

 

 

 

 

Cash and short term investments

 

$

16,492

 

$

16,492

 

Available-for-sale securities

 

201,032

 

201,032

 

Other investments, at cost

 

5,637

 

 

Loans held for sale

 

3,725

 

3,725

 

Loans receivable

 

324,311

 

324,204

 

Allowance for loan losses

 

4,699

 

 

Net loans

 

319,612

 

324,204

 

Accrued interest

 

1,914

 

1,914

 

Interest rate swap

 

(602

)

(602

)

Financial liabilities:

 

 

 

 

 

Non-interest bearing demand

 

$

83,572

 

$

83,572

 

NOW and money market accounts

 

136,483

 

136,483

 

Savings

 

34,048

 

34,048

 

Time deposits

 

210,482

 

214,437

 

Total deposits

 

464,585

 

468,540

 

Federal Home Loan Bank Advances

 

43,862

 

50,238

 

Short term borrowings

 

13,616

 

13,616

 

Junior subordinated debentures

 

17,913

 

17,913

 

Accrued interest payable

 

1,624

 

1,624

 

 

30



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The following tables reflect the changes in fair values for the nine and three-month periods ended September 30, 2012 and 2011 and where these changes are included in the income statement:

 

(Dollars in thousands)

 

 

 

Nine months ended
September 30,

 

Three months ended
 September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Description

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Interest rate swap

 

$

(57

)

$

(185

)

$

(20

)

$

(60

)

Total

 

$

(57

)

$

(185

)

$

(20

)

$

(60

)

 

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2012 and December 31, 2011 that are measured on a recurring basis.  There were no liabilities carried at fair value as of September 30, 2012 or December 31, 2011 that are measured on a recurring basis.

 

(Dollars in thousands)

 

Description

 

September
30, 2012

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

1,544

 

$

 

$

1,544

 

$

 

Mortgage-backed securities

 

122,466

 

 

122,466

 

 

Small Business Administration securities

 

50,931

 

 

50,931

 

 

State and local government

 

33,827

 

 

33,827

 

 

Corporate and other securities

 

1,966

 

906

 

1,060

 

 

 

 

210,734

 

906

 

209,828

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap/swap

 

(418

)

 

 

(418

)

Total

 

$

210,316

 

$

906

 

$

209,828

 

$

(418

)

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description

 

December
31, 2011

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

34

 

$

 

$

34

 

$

 

Mortgage backed securities

 

141,631

 

 

141,631

 

 

Small Business Administration securities

 

36,479

 

 

36,479

 

 

State and local government

 

20,488

 

 

20,488

 

 

Corporate and other securities

 

2,400

 

926

 

1,474

 

 

 

 

201,032

 

926

 

200,106

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap/floor

 

(602

)

 

 

(602

)

Total

 

$

200,430

 

$

926

 

$

200,106

 

$

(602

)

 

31



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The following tables reconcile the changes in Level 3 financial instruments for the nine and three months ended September 30, 2012, that are measured on a recurring basis.

 

(Dollars in thousands)

 

Interest rate
Cap/Floor/Swap

 

Beginning Balance December 31, 2011

 

$

(602

)

Total gains or losses (realized/unrealized)

 

 

 

Included in earnings

 

(57

)

Included in other comprehensive income

 

 

Purchases, issuances, and settlements

 

241

 

Transfers in and/or out of Level 3

 

 

Ending Balance September 30, 2012

 

$

(418

)

 

 

 

 

(Dollars in thousands)

 

Interest rate
Cap/Floor/Swap

 

Beginning Balance June 30, 2012

 

$

(479

)

Total gains or losses (realized/unrealized)

 

 

 

Included in earnings

 

(20

)

Included in other comprehensive income

 

 

Purchases, issuances, and settlements

 

81

 

Transfers in and/or out of Level 3

 

 

Ending Balance September 30, 2012

 

$

(418

)

 

32



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2012 and December 31, 2011 that are measured on a non-recurring basis.

 

(Dollars in thousands)

 

Description 

 

September 30,
2012

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

15

 

$

 

$

 

$

15

 

Real estate:

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

477

 

 

 

477

 

Mortgage-commercial

 

9,041

 

 

 

9,041

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

Other

 

11

 

 

 

11

 

Total impaired

 

9,544

 

 

 

9,544

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Construction

 

301

 

 

 

301

 

Mortgage-residential

 

438

 

 

 

438

 

Mortgage-commercial

 

4,831

 

 

 

4,831

 

Total other real estate owned

 

5,570

 

 

 

5,570

 

Total

 

$

15,114

 

$

 

$

 

$

15,114

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description 

 

December 31,
2011

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

45

 

$

 

$

 

$

45

 

Real estate:

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

622

 

 

 

622

 

Mortgage-commercial

 

8,667

 

 

 

8,667

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

Other

 

19

 

 

 

19

 

Total impaired

 

9,353

 

 

 

9,353

 

Other real estate owned:

 

 

 

 

 

 

 

Construction

 

2,156

 

 

 

2,156

 

Mortgage-residential

 

4,278

 

 

 

4,278

 

Mortgage-commercial

 

917

 

 

 

917

 

Total other real estate owned

 

7,351

 

 

 

7,351

 

Total

 

$

16,704

 

$

 

$

 

$

16,704

 

 

33



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

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 value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO.  This internal process would consist of evaluating the underlying collateral to independently obtained comparable properties.  With respect to less complex or smaller credits, an internal evaluation may be performed.  Generally the independent and internal evaluations are updated annually.  Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property. The aggregate amount of impaired loans was $9.5 million and $9.4 million for the nine months ended September 30, 2012 and year ended December 31, 2011, respectively.

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

 

Fair Value as
of September
30, 2012

 

Valuation Technique

 

Significant
Unobservable
Inputs

 

Significant
Unobservable
Inputs

 

Interest Rate Swap

 

$

(418

)

Discounted cash flows

 

Weighted Average Credit Factor

 

3.20%

 

 

 

 

 

 

 

 

 

 

 

 

OREO

 

$

5,570

 

Appraisal Value/Comparison Sales/Other estimates

 

Appraisals and or sales of comparable properties

 

Appraisals discounted 6% to 16% for sales commissions and other holding cost

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

9,544

 

Appraisal Value/Discounted Cash Flows

 

Appraisals and or sales of comparable properties

 

Appraisals discounted 6% to 16% for sales commissions and other holding cost

 

 

34



Table of Contents

 

Note 7 — Subsequent Events

 

Effective October 1, 2012, the Bank converted from a national bank charter to a South Carolina state bank charter and changed its name from First Community Bank, N.A. to First Community Bank.

 

On August 29, 2012, we repurchased $3.78 million of our Series T preferred stock from the U.S. Treasury through a modified Dutch auction process.  This represented 3,780 shares of the original 11,350 shares of preferred stock sold to the U.S. Treasury in November 2008 pursuant to the TARP Capital Purchase Program.  The remaining 7,570 shares of Series T preferred stock were purchased in this same auction by third party investors unrelated to the Company.  As of October 8, 2012, we have repurchased or redeemed the remaining shares of Series T preferred stock from the third party investors.  The financial results reported for the third quarter include non-recurring expenses related to this matter in the amount of $119 thousand including attorney costs, CPA costs, and U.S. Treasury’s counsel’s costs.  In addition, we recorded a charge for the remaining discount accretion of approximately $159 thousand.

 

On October 25, 2012, the U.S. Treasury accepted our bid to repurchase the warrant to purchase 195,915 shares of our common stock issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program.  The repurchase price agreed upon was $297,500. The repurchase transaction was completed on November 1, 2012.  The repurchase of the warrant, from the U.S. Treasury has completely eliminated its equity stake in the Company through the TARP Capital Purchase Program.

 

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements.  Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.  Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events other than disclosed above occurred requiring accrual or disclosure.

 

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.  Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company.  Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated 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,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements.  Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission (the “SEC”) and the following:

 

·                          reduced earnings due to higher credit losses generally and specifically because losses in the sectors of our loan portfolio secured by real estate are greater than expected due to economic factors, including, but not limited to, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

·                          the amount of our loan portfolio collateralized by real estate and weaknesses in the real estate market;

·                          restrictions or conditions imposed by our regulators on our operations may make it more difficult for us to achieve our goals, including the potential that the regulatory agencies may require higher levels of capital above the current standard regulatory-mandated minimums, including the impact of the proposed capital rules under Basel III;

·                          reduced earnings due to higher other-than-temporary impairment charges resulting from additional decline in the value of our securities portfolio, specifically as a result of increasing default rates, and loss severities on the underlying real estate collateral;

·                          the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

·                          results of examinations by our regulatory authorities, including the possibility that the regulatory authorities

 

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may, among other things, require us to increase our allowance for loan losses or write-down assets;

·                          significant 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, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and regulations adopted thereunder, changes in federal and/or state tax laws or interpretations thereof by taxing authorities, including potential negative economic developments that may occur if certain federal tax reductions expire and spending cuts go into effect as currently scheduled, and other governmental initiatives affecting the financial services industry;

·                          general economic conditions, either nationally or regionally and especially in our primary service area, being less favorable than expected resulting in, among other things, a deterioration in credit quality;

·                          changes occurring in business conditions and inflation;

·                          increased funding costs due to market illiquidity, increased competition for funding, and/or increased regulatory requirements with regard to funding;

·                          changes in deposit flows;

·                          changes in technology;

·                          changes in monetary and tax policies, including confirmation of the income tax refund claims received by the Internal Revenue Service (“IRS”);

·                          changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board and the Financial Accounting Standards Board;

·                          the rate of delinquencies and amounts of loans charged-off;

·                         the rate of loan growth in recent years and the lack of seasoning of a portion of our loan portfolio;

·                          our ability to maintain appropriate levels of capital and to comply with our higher individual minimum capital ratios;

·                          our ability to attract and retain key personnel;

·                          our ability to retain our existing clients, including our deposit relationships;

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

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

·                          other risks and uncertainties detailed from time to time in our filings with the SEC.

 

These risks are exacerbated by the developments since 2008 in national and international financial markets, and we are unable to predict what effect continued uncertainty in market conditions will have on the Company.  Beginning in 2008 and continuing into 2012, the capital and credit markets have experienced severe levels of volatility and disruption.  During the first nine months of 2012, economic conditions, while slow by historical standards and still fluctuating on a day-to-day basis, have shown general signs of stabilization. However, as a result of U.S. government fiscal challenges, continued volatility in European sovereign and bank debt, slow improvement in domestic employment conditions and the economic and monetary policy statements by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), it is difficult to predict if this stabilization is indicative of a lasting trend. There can be no assurance that these challenging developments of the past few years will not further materially and adversely affect our business, financial condition and results of operations.

 

All forward-looking statements in this report are based on information available to us as of the date of this report.  Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations will be achieved.  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 nine months and three months ended September 30, 2012 as compared to the nine month and three month periods ended September 30, 2011 and also analyzes our financial condition as of September 30, 2012 as compared to December 31, 2011.  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.

 

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

 

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against our operating earnings. In the following section we have included a discussion of this process, as well as several tables describing our allowance for loan losses and the allocation of this allowance among our various categories of loans.

 

In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers.  We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

 

During the third quarter of 2012 and October 2012, we finalized the following significant four events:

 

·                  On July 27, 2012, the Company closed its public offering of common stock.  The offering resulted in the issuance of a total of 1.875 million shares of common stock at $8.00 per share, resulting in gross proceeds of $15 million, as compared to our original target of $12.5 million, and  net proceeds of approximately $13.8 million.  The investors in the offering consisted of a blend of institutional and retail investors.  The offering was over-subscribed and priced at the closing price of our stock on the day of the pricing of the offering.  We believe that this offering represents the only successfully executed underwritten public offering of common stock in a capital raising offering by a bank in the Carolinas with $1 billion or less in total assets in more than five years.

·                  On August 29, 2012, we repurchased $3.78 million of our Series T preferred stock from the U.S. Treasury through a modified Dutch auction process.  This represented 3,780 shares of the original 11,350 shares of preferred stock sold to the U.S. Treasury in November 2008 pursuant to the TARP Capital Purchase Program.  The remaining 7,570 shares of Series T preferred stock were purchased in this same auction by third party investors unrelated to the Company.  The auction price was $982.83 per share, which we believe was the highest price paid through that date for a company’s shares in the Treasury’s TARP preferred stock auctions.  As of October 8, 2012, we have repurchased or redeemed the remaining shares of Series T preferred stock from the third party investors.  The financial results reported for the third quarter include non-recurring expenses related to this matter in the amount of $119 thousand including attorney costs, CPA costs, and U.S. Treasury underwriter costs.  In addition, we recorded a charge for the remaining discount accretion of approximately $159 thousand.

·                  In addition, effective October 1, 2012, we completed a planned conversion from a national bank charter to a state bank charter as a non-member bank.  The conversion will reduce certain regulatory examination cost in the future.

·                  On October 25, 2012, the U.S. Treasury accepted our bid to repurchase the warrant to purchase 195,915 shares of our common stock issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program.  The repurchase price agreed upon was $297,500.  The repurchase transaction was completed on November 1, 2012.  The repurchase of the warrant, from the U.S. Treasury has completely eliminated its equity stake in the Company through the TARP Capital Purchase Program.

 

In addition to the events described above, the following discussion and analysis 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 statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of September 30, 2012 and our notes included in the consolidated financial statements in our 2011 Annual Report on Form 10-K as filed with the SEC.

 

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,

 

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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.

 

The evaluation and recognition of OTTI on certain investments, including our private label MBSs and other corporate debt security holdings, requires significant judgment and estimates.  Some of the more critical judgments supporting the evaluation of OTTI include projected cash flows including prepayment assumptions, default rates and severities of losses on the underlying collateral within the security.  Under different conditions or utilizing different assumptions, the actual OTTI recognized by us may be different from the actual amounts recognized in our consolidated financial statements.  See Note 3 to the financial statements for the disclosure of certain assumptions used as well as OTTI recognized in the financial statements during the nine and three months ended September 30, 2012 and 2011.

 

Recent Regulatory Developments

 

As described above, effective October 1, 2012, the Bank converted from a national bank charter to a South Carolina state bank charter and changed its name from First Community Bank, N.A. to First Community Bank.  As a national bank, the Bank’s primary regulator was the Office of the Comptroller of the Currency (the “OCC”).  As a South Carolina state chartered bank, the Bank’s primary federal regulator is now the Federal Deposit Insurance Corporation (the “FDIC”).

 

Following a recent on-site examination of the Bank, the OCC notified the Bank that, effective June 28, 2012, the Bank is no longer subject to the Formal Written Agreement that it entered into with the OCC on April 6, 2010 (the “Formal Agreement”). The Formal Agreement was based on the findings of the OCC during a 2009 on-site examination of the Bank.  As reflected in the Formal Agreement, the OCC’s primary concern with the Bank was driven by the rating agencies downgrades of non-agency MBSs in its investment portfolio.  These securities, purchased in 2004 through 2008, were all rated AAA by the rating agencies at the time of purchase; however, they were impacted by the economic recession and the stress on the residential housing sector and were subsequently downgraded, many to below investment grade.  As of September 30, 2012, the Bank had reduced the non-agency MBSs in its investment portfolio that are rated below investment grade to $1.6 million.

 

The OCC also notified the Bank that, effective June 28, 2012, it is no longer subject to the Individual Minimum Capital Ratios established for the Bank on February 24, 2010, which had required the Bank to maintain a Tier 1 leverage capital ratio of at least 8.00%, a Tier 1 risk-based capital ratio of at least 10.00%, and a total risk-based capital ratio of at least 12.00%.  The general regulatory minimums to be well-capitalized are a Tier 1 leverage capital ratio of at least 5.00%, a Tier 1 risk-based capital ratio of at least 6.00%, and a total risk-based capital ratio of at least 10.00%.  These regulatory capital ratios for the Bank were 10.08%, 17.13% and 18.39%, respectively, as of September 30, 2012. The Bank is well-capitalized for regulatory purposes.

 

In addition, the Federal Reserve notified the Company that, effective July 10, 2012, the Company is no longer subject to the MOU.

 

Comparison of Results of Operations for Nine Months Ended September 30, 2012 to the Nine Months Ended September 30, 2011

 

Net Income

 

Our net income for the nine months ended September 30, 2012 was $2.9 million, or $0.60 diluted earnings per common share, as compared to $2.3 million, or $0.53 diluted earnings per common share, for the nine months ended September 30, 2011.  The increase in net income between the two periods is primarily due to a lower provision for loan losses and an increase of $1.3 million in non-interest income.  These were partially offset by a decrease of $412 thousand in net-interest income and a $577 thousand increase in non- interest expense during the nine months ended September 30, 2012 as compared to the same period in 2011.  Average earning assets increased by $2.4 million in the first nine months of 2012 as compared to the same period in 2011.  Average earning assets were $552.5 million during the nine months ended September 30, 2012 as compared to $550.1 million during the nine months ended September 30, 2011.  The slight increase in average earning assets was primarily a result of the inclusion of the common stock offering proceeds in average earning assets during part of this period prior to redeeming the Series T preferred stock noted above.

 

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Net Interest Income

 

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 nine month periods ended September 30, 2012 and 2011, along with average balances and the related interest income and interest expense amounts.

 

Net interest income was $13.3 million for the nine months ended September 30, 2012 as compared to $13.7 million for the nine months ended September 30, 2011.  This decrease was primarily due to the decrease in earning assets.  The net interest margin on a taxable equivalent basis decreased 7 basis points, from 3.33% as of September 30, 2011 to 3.26% as of September 30, 2012.  The yield on earning assets decreased by 45 basis points in the first nine months of 2012 as compared to the same period in 2011. The yield on earning assets for the nine months ended September 30, 2012 and 2011 was 4.24% and 4.69%, respectively.  The cost of interest-bearing liabilities during the first nine months of 2012 was 1.25% as compared to 1.58% in the same period of 2011, resulting in a 33 basis points decrease. Continued low loan demand has resulted in loans comprising 59.8% of average earning assets in the first nine months of 2012 as compared to 60.0% in the same period of 2011.  The relatively flat level loans as well as reinvesting cash flows from maturing loans and investments at interest rates that have continued to decline over the last year have resulted in the 45 basis point decline in the yield on earning assets during the two periods.  Our cost of funds has declined by 33 basis points on average in the first nine months of 2012 as compared to the same period of 2011.  Interest-bearing transaction accounts, money market accounts and savings deposits, which are typically our lower costing funds, represent 39.5% of our average interest bearing liabilities during the first nine months of 2012 as compared to 34.2% in the same period of 2011.  Time deposits and borrowed funds, typically the higher costing funds, represent 60.5% of our average interest-bearing funds in the first nine months of 2012 as compared to 65.8% during the same period in 2011.  Throughout the first nine months of 2012, we continued to focus on controlling the growth of the balance sheet and shifting our funding from higher cost certificates of deposit to “pure deposits” (deposits other than certificates of deposits).  The improvement in the overall mix of our funding sources has contributed to the reduction in our cost of funds during the first nine months of 2012 as compared to the same period in 2011.

 

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Provision and Allowance for Loan Losses

 

At September 30, 2012 and December 31, 2011, the allowance for loan losses was $4.7 million.  This represented 1.45% of total loans at both September 30, 2012 and December 31, 2011.  Our provision for loan losses was $416 thousand for the nine months ended September 30, 2012 as compared to $1.1 million for the nine months ended September 30, 2011.  This provision is made based on our assessment of general loan loss risk and asset quality.  The allowance for loan losses represents an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible.  Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate.  Our determination of the allowance for loan losses is based on evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, the experience ability and depth of lending personnel, economic conditions (local and national) 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.

 

The decrease in the provision for loan losses for the first nine months of 2012 as compared to the same period in 2011 is a result of a continuation of moderating levels of classified and non-performing loans as well as some moderate improvement in economic conditions, including stabilizing unemployment levels, in our markets. Our loan portfolio consists of a large percentage of real estate secured loans.  Real estate values continue to be adversely impacted as a result of the economic downturn over the last several years.  Impaired values of the underlying real estate collateral as well as continued slowdown in both residential and commercial real estate sales impacts our ability to sell collateral upon foreclosure.  Although there are signs in our market that this slowdown is moderating, there is a risk that this trend will continue.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.  If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.

 

Non-performing assets were $10.5 million (1.73% of total assets) at September 30, 2012 as compared to $9.5 million (1.6% of total assets), $10.8 million (1.79% of total assets) and $12.8 million (2.15% of total assets) at June 30, 2012, March 31, 2012 and December 31, 2011, respectively. The net increase of $1.0 million in non-performing assets at September 30, 2012 on a linked quarter basis is primarily attributed to the net effect of the inflow of three new non-accrual loans in the approximate amount of $1.6 million, the movement of another three loans from non-accrual to Other Real Estate Owned (“OREO”) status in the amount of $1.0 million, and the sale of OREO properties in the amount of approximately $375 thousand. While we believe these ratios are favorable in comparison to current industry results nationally and specifically in our local markets, we continue to be concerned about the impact of this economic environment on our customer base of local businesses and professionals.  There were 26 loans, totaling $4.9 million, included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2012. The largest with a carrying value of $1.4 million is secured by a first lien on an owner occupied commercial business property located in the midlands of South Carolina.  The average balance of the remaining 24 loans is approximately $145 thousand and the majority of these loans are secured by first mortgage liens. At the time the loans are placed in non-accrual status, we typically obtain an updated appraisal and, if the loan balance exceeds fair value, write the balance down to the fair value.  At September 30, 2012, we had no loans delinquent more than 90 days and still accruing interest, and loans totaling $3.4 million that were delinquent 30 days to 89 days representing 1.05% of total loans.

 

Our management continuously monitors non-performing, classified and past due loans, to identify deterioration regarding the condition of these loans. At September 30, 2012, we have identified two loan relationships in the amount of $1.7 million that are current as to principal and interest and not included in non-performing assets that could represent potential problem loans.  These balances are included as substandard loans in Note 4 of the financial statements.

 

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

 

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ratings of loans within the portfolio.  This allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The annualized weighted average loss ratios over the 24 month period ended September 30, 2012 for loans classified substandard, special mention and pass have been approximately 3.43%, 1.46% and 0.24%, respectively. The qualitative factors have been established based on certain assumptions made as a result of the current local economic conditions and as conditions change are adjusted to be directionally consistent with these changes. 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.  The unallocated portion of the allowance is composed of factors based on management’s evaluation of various conditions that are not directly measured in the estimation of probable losses through the experience formula or specific allowances.  The unallocated allowance of the portfolio is primarily identified through discussions with senior credit management and through consideration of various portfolio specifics and other uncertainties outside of our markets that could impact the risk inherent in the portfolio.  These include factors such as uncertainty as to a sustainable economic recovery, ongoing global debt crisis and sustained levels of high national unemployment.  The unallocated portion of the allowance as a percentage of the total allowance has grown over the last several years.  Given these uncertainties in economic conditions and particularly real estate valuations, we do not believe it would be prudent to reduce substantially the overall level of our allowance at this time.  The unallocated portion as a percentage of the loan portfolio has grown recently, primarily as a result of higher historical loss periods dropping out of our overall analysis accompanied by a relatively flat loan portfolio.  As economic conditions show sustainable improvement, we believe the unallocated portion of the allowance should decrease as a percentage of the total allowance. In the near term, however, this percentage may continue to increase slightly.

 

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.

 

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The following table summarizes the activity related to our allowance for loan losses:

 

Allowance for Loan Losses

 

 

 

Nine months Ended
September 30,

 

(Dollars in thousands)

 

2012

 

2011

 

Average loans outstanding (including loans held for sale)

 

$

330,263

 

$

329,843

 

Loans outstanding at period end

 

$

323,534

 

$

324,233

 

Non-performing assets:

 

 

 

 

 

Nonaccrual loans

 

$

4,923

 

$

3,408

 

Loans 90 days past due still accruing

 

 

 

Foreclosed real estate

 

5,570

 

8,269

 

Total non-performing assets

 

$

10,493

 

$

11,677

 

 

 

 

 

 

 

Beginning balance of allowance

 

$

4,699

 

$

4,911

 

Loans charged-off:

 

 

 

 

 

Construction and development

 

 

 

1-4 family residential mortgage

 

112

 

142

 

Multi-family residential

 

 

 

Non-residential real estate

 

245

 

683

 

Home equity

 

 

247

 

Commercial

 

88

 

239

 

Installment & credit card

 

51

 

57

 

Total loans charged-off

 

496

 

1,368

 

Recoveries:

 

 

 

 

 

1-4 family residential mortgage

 

10

 

4

 

Non-residential real estate

 

 

 

Home equity

 

3

 

4

 

Commercial

 

32

 

27

 

Installment & credit card

 

31

 

20

 

Total recoveries

 

76

 

55

 

Net loan charge offs

 

420

 

1,313

 

Provision for loan losses

 

416

 

1,110

 

Balance at period end

 

$

4,695

 

$

4,708

 

 

 

 

 

 

 

Net charge -offs to average loans

 

0.13

%

0.40

%

Allowance as percent of total loans

 

1.45

%

1.45

%

Non-performing assets as % of total assets

 

1.73

%

1.92

%

Allowance as % of non-performing assets

 

44.74

%

40.32

%

 

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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

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

% of
loans in

 

 

 

% of
loans in

 

(Dollars in thousands)

 

Amount

 

Category

 

Amount

 

Category

 

Commercial, Financial and Agricultural

 

$

342

 

6.0

%

$

331

 

6.4

%

Real Estate — Construction

 

 

3.6

%

 

3.6

%

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

Commercial

 

1,084

 

69.1

%

1,475

 

67.9

%

Residential

 

492

 

11.4

%

514

 

11.8

%

Consumer:

 

 

 

 

 

 

 

 

 

Home Equity

 

377

 

8.3

%

521

 

8.6

%

Other

 

53

 

1.6

%

57

 

1.7

%

Unallocated

 

2,347

 

N/A

 

1,801

 

N/A

 

Total

 

$

4,695

 

100.0

%

$

4,699

 

100.0

%

 

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.

 

Non-interest Income and Non-interest Expense

 

Non-interest income during the first nine months of 2012 was $5.7 million as compared to $4.4 million during the same period in 2011.  Deposit service charges for the nine months ended September 30, 2012 were $1.2 million, a decrease of $217 thousand from $1.4 million for the nine months ended September 30, 2011.  This decrease results from lower fees on our Overdraft Privilege (ODP) product.  Mortgage origination fees increased $1.8 million primarily as a result of the addition of Palmetto South Mortgage Corporation (“Palmetto South”) in the third quarter of 2011 as well as continued refinancing activity as a result of the historically low interest rate environment.  In the nine months ended September 30, 2011, we had gains on sale of securities in the amount of $274 thousand, as compared to a loss of $62 thousand in the first nine months of 2012.  During the nine months ended September 30, 2012 and 2011, we sold certain non-agency MBSs that were rated below investment grade.  During the first nine months of 2012, we sold eight below investment grade non-agency MBSs and one investment grade corporate security with a total book value of approximately $11.7 million.  The loss on the sales amounted to approximately $2.1 million and was offset by gains of the approximate same amount from the sale of certain agency MBSs and municipal securities.  The sales in the first nine months of 2011 also related primarily to the sale of certain non-agency MBSs that had been previously downgraded to below investment grade.  The sales in the first nine months of 2012 and 2011 served to significantly reduce the level of securities on our balance sheet that are rated below investment grade.  The cash generated from these transactions were reinvested in our investment portfolio, primarily in securities with a risk rating of 20% or less. At September 30, 2012, we have four remaining securities with a carrying value of $1.7 million that are rated below investment grade.  During the first nine months of 2012, we incurred OTTI charges of $200 thousand (credit component) on certain non-agency MBSs that were sold as part of the transactions noted above (see Note 3 — Investment Securities to our Consolidated Financial Statements for further information).  The sale of the below investment grade MBSs in both the 2011 and 2012 periods significantly reduces our exposure to future OTTI charges from our investment portfolio.  In the first nine months of 2012, we paid down Federal Home Loan Bank advances in the amount of $4.0 million and incurred a loss in the amount of $121 thousand.  During the same period of 2011, we paid down $6.7 million in Federal Home Loan advances and incurred a loss of $74 thousand related to the prepayment of these advances in the third quarter of 2011.

 

Total non-interest expense increased by $577 thousand, or 4.19%, during the first nine months of 2012, as compared to the same period in 2011.  Salary and benefit expense increased by $1.2 million from $7.0 million in the first nine

 

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months of 2011 to $8.2 million in the first nine months of 2012.  At September 30, 2012, we had 157 full time equivalent employees.  As a result of the Palmetto South acquisition in the third quarter of 2011, we added approximately 10 full time equivalent employees.  This increase in the number of full time equivalent employees as well as normal salary adjustments account for the increase in salary and benefit cost in the first nine months of 2012 as compared to the same period in 2011.  Occupancy cost increased $79 thousand in the first nine months of 2012 as compared to the same period of 2011.  This increase is primarily a result of the addition of lease payments and other costs associated with the Palmetto South office facility.  FDIC insurance assessments decreased by $184 thousand in the first nine months of 2012 as compared to the same period in 2011.  The decrease is primarily a result of changes made to the base used to calculate the assessment.   The assessment base changed to an asset-based calculation effective for the second quarter of 2011.  The assessment rate for the first quarter of 2011 was approximately 22 basis points on deposits. Beginning in the second quarter 2011 and thereafter, this rate changed to approximately 14 basis points of the Bank’s total average assets less bank tangible equity.  In November 2009, all insured institutions, with limited exceptions, were required to prepay insurance assessments for a three-year period. Our prepayment made to the FDIC in December 2009 totaled approximately $2.9 million.  At September 30, 2012, the remaining prepaid insurance assessment amounted to $446 thousand and is included in “Other assets”.   Other real estate expenses decreased $79 thousand in the first nine months of 2012 as compared to the same period in 2011.  The decrease relates to moderating levels of accumulated delinquent taxes, insurance, legal fees and repair expenses incurred as the level of other real estate owned increased over the last several years.  Amortization of intangibles decreased in the first half of 2012 in the amount of $313 thousand.  This decrease reflects that during the fourth quarter of 2011 the core deposit premium for the 2004 acquisition of Dutch Fork Bankshares (“Dutch Fork”) became fully amortized.  The amortization on that core deposit intangible was approximately $35 thousand per month. The other changes in non-interest expense categories reflect normal fluctuations between the two periods.

 

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

 

 

 

Nine months ended

 

 

 

September 30,

 

(In thousands)

 

2012

 

2011

 

Data processing

 

$

383

 

$

356

 

Supplies

 

118

 

133

 

Telephone

 

226

 

230

 

Correspondent services

 

120

 

152

 

Loss on limited partnership interest

 

141

 

89

 

Insurance

 

161

 

161

 

Postage

 

129

 

131

 

Professional fees

 

624

 

817

 

Director fees

 

224

 

228

 

Other

 

553

 

510

 

 

 

$

2,679

 

$

2,807

 

 

Income Tax Expense

 

Our effective tax rate was 30.7% and 29.9% in the first nine months of 2012 and 2011, respectively.  Our effective tax rate is currently expected to remain between 30.0% and 32.0% throughout the rest of 2012.

 

Comparison of Results of Operations for Three Months Ended September 30, 2012 to the Three Months Ended September 30, 2011:

 

Net Income

 

Please refer to the table “Yields on Average Earning Assets and Rates on Average Interest-Bearing Liabilities” appearing at the end of this Item for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended September 30, 2012 and 2011, along with average balances and the related interest income and interest expense amounts.

 

Our net income for the third quarter of 2012 was $1.2 million, or $0.19 diluted earnings per common share, as compared to $957 thousand, or $0.24 diluted earnings per common share, in the same period of 2011.  Net interest income decreased by $299 thousand for the three months ended September 30, 2012 from $4.6 million in 2011 to $4.3 million in 2012.  The decrease in net interest income is primarily due to a decrease in our net interest margin in

 

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the third quarter of 2012 as compared to the same period of 2011.  The net-interest margin for the third quarter of 2012 on a tax equivalent basis was 3.12% as compared to 3.37% in 2011.  The yield on average earning assets decreased to 3.99% in the third quarter of 2012 from 4.64% in the third quarter of 2011. The cost of interest bearing liabilities also decreased to 1.16% in the third quarter of 2012 as compared to 1.49% in the third quarter of 2011.

 

The decline in net interest margin was partially impacted by the increase in average earning assets as a result of proceeds from the common stock offering.  The net funds received in this offering on July 27, 2012 of approximately $13.8 million were held for the balance of the third quarter.  This increased average earning assets by approximately $10.0 million and were held in very low yielding overnight funds while we finalized our redemption and repurchase of the Series T preferred stock as described above.  We estimate this impacted our net interest margin for the third quarter of 2012 by approximately 6 basis points.  Average earning assets were $563.2 million during the third quarter of 2012 as compared to $551.9 million during the third quarter of 2011.  The yield on earning assets decreased to 3.99% for the three months ended September 30, 2012 as compared to 4.64% in the same period of 2011.  The decline in yield on securities of 100 basis points was the biggest contributor to the decline in our yield on earning assets.  This was caused by the continuing historically low interest rate environment and the result of reinvesting the cash flows from the portfolio in lower yielding securities.  In addition, the sale of the majority of our private label mortgage backed securities earlier in 2012 resulted in reinvesting the proceeds of these transactions in substantially lower yielding securities.  As previously stated, the sale of these private label mortgage backed securities substantially reduces the potential for future OTTI charges.  Through continued discipline in pricing new and maturing time deposits, the cost of interest bearing liabilities decreased 33 basis points in the third quarter of 2012 to 1.16% as compared to 1.49% during the same period in 2011.

 

The impact of the decrease in net interest margin was offset by an increase of $714 thousand in non-interest income from $1.7 million in the third quarter of 2011 to $2.4 million in the third quarter of 2012.  The majority of this increase resulted from an increase in mortgage origination fees of $695 thousand in the third quarter of 2012 as compared to the same period in 2011.  The addition of Palmetto South in the third quarter of 2011 and continued historically low interest rates have contributed to the increase in this source of revenue.  During the third quarter of 2012, we incurred a loss of $35 thousand on the sale of one corporate security. This compares to a gain of $133 thousand in the same period of 2011.  As previously discussed, we paid down $6.7 million in Federal Home Loan advances in the third quarter of 2011.  A loss of $74 thousand related to the prepayment of these advances was recorded in the third quarter of 2011.  There were no prepayment of FHLB advances in the third quarter of 2012.

 

Provision for Loan Losses

 

The provision for loan losses for the three months ended September 30, 2012 was $115 thousand as compared to $360 thousand for the three months ended September 30, 2011.  As noted in the discussion of our nine month results, the decrease in the provision for loan losses for the three months ending September 30, 2012 as compared to the same period in 2011 is a result of a continuation of moderating levels of classified and non-performing loans as well as some stabilizing economic conditions, including unemployment levels, in our markets.

 

Non-interest Income and Non-interest Expense

 

For the three months ended September 30, 2012, we had non-interest income of $2.4 million as compared to non-interest income of $1.7 million in the same period of 2011.  Deposit service charges decreased by $45 thousand in the third quarter of 2012 as compared to the same period of 2011.  This decrease is a result of fewer items being presented for payment on insufficient funds as well as the impact of regulatory changes related to overdraft protection programs on assessing charges for items presented through ATMs and electronic point of sale transactions. The decrease in our net interest income and lower deposit service charges was primarily offset by a significant increase of $695 thousand in mortgage origination fees during the two periods.  As previously noted, the addition of Palmetto South in the third quarter of 2011, as well as the continued very low interest rate environment, contributed to the increase in this source of fee income.

 

Total non-interest expense increased by $265 thousand in the third quarter of 2012, as compared to the same period of 2011.  Salaries and benefits increased by $381 thousand in the third quarter of 2012 as compared to the same period in 2011.  This increase is a result of the addition of approximately ten Palmetto South employees in the third quarter of 2011 as well as normal annual salary adjustments between the two periods.  A slight increase in other real estate expenses of $39 thousand in the third quarter of 2012 is primarily a result of write-downs on one OREO property in the third quarter of 2012 as compared to the same period of 2011.  Amortization of intangibles decreased from $105 thousand in the third quarter of 2011 to $51 thousand in the same period of 2012.  As noted in the nine month discussion, this is a result of the previously recorded core deposit intangible recorded as a result of the 2004 acquisition of Dutch Fork being fully amortized in the second half of 2011.  FDIC assessment expense decreased by

 

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$59 thousand in the third quarter of 2012 as compared to the same period of 2011.  This decrease results from a slightly lower rate being assessed to our bank beginning July 1, 2012.  All other variances in non-interest expenses during the three months ended September 30, 2012 as compared to the same period of 2011 reflect normal fluctuations in each of the categories.

 

Financial Position

 

Assets totaled $606.3 million at September 30, 2012, as compared to $593.9 million at December 31, 2011, an increase of $12.4 million.  This increase in assets results a continued strategy to grow “pure deposits” (deposits excluding time deposits) while reducing higher costing time deposits through controlling pricing.  Loans (excluding loans held for sale) at September 30, 2012 were $323.5 million as compared to $324.3 million at December 31, 2011.  We funded in excess of $37.6 million of new loan production in the first nine months of 2012, but scheduled pay downs as well as modest transfers from loans to other real estate owned accounted for the slight decrease in loan balances during the nine month period.  At September 30, 2012 and December 31, 2011, loans (excluding loans held for sale) accounted for 58.0% and 60.0% of earning assets, respectively.  The loan-to-deposit ratio at September 30, 2012 was 68.2% as compared to 69.8% at December 31, 2011. Investment securities increased from $206.7 million at December 31, 2011 to $215.3 million at September 30, 2012.  Deposits increased by $9.9 million to $474.5 million at September 30, 2012 as compared to $464.6 million at December 31, 2011.  The increase in deposits was partially used to prepay a $4.0 million Federal Home Loan Bank advance.  This advance was scheduled to mature in the first quarter of 2013.

 

During the first nine months of 2012, as previously discussed, we sold eight below investment grade non-agency MBSs and on corporate investment grade security with a total book value of approximately $11.7 million.  The loss on the sale of these securities was approximately $2.1 million and was offset by the sale of agency mortgage backed and municipal securities for a gain of the approximate same amount.  The sales of these non-agency MBSs have served to significantly reduce the level of securities on our balance sheet that are rated below investment grade.  The cash generated from these transactions was reinvested in the investment portfolio in securities with a risk rating of 20% or less, thus further improving our risk based capital ratios.  As previously noted, these downgraded investments have been under a great deal of scrutiny by our primary regulatory agency as a result of being downgraded.  We have further discussed that, in our opinion, the rating system and the regulatory concerns do not properly reflect the overall credit risk in this type of multi-obligor securities since neither adequately considers the price paid by the holder of the bond.  The decreased level of these below investment grade securities provides for improved regulatory capital ratios since the proceeds are primarily invested in lower regulatory risk weighted assets, as well as reduces the regulatory concern related to the downgraded securities portfolio.  As of September 30, 2012, the total book value of securities (four securities) rated below investment grade in our portfolio amounted to $1.7 million.  As previously noted, management continues to monitor the remaining portfolio with a high degree of scrutiny. There can be no assurance that we will not conclude in future periods that conditions existing at that time indicate some or all of the securities may be sold or are other-than temporarily impaired, which would require a charge to earnings in such period.

 

Quality loan portfolio growth continues to be a strategic focus in 2012 and beyond.  One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we serve. Loan production and portfolio growth rates continue to be impacted by the current economic recession, as borrowers are less inclined to leverage their corporate and personal balance sheets. However, we remain committed to meeting the credit needs of our local markets. A continuation of the very slow recovery from recessionary national and local economic conditions as well as deterioration of asset quality within our Company could significantly impact our ability to grow our loan portfolio.

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

(In thousands)

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

19,469

 

6.0

%

$

20,608

 

6.4

%

Real estate:

 

 

 

 

 

 

 

 

 

Construction

 

11,739

 

3.6

%

11,767

 

3.6

%

Mortgage — residential

 

36,861

 

11.4

%

38,337

 

11.8

%

Mortgage — commercial

 

223,595

 

69.1

%

220,288

 

67.9

%

Consumer:

 

 

 

 

 

 

 

 

 

Home Equity

 

26,778

 

8.3

%

27,976

 

8.6

%

Other

 

5,092

 

1.6

%

5,335

 

1.7

%

Total gross loans

 

323,534

 

100.0

%

324,311

 

100.0

%

Allowance for loan losses

 

(4,695

)

 

 

(4,699

)

 

 

Total net loans

 

$

318,839

 

 

 

$

319,612

 

 

 

 

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%.

 

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 the asset/liability modeling is a precise indicator 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 twelve months.

 

We entered into a five year interest rate swap agreement on October 8, 2008 that expires on October 8, 2013. The swap agreement has a $10.0 million notional amount. We receive a variable rate of interest on the notional amount based on a three month LIBOR rate and pay a fixed rate interest of 3.66%. The contract was entered into to protect us from the negative impact of rising interest rates. Our exposure to credit risk is limited to the ability of the counterparty to make potential future payments required pursuant to the agreement. Our exposure to market risk of loss is limited to the changes in the market value of the swap between reporting periods. At September 30, 2012 and December 31, 2011, the fair value of the contract was a negative $418 thousand and $602 thousand, respectively. A fair value adjustment for the swap of ($57 thousand) and ($185 thousand) was recognized in other income for the nine month periods ended September 30, 2012 and 2011, respectively. The fair value of the contract is the present value, over the

 

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remaining term of the contract, of the difference between the swap rate to maturity at the reporting date multiplied by the notional amount and the fixed interest rate of 3.66% multiplied by the notional amount of the contract.

 

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 September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 over twelve months.

 

Net Interest Income Sensitivity

 

Change in
short-term
interest
rates

 

September 30,
2012

 

June 30,
2012

 

March 31,
 2012

 

December
31, 2011

 

+200bp

 

+6.68

%

+ 7.88

%

+ 3.49

%

+3.05

%

+100bp

 

+3.99

%

+ 4.78

%

+ 2.08

%

+2.06

%

Flat

 

 

 

 

 

-100bp

 

-8.40

%

- 9.51

%

- 6.50

%

-7.48

%

-200bp

 

-12.56

%

- 15.23

%

- 11.20

%

-12.91

%

 

The significant decrease in net interest income in a down 200 basis point environment primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts.  The interest rates on these accounts are at a level where they 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.  At the current historically low interest rate levels a downward shift of 200 basis points across the entire yield curve is unlikely.

 

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 September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011 the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 8.15%, 10.29%, 3.24% and 2.70%, respectively.

 

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Liquidity and Capital Resources

 

We believe our liquidity remains adequate to meet operating and loan funding requirements.  Interest-bearing bank balances, federal funds sold, and investment securities available-for-sale represents 36.4% of total assets at September 30, 2012.  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 thousand or more as they tend to be more sensitive to changes in interest rates, and thus less reliable sources of funding for liquidity purposes.  At September 30, 2012, the amount of certificates of deposits of $100 thousand or more represented 15.9% 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.

 

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 predetermined interest rates for a specified period of time. At September 30, 2012, we had issued commitments to extend credit of $44.8 million, including $25.7 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, commercial and residential real estate.  We manage the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.

 

Other than as described elsewhere in this report, we are not aware of any trends, events or uncertainties 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.

 

The Company has 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.  Shareholders’ equity was 9.0% and 8.1% of total assets at September 30, 2012 and December 31, 2011, respectively.  The Bank maintains federal funds purchased lines, in the total amount of $20.0 million, with two financial institutions, although these have not been utilized in 2011 or 2012.  In addition, the Bank has a repo line in the amount of $10.0 million with another financial institution.  Specific investment securities would be pledged if and when we were to utilize the repo line.  The Federal Home Loan Bank of 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 noncore 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 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%.  Generally, to be considered adequately capitalized, the OCC and Federal Reserve regulatory capital guidelines for Tier 1 capital, total capital and leverage capital ratios are 4.0%, 8.0% and 4.0%, respectively.  As previously noted, effective October 1, 2012, we completed a planned conversion of our Bank from a national bank charter to a state bank charter (as a non-member bank).  As a result, our Bank’s primary federal regulator is now the FDIC rather than the OCC.  The required regulatory capital ratios to be “adequately” capitalized and “well” capitalized remain the same under the FDIC.

 

The OCC notified the Bank that, effective June 28, 2012, it is no longer subject to the Individual Minimum Capital

 

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Ratios established for the Bank on February 24, 2010, which had required the Bank to maintain a Tier 1 leverage capital ratio of at least 8.00%, a Tier 1 risk-based capital ratio of at least 10.00%, and a total risk-based capital ratio of at least 12.00%.  These regulatory capital ratios for the Bank were 10.08%, 17.05% and 18.31%, respectively, as of September 30, 2012, as compared to 9.27%, 15.12%, and 16.38%, respectively, at December 31, 2011. The Company’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.56%, 17.86%, and 19.80%, respectively, at September 30, 2012, as compared to 9.40%, 15.33% and 17.25%, respectively, at December 31, 2011.  Accordingly, both the Bank and the Company are considered to be “well capitalized” as of September 30, 2012.  Management anticipates that the Bank and the Company will remain a well capitalized institution for at least the next 12 months.

 

As previously discussed, following a recent on-site examination of the bank, the OCC notified the bank that, effective June 28, 2012, the Bank is no longer subject to the Formal Agreement that it entered into with the OCC on April 6, 2010.  In addition, the Federal Reserve has notified the Company that, effective July 10, 2012, the Company is no longer subject to the MOU that it had entered into with the Federal Reserve in December of 2011 (which had terminated and replaced a Memorandum of Understanding entered into in June of 2010).

 

The ability of the Company to pay cash dividends is dependent upon receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements.

 

As previously noted, on July 27, 2012, the Company closed its public offering of common stock.  The offering resulted in the issuance of a total of 1.875 million shares of common stock at $8.00 per share, resulting in gross proceeds of $15 million.  Net proceeds were approximately $13.8 million after deducting underwriting, discount, commissions and other estimated expenses.

 

We used the proceeds of the public offering to repurchase all 11,350 outstanding shares of our Series T preferred stock originally issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program.  In addition, on October 25, 2012, the U.S. Treasury accepted our bid to repurchase the warrant for 195,915 shares of our common stock issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program.  The repurchase price was $297,500. The repurchase of the warrants was closed on November 1, 2012.

 

The balance of the proceeds from the public offering will be used for general corporate purposes, including contributing a portion of the proceeds to the Bank as additional capital to support organic growth and, potentially, opportunistic acquisitions that meet our investment criteria.

 

In June 2012, the Federal Reserve approved three notices of proposed rulemaking (“NPRs”) to, among other things, implement the Basel III minimum capital requirements and capital conservation buffer. The three NPRs are expected to be published jointly by the Federal Reserve, the FDIC and the OCC after each agency has completed its approval process. The comment period on the NPRs expired on October 22, 2012. If approved in their current form, the NPRs would be effective over a phased-in period from 2013 to 2019. We are in the process of evaluating the impact of the proposed rules on the Company and the Bank.

 

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FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 

 

 

Nine months ended September 30, 2012

 

Nine months ended September 30, 2011

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

(Dollars in thousands)

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

330,263

 

$

13,804

 

5.58

%

$

329,843

 

$

14,376

 

5.83

%

Securities:

 

204,212

 

3,669

 

2.40

%

204,040

 

4,854

 

3.18

%

Federal funds sold and securities purchased under agreements to resell

 

17,976

 

61

 

0.45

%

16,230

 

58

 

0.48

%

Total earning assets

 

552,451

 

17,534

 

4.24

%

550,113

 

19,288

 

4.69

%

Cash and due from banks

 

8,580

 

 

 

 

 

7,830

 

 

 

 

 

Premises and equipment

 

17,417

 

 

 

 

 

17,818

 

 

 

 

 

Other assets

 

27,032

 

 

 

 

 

33,063

 

 

 

 

 

Allowance for loan losses

 

(4,741

)

 

 

 

 

(4,841

)

 

 

 

 

Total assets

 

$

600,739

 

 

 

 

 

$

603,983

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

88,815

 

120

 

0.18

%

$

81,710

 

217

 

0.36

%

Money market accounts

 

51,932

 

120

 

0.31

%

48,748

 

165

 

0.45

%

Savings deposits

 

38,390

 

37

 

0.13

%

31,541

 

38

 

0.16

%

Time deposits

 

201,601

 

2,196

 

1.46

%

221,766

 

3,137

 

1.89

%

Other borrowings

 

72,710

 

1,772

 

3.26

%

89,949

 

2,030

 

3.02

%

Total interest-bearing liabilities

 

453,448

 

4,245

 

1.25

%

473,714

 

5,587

 

1.58

%

Demand deposits

 

89,915

 

 

 

 

 

82,007

 

 

 

 

 

Other liabilities

 

5,436

 

 

 

 

 

4,872

 

 

 

 

 

Shareholders’ equity

 

51,940

 

 

 

 

 

43,390

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

600,739

 

 

 

 

 

$

603,983

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funds, including demand deposits

 

 

 

 

 

1.04

%

 

 

 

 

1.34

%

Net interest spread

 

 

 

 

 

2.99

%

 

 

 

 

3.11

%

Net interest income/margin

 

 

 

$

13,289

 

3.21

%

 

 

$

13,701

 

3.33

%

Net interest income/margin FTE basis

 

$

190

 

$

13,479

 

3.26

%

$

18

 

$

13,719

 

3.33

%

 

51



Table of Contents

 

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 

 

 

Three months ended September 30, 2012

 

Three months ended September 30, 2011

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

(Dollars in thousands)

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

330,106

 

$

4,548

 

5.48

%

$

325,008

 

$

4,747

 

5.86

%

Securities:

 

208,769

 

1,079

 

2.06

%

212,425

 

1,618

 

3.06

%

Federal funds sold and securities purchased

 

24,315

 

23

 

0.38

%

14,486

 

17

 

0.47

%

Total earning assets

 

563,190

 

5,650

 

3.99

%

551,919

 

6,382

 

4.64

%

Cash and due from banks

 

8,698

 

 

 

 

 

8,397

 

 

 

 

 

Premises and equipment

 

17,394

 

 

 

 

 

17,684

 

 

 

 

 

Other assets

 

25,483

 

 

 

 

 

32,949

 

 

 

 

 

Allowance for loan losses

 

(4,745

)

 

 

 

 

(4,833

)

 

 

 

 

Total assets

 

$

610,020

 

 

 

 

 

$

606,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

91,778

 

$

37

 

0.16

%

$

85,519

 

$

69

 

0.32

%

Money market accounts

 

53,328

 

36

 

0.27

%

50,220

 

54

 

0.43

%

Savings deposits

 

39,955

 

13

 

0.13

%

32,275

 

12

 

0.15

%

Time deposits

 

195,230

 

652

 

1.33

%

218,948

 

979

 

1.79

%

Other borrowings

 

72,460

 

583

 

3.20

%

86,280

 

640

 

2.98

%

Total interest-bearing liabilities

 

452,751

 

1,321

 

1.16

%

473,242

 

1,754

 

1.49

%

Demand deposits

 

93,098

 

 

 

 

 

82,252

 

 

 

 

 

Other liabilities

 

5,723

 

 

 

 

 

5,585

 

 

 

 

 

Shareholders’ equity

 

58,448

 

 

 

 

 

45,037

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

610,020

 

 

 

 

 

$

606,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funds, including demand deposits

 

 

 

 

 

0.97

%

 

 

 

 

1.27

%

Net interest spread

 

 

 

 

 

2.83

%

 

 

 

 

3.15

%

Net interest income/margin

 

 

 

$

4,329

 

3.06

%

 

 

$

4,628

 

3.36

%

Net interest income/margin FTE basis

 

$

94

 

$

4,423

 

3.12

%

$

5

 

$

4,633

 

3.37

%

 

52



Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in our quantitative and qualitative disclosures about market risk as of September 30,  2012 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2011.  See the “Market Risk Management’s subsection in Item 2, Management Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.

 

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 September 30, 2012.  There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2012 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.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

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

 

Item 1A.  Risk Factors.

 

Not Applicable.

 

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

 

Not Applicable.

 

Item 3.  Defaults Upon Senior Securities.

 

Not Applicable.

 

Item 4.  Mine Safety Disclosures.

 

Not Applicable.

 

Item 5.  Other Information.

 

None.

 

Item 6.  Exhibits

 

Exhibit

 

Description

 

 

 

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.

 

101              The following materials from the Quarterly Report on Form 10-Q of First Community Corporation for the quarter ended September 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated

 

53



Table of Contents

 

Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. (1)

 


(1)           As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” or part of a registration statement or prospectus for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

 

54



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:

November 13, 2012

 

By:

/s/ Michael C. Crapps

 

 

 

 

Michael C. Crapps

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

 

Date:

November 13, 2012

 

By:

/s/ Joseph G. Sawyer

 

 

 

 

Joseph G. Sawyer

 

 

 

 

Senior Vice President (Principal Financial and Accounting Officer)

 

55



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit
Number

 

Description

 

 

 

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.

 

101         The following materials from the Quarterly Report on Form 10-Q of First Community Corporation for the quarter ended September 30, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. (1)

 


(1)           As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” or part of a registration statement or prospectus for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

 

56