FIRST COMMUNITY CORP /SC/ - Quarter Report: 2016 March (Form 10-Q)

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 March 31, 2016

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to _____

Commission File No. 000-28344

FIRST COMMUNITY CORPORATION
(Exact name of registrant as specified in its charter)

South Carolina	57-1010751
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of principal executive offices) (Zip Code)

(803) 951-2265

(Registrant’s telephone number, including area code)

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

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

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 ¨ 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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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 ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 12, 2016, 6,693,042 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Consolidated Balance Sheets	4
Consolidated Statements of Income	5
Consolidated Statements of Comprehensive Income	6
Consolidated Statements of Changes in Shareholders’ Equity	7
Consolidated Statements of Cash Flows	8
Notes to Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	49

PART II – OTHER INFORMATION	50
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3. Defaults Upon Senior Securities	50
Item 4. Mine Safety Disclosures	50
Item 5. Other Information	50
Item 6. Exhibits	60

SIGNATURES	51
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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
(Dollars in thousands, except par value)	2016			2015
	(Unaudited)
ASSETS
Cash and due from banks	$	9,990		$	10,973
Interest-bearing bank balances		15,237			11,375
Federal funds sold and securities purchased under agreements to resell		598			593
Investment securities held-to-maturity		17,327			17,371
Investment securities available-for-sale		266,779			264,687
Other investments, at cost		1,913			1,783
Loans held for sale		2,545			2,962
Loans		494,021			489,191
Less, allowance for loan losses		4,687			4,596
Net loans		489,334			484,595
Property, furniture and equipment - net		30,184			29,929
Land held for sale		1,080			1,080
Bank owned life insurance		20,454			20,301
Other real estate owned		1,484			2,458
Intangible assets		1,337			1,419
Goodwill		5,078			5,078
Other assets		7,069			8,130
Total assets	$	870,409		$	862,734
LIABILITIES
Deposits:
Non-interest bearing	$	163,383		$	156,247
Interest bearing		558,853			559,904
Total deposits		722,236			716,151
Securities sold under agreements to repurchase		20,697			21,033
Federal Home Loan Bank advances		24,432			24,788
Junior subordinated debt		14,964			14,964
Other liabilities		6,469			6,760
Total liabilities		788,798			783,696
SHAREHOLDERS’ EQUITY
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized; none issued and outstanding
Common stock, par value $1.00 per share; 10,000,000 shares authorized; issued and outstanding 6,693,042 at March 31, 2016 6,690,551 at December 31, 2015		6,693			6,690
Common stock warrants issued		46			46
Nonvested restricted stock		(490	)		(297	)
Additional paid in capital		75,786			75,761
Accumulated deficit		(3,051	)		(3,992	)
Accumulated other comprehensive income		2,627			830
Total shareholders’ equity		81,611			79,038
Total liabilities and shareholders’ equity	$	870,409		$	862,734

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)	Three Months ended March 31,
	2016		2015
Interest and dividend income:
Loans, including fees	$	5,681	$	5,874
Investment securities - taxable		948		1,002
Investment securities – non taxable		485		380
Federal funds sold and securities purchased under resale agreements		14		6
Other		9		21
Total interest income		7,137		7,283
Interest expense:
Deposits		448		426
Federal funds sold and securities sold under agreement to repurchase		10		8
Other borrowed money		342		401
Total interest expense		800		835
Net interest income		6,337		6,448
Provision for loan losses		140		406
Net interest income after provision for loan losses		6,197		6,042
Non-interest income:
Deposit service charges		347		347
Mortgage banking income		665		735
Investment advisory and non-deposit commissions		291		296
Gain on sale of securities		59		104
Gain on sale of other assets		3		4
Loss on early extinguishment of debt		—		(103	)
Other		724		598
Total non-interest income		2,089		1,981
Non-interest expense:
Salaries and employee benefits		3,751		3,565
Occupancy		559		485
Equipment		429		402
Marketing and public relations		94		226
FDIC Assessment		138		138
Other real estate expense		51		154
Amortization of intangibles		83		103
Other		1,237		1,027
Total non-interest expense		6,342		6,100
Net income before tax		1,944		1,923
Income taxes		476		519
Net income	$	1,468	$	1,404

Basic earnings per common share	$	0.22	$	0.22
Diluted earnings per common share	$	0.22	$	0.21

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three months ended March 31,
	2016			2015

Net income	$	1,468		$	1,404

Other comprehensive income:
Unrealized gain during the period on available-for-sale securities, net of tax of $946 and $495, respectively		1,836			962

Less: Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax expense of $20 and $35, respectively		(39	)		(69	)

Other comprehensive income		1,797			893
Comprehensive income	$	3,265		$	2,297

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

Three Months ended March 31, 2016 and March 31, 2015

(Unaudited)

																			Accumulated
	Common						Common			Additional			Nonvested						Other
(Dollars in thousands)	Shares			Common			Stock			Paid-in			Restricted			Accumulated			Comprehensive
	Issued			Stock			Warrants			Capital			Stock			Deficit			Income		Total
Balance December 31, 2014		6,664		$	6,664		$	48		$	75,504		$	(673	)	$	(8,286	)	$	1,271	$	74,528
Net income																	1,404					1,404
Other comprehensive income net of tax of $460																				893		893
Issuance of restricted stock		13			13						137			(150	)							—
Amortization of compensation on restricted stock														129								129
Exercise of stock warrants		2			2			(2	)													—
Dividends: Common ($0.07 per share)																	(457	)				(457	)
Dividend reinvestment plan		5			5						46											51
Balance March 31, 2015		6,684		$	6,684		$	46		$	75,687		$	(694	)	$	(7,339	)	$	2,164	$	76,548

Balance December 31, 2015		6,690		$	6,690		$	46		$	75,761		$	(297	)	$	(3,992	)	$	830	$	79,038
Net income																	1,468					1,468
Other comprehensive income net of tax of $926																				1,797		1,797
Issuance of restricted stock		22			22						268			(290	)							—
Amortization of compensation on restricted stock														97								97
Shares retired		(26	)		(26	)					(327	)										(353	)
Issuance of common stock		1			1						13											14
Dividends: Common ($0.08 per share)																	(527	)				(527	)
Dividend reinvestment plan		6			6						71											77
Balance March 31, 2016		6,693		$	6,693		$	46		$	75,786		$	(490	)	$	(3,051	)	$	2,627	$	81,611

See Notes to Consolidated Financial Statements

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
(Dollars in thousands)	2016			2015
Cash flows from operating activities:
Net income	$	1,468		$	1,404
Adjustments to reconcile net income to net cash provided from operating activities:
Depreciation		325			297
Premium amortization		976			936
Provision for loan losses		140			406
Write-down of other real estate owned		5			90
Gain on sale of other real estate owned		(3	)		(4	)
Origination of loans held-for-sale		(18,184	)		(23,701	)
Sale of loans held-for-sale		18,601			22,379
Amortization of intangibles		83			103
Accretion on acquired loans		(235	)		(509	)
Gain on sale of securities		(59	)		(104	)
Loss on extinguishment of debt		—			103
(Increase) Decrease in other assets		(5	)		1,461
Decrease in other liabilities		(290	)		(1,711	)
Net cash provided from operating activities		2,822			1,150
Cash flows from investing activities:
Purchase of investment securities available-for-sale		(20,362	)		(5,436	)
Purchase of investment securities held-to-maturity		—			(2,142	)
Maturity/call of investment securities available-for-sale		8,614			9,643
Proceeds from sale of securities available-for-sale		11,479			6,955
Proceeds from sale of other securities		—			304
Increase in loans		(4,668	)		(10,382	)
Proceeds from sale of other real estate owned		981			185
Purchase of property and equipment		(580	)		(1,170	)
Net cash used in investing activities		(4,536	)		(2,043	)
Cash flows from financing activities:
Increase in deposit accounts		6,085			25,035
Decrease in securities sold under agreements to repurchase		(336	)		(699	)
Advances from the Federal Home Loan Bank		30,500			8,500
Repayment of advances from Federal Home Loan Bank		(30,861	)		(9,858	)
Issuance of common stock		14			—
Shares retired		(353	)		—
Dividends paid: Common Stock		(527	)		(457	)
Dividend reinvestment plan		77			51
Net cash provided from financing activities		4,599			22,572
Net increase in cash and cash equivalents		2,885			21,679
Cash and cash equivalents at beginning of period		22,940			22,532
Cash and cash equivalents at end of period	$	25,825		$	44,211
Supplemental disclosure:
Cash paid during the period for:
Interest	$	782		$	865
Income taxes	$	50		$	935
Non-cash investing and financing activities:
Unrealized gain on securities	$	1,797		$	893
Transfer of loans to foreclosed property	$	11		$	75

See Notes to Consolidated Financial Statements

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 the cash flows of First Community Corporation (the “Company”), present fairly in all material respects the Company’s financial position at March 31, 2016 and December 31, 2015, and the Company’s results of operations and cash flows for the three months ended March 31, 2016 and 2015. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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 2015 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:

(In thousands except average market price)

	Three months
	ended March 31,
	2016		2015
Numerator (Net income available to common shareholders)	$	1,468	$	1,404
Denominator
Weighted average common shares outstanding for:
Basic shares		6,573		6,522
Dilutive securities:
Deferred compensation		36		20
Warrants/Restricted stock -Treasury stock method		142		123
Diluted shares		6,751		6,665
The average market price used in calculating assumed number of shares	$	13.64	$	11.42

There were no options outstanding as of March 31, 2016. At March 31, 2015, there were 8,903 outstanding options at an average exercise price of $14.21. None of these options had an exercise price below the average market price of $11.42 for the three-month period ended March 31, 2015, and, therefore, they were 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. On November 15, 2012, the subordinated notes were redeemed in full at par. Warrants for 107,500 shares of common stock at $5.90 per share were issued in connection with the issuance of the subordinated debt. At March 31, 2016 there were 97,180 warrants outstanding. These warrants expire December 16, 2019 and are included in dilutive securities in the table above.

The Company has issued a total of 138,000 restricted shares under the terms of its compensation plans and employment agreements. The employee shares cliff vest over a three year period; the non-employee director shares vest one year after issuance. The unrecognized compensation cost at March 31, 2016 for non-vested shares amounts to $490 thousand.

In 2006 the Company established a Non-Employee Director Deferred Compensation Plan, whereby a director may elect to defer all or any part of annual retainer and monthly meeting fees payable with respect to service on the board of directors or a committee of the board. Units of common stock are credited to the director’s account at the time compensation is earned and are included in dilutive securities in the table above. At March 31, 2016 and 2014 there were 97,441 units in the plan. The accrued liability at March 31, 2016 amounted to $892 and is included in “Other liabilities” on the balance sheet.

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
March 31, 2016:
US Treasury securities	$	1,545	$	19	$	—	$	1,564
Government sponsored enterprises		952		71		—		1,023
Mortgage-backed securities		148,382		1,468		395		149,455
Small Business Administration pools		57,360		450		383		57,427
State and local government		53,330		2,693		7		56,016
Corporate and other securities		1,349		—		55		1,294
	$	262,918	$	4,701	$	840	$	266,779
December 31, 2015:
US Treasury securities	$	1,547	$	—	$	25	$	1,522
Government sponsored enterprises		950		42		—		992
Mortgage-backed securities		146,935		498		1,172		146,261
Small Business Administration pools		57,474		355		501		57,328
State and local government		55,294		2,037		36		57,295
Corporate and other securities		1,349		—		60		1,289
	$	263,549	$	2,932	$	1,794	$	264,687

HELD-TO-MATURITY:

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2016:
State and local government	$	17,327	$	479	$	—	$	17,806
	$	17,327	$	479	$	—	$	17,806
December 31, 2015:
State and local government	$	17,371	$	211	$	27	$	17,555
	$	17,371	$	211	$	27	$	17,555

During the three months ended March 31, 2016 and March 31, 2015, the Company received proceeds of $11.5 million and $7.0 million, respectively, from the sale of investment securities available-for-sale, amounting to gross gains of $58.8 thousand and $104.1 thousand in earnings for each respective period. There were no gross losses from the sale of investment securities for the three months ended March 31, 2016 and March 31, 2015.

At March 31, 2016, corporate and other securities available-for-sale included the following at fair value: mutual funds at $817.2 thousand, foreign debt of $60.2 thousand, and corporate preferred stock in the amount of $416.8 thousand. At December 31, 2015, corporate and other securities available-for-sale included the following at fair value: mutual funds at $812.0 thousand, foreign debt of $60.1 thousand, and corporate preferred stock in the amount of $416.8 thousand.

Other investments, at cost, include Federal Home Loan Bank (“FHLB”) stock in the amount of $1.9 million and $1.8 million at March 31, 2016 and December 31, 2015, respectively.

Note 3—Investment Securities – continued

The following tables show 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 March 31, 2016 and December 31, 2015. There were no held-to-maturity securities with gross unrealized losses at March 31, 2016.

	Less than 12 months				12 months or more				Total
March 31, 2016 (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	$	36,214	$	206	$	11,957	$	185	$	48,171	$	391
Small Business Administration pools		9,732		71		23,603		312		33,335		383
Non-agency mortgage-backed securities		165		1		274		3		439		4
State and local government		—		—		853		7		853		7
Corporate bonds and other		—		—		817		55		817		55
Total	$	46,111	$	278	$	37,504	$	562	$	83,615	$	840

	Less than 12 months				12 months or more				Total
December 31, 2015 (Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available-for-sale securities:
US Treasury	$	1,522	$	25	$	—	$	—	$	1,522	$	25
Government Sponsored Enterprise mortgage-backed securities		69,112		731		17,593		439		86,705		1,170
Small Business Administration pools		13,386		153		25,709		348		39,095		501
Non-agency mortgage-backed securities		—		—		186		2		186		2
State and local government		1,461		8		1,362		28		2,823		36
Corporate bonds and other		—		—		812		60		812		60
Total	$	85,481	$	917	$	45,662	$	877	$	131,143	$	1,794

	Less than 12 months				12 months or more				Total
December 31, 2015 (Dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Held-to-maturity securities:
State and local government	$	3,473	$	24	$	444	$	3	$	3,917	$	27
Total	$	3,473	$	24	$	444	$	3	$	3,917	$	27

Note 3—Investment Securities - continued

Government Sponsored Enterprise, Mortgage-Backed Securities: The Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), issued by government sponsored enterprises (“GSEs”) with an amortized cost of $147.9 million and $146.9 million and approximate fair value of $148.9 million and $146.3 million at March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016 and December 31, 2015, all of the MBSs issued by GSEs were classified as “Available for Sale.” Unrealized losses on certain of 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 does not intend to sell these securities and it is more likely than not the Company will not be required sell these securities before a recovery of its amortized cost, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at March 31, 2016.

Non-agency Mortgage-Backed Securities: The Company held private label mortgage-backed securities (“PLMBSs”), including CMOs, at March 31, 2016 with an amortized cost of $519.6 thousand and approximate fair value of $516.7 thousand. The Company held PLMBSs, including CMOs, at December 31, 2015 with an amortized cost of $554.8 thousand and approximate fair value of $556.3 thousand. 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.

State and Local Governments and Other: Management monitors these securities on a quarterly basis to identify any deterioration in the credit quality. Included in the monitoring is a review of the credit rating, a financial analysis and certain demographic data on the underlying issuer. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2016.

The following sets forth the amortized cost and fair value of investment securities at March 31, 2016 by contractual maturity. 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				Held-to-maturity
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	4,155	$	4,196	$	—	$	—
Due after one year through five years		154,676		156,292		5,011		5,100
Due after five years through ten years		92,339		94,572		12,316		12,706
Due after ten years		11,748		11,719		—		—
	$	262,918	$	266,779	$	17,327	$	17,806

Note 4—Loans

Loans summarized by category as of March 31, 2016, December 31, 2015 and March 31, 2015 are as follows:

	March 31,		December 31,		March 31,
(Dollars in thousands)	2016		2015		2015
Commercial, financial and agricultural	$	39,092	$	37,809	$	32,569
Real estate:
Construction		39,311		35,829		36,080
Mortgage-residential		47,768		49,077		49,838
Mortgage-commercial		329,093		326,978		294,108
Consumer:
Home equity		30,419		30,906		33,511
Other		8,338		8,592		8,195
Total	$	494,021	$	489,191	$	454,301

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the three months ended March 31, 2016 and March 31, 2015 and for the year ended December 31, 2015 is as follows:

(Dollars in thousands)
						Real estate		Real estate
				Real estate		Mortgage		Mortgage			Consumer			Consumer
	Commercial			Construction		Residential		Commercial			Home equity			Other			Unallocated		Total
March 31, 2016
Allowance for loan losses:
Beginning balance December 31, 2015	$	75		$	51	$	223	$	2,036		$	127		$	37		$	2,047	$	4,596
Charge-offs		—			—		—		(45	)		—			(18	)		—		(63	)
Recoveries		2			—		2		6			1			3			—		14
Provisions		(4	)		6		12		4			(41	)		4			159		140
Ending balance March 31, 2016	$	73		$	57	$	237	$	2,001		$	87		$	26		$	2,206	$	4,687

Ending balances:
Individually evaluated for impairment	$	—		$	—	$	—	$	3		$	—		$	—		$	—	$	3

Collectively evaluated for impairment		73			57		237		1,998			87			26			2,206		4,684

March 31, 2016 Loans receivable:
Ending balance-total	$	39,092		$	39,311	$	47,768	$	329,093		$	30,419		$	8,338		$	—	$	494,021

Ending balances:
Individually evaluated for impairment		3			—		877		7,165			—			—			—		8,045

Collectively evaluated for impairment	$	39,089		$	39,311	$	46,891	$	321,928		$	30,419		$	8,338		$	—	$	485,976

Note 4—Loans-continued

(Dollars in thousands)
						Real estate		Real estate
				Real estate		Mortgage		Mortgage			Consumer			Consumer
	Commercial			Construction		Residential		Commercial			Home equity			Other			Unallocated			Total
March 31, 2015
Allowance for loan losses:
Beginning balance December 31, 2014	$	67		$	45	$	179	$	1,572		$	134		$	44		$	2,091		$	4,132
Charge-offs		(56	)		—		—		(291	)		—			(11	)		—			(358	)
Recoveries		2			—		1		4			1			64			—			72
Provisions		197			89		63		295			(14	)		(39	)		(185	)		406
Ending balance March 31, 2015	$	210		$	134	$	243	$	1,580		$	121		$	58		$	1,906		$	4,252

Ending balances:
Individually evaluated for impairment	$	—		$	—	$	4	$	3		$	—		$	—		$	—		$	7

Collectively evaluated for impairment		210			134		239		1,577			121			58			1,906			4,245

March 31, 2015
Loans receivable:
Ending balance-total	$	32,569		$	36,080	$	49,838	$	294,108		$	33,511		$	8,195		$	—		$	454,301

Ending balances:
Individually evaluated for impairment		—			—		1,066		6,740			91			—			—			7,897

Collectively evaluated for impairment	$	32,569		$	36,080	$	48,772	$	287,368		$	33,420		$	8,195		$	—		$	446,404

Note 4—Loans-continued

(Dollars in thousands)
						Real estate			Real estate
				Real estate		Mortgage			Mortgage			Consumer			Consumer
	Commercial			Construction		Residential			Commercial			Home equity			Other			Unallocated			Total
December 31, 2015
Allowance for loan losses:
Beginning balance December 31, 2014	$	67		$	45	$	179		$	1,572		$	134		$	44		$	2,091		$	4,132
Charge-offs		(69	)		—		(50	)		(626	)		—			(62	)		—			(807	)
Recoveries		6			—		7			33			3			84			—			133
Provisions		71			6		87			1,057			(10	)		(29	)		(44	)		1,138
Ending balance December 31, 2015	$	75		$	51	$	223		$	2,036		$	127		$	37		$	2,047		$	4,596

Ending balances:
Individually evaluated for impairment	$	—		$	—	$	3		$	—		$	—		$	—		$	—		$	3

Collectively evaluated for impairment		75			51		220			2,036			127			37			2,047			4,593

December 31, 2015
Loans receivable:
Ending balance-total	$	37,809		$	35,829	$	49,077		$	326,978		$	30,906		$	8,592		$	—		$	489,191

Ending balances:
Individually evaluated for impairment		9			—		848			5,620			—			—			—			6,477

Collectively evaluated for impairment	$	37,800		$	35,829	$	48,229		$	321,358		$	30,906		$	8,592		$	—		$	482,714

Loans outstanding and available lines of credit to bank directors, executive officers and their related business interests amounted to $8.7 million and $9.5 million at March 31, 2016 and March 31, 2015, respectively. Repayments on these loans during the three months ended March 31, 2016 were $163.7 thousand and there were no new loans made. Repayments on these loans during the three months ended March 31, 2015 were $961.5 thousand and loans made amounted to $871.7 thousand. Related party loans and lines of credit 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.

Note 4—Loans-continued

The following table presents at March 31, 2016 and December 31, 2015 loans individually evaluated and considered impaired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings (“TDRs”).

(Dollars in thousands)	March 31,		December 31,
	2016		2015
Total loans considered impaired	$	8,045	$	6,477
Loans considered impaired for which there is a related allowance for loan loss:
Outstanding loan balance		48		49
Related allowance		3		3
Loans considered impaired and previously written down to fair value		7,999		6,428
Average impaired loans		12,771		9,518

The following tables are by loan category and present at March 31, 2016, December 31, 2015 and March 31, 2015 loans individually evaluated and considered impaired under FASB ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing TDRs.

(Dollars in thousands)							Three months ended
			Unpaid				Average		Interest
March 31, 2016	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no allowance recorded:
Commercial	$	3	$	3	$	—	$	8	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		829		859		—		1,049		1
Mortgage-commercial		7,165		9,902		—		11,665		25
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		48		48		3		49		—
Mortgage-commercial		—		—		—		—		—
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		3		3		—		8		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		877		907		3		1,098		1
Mortgage-commercial		7,165		9,902		—		11,665		25
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—
	$	8,045	$	10,812	$	3	$	12,771	$	26

Note 4—Loans-continued

(Dollars in thousands)							Three months ended
			Unpaid				Average		Interest
March 31, 2015	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no allowance recorded:
Commercial	$	—	$	—	$	—	$	—	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		1,014		1,157		—		1,266		1
Mortgage-commercial		6,492		7,995		3		8,584		30
Consumer:
Home Equity		91		97		—		97		—
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		52		52		4		52		—
Mortgage-commercial		248		248		3		250		—
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		1,066		1,209		4		1,318		1
Mortgage-commercial		6,740		8,243		3		8,834		30
Consumer:
Home Equity		91		97		—		97		—
Other		—		—		—		—		—
	$	7,897	$	9,549	$	7	$	10,249	$	31

Note 4—Loans-continued

(Dollars in thousands)
December 31, 2015			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no allowance recorded:
Commercial	$	9	$	9	$	—	$	13	$	—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		799		874		—		1,082		1
Mortgage-commercial		5,620		7,548		—		8,372		60
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

With an allowance recorded:
Commercial		—		—		—		—		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		49		49		3		51		3
Mortgage-commercial		—		—		—		—		—
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—

Total:
Commercial		9		9		—		13		—
Real estate:
Construction		—		—		—		—		—
Mortgage-residential		848		923		3		1,133		4
Mortgage-commercial		5,620		7,548		—		8,372		60
Consumer:
Home Equity		—		—		—		—		—
Other		—		—		—		—		—
	$	6,477	$	8,480	$	3	$	9,518	$	64

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 monthly 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered as pass rated loans. As of March 31, 2016 and December 31, 2015, 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 March 31, 2016 and December 31, 2015, no loans were classified as doubtful.

Note 4—Loans-continued

(Dollars in thousands)
March 31, 2016			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	38,848	$	241	$	3	$	—	$	39,092
Real estate:
Construction		38,856		455		—		—		39,311
Mortgage – residential		45,756		838		1,174		—		47,768
Mortgage – commercial		313,127		6,870		9,096		—		329,093
Consumer:
Home Equity		30,074		176		169		—		30,419
Other		8,335		1		2		—		8,338
Total	$	474,996	$	8,581	$	10,444	$	—	$	494,021

(Dollars in thousands)
December 31, 2015			Special
	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial & agricultural	$	37,501	$	299	$	9	$	—	$	37,809
Real estate:
Construction		35,374		455		—		—		35,829
Mortgage – residential		46,580		1,378		1,119		—		49,077
Mortgage – commercial		310,367		7,555		9,056		—		326,978
Consumer:
Home Equity		30,587		180		139		—		30,906
Other		8,587		1		4		—		8,592
Total	$	468,996	$	9,868	$	10,327	$	—	$	489,191

At March 31, 2016 and December 31, 2015, non-accrual loans totaled $6.0 million and $4.8 million, respectively.

TDRs that are still accruing and included in impaired loans at March 31, 2016 and December 31, 2015 amounted to $2.0 million and $1.6 million, respectively. TDRs in non-accrual status at both March 31, 2016 and December 31, 2015 amounted to $1.8 million.

Loans greater than 90 days delinquent and still accruing interest were $32.2 thousand as of March 31, 2016. There were no loans greater than 90 days delinquent and still accruing interest as of December 31, 2015.

Note 4—Loans-continued

We account for acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Purchase credit impaired (“PCI”) loans acquired totaled $4.2 million at estimated fair value, and acquired performing loans totaling $102.3 million at estimated fair value were not credit impaired. The gross contractual amount receivable for PCI loans and acquired performing loans was approximately $5.7 million and $116.0 million, respectively, as of the acquisition date. For the acquired performing loans, the best estimate at acquisition date of contractual cash flows not expected to be collected is $825 thousand. Determining the fair value of PCI loans at acquisition required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of cash flows expected to be collected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and is called the nonaccretable difference. In accordance with GAAP, there was no carry-over of previously established allowance for credit losses from the acquired company.

In conjunction with the acquisition of Savannah River Financial Corporation of Augusta, Georgia, the bank holding company for Savannah River Banking Company (“Savannah River”) on February 1, 2014, the acquired PCI loan portfolio was accounted for at fair value as follows:

(Dollars in thousands)	February 1, 2014

Contractual principal and interest at acquisition	$	5,717
Nonaccretable difference		(1,205	)
Expected cash flows at acquisition		4,512
Accretable yield		(272	)
Basis in PCI loans at acquisition – estimated fair value	$	4,240

Note 4—Loans-continued

A summary of changes in the accretable yield for PCI loans for the three months ended March 31, 2016 and March 31, 2015 follows (in thousands):

(Dollars in thousands)	Three Months Ended March 31, 2016			Three Months Ended March 31, 2015

Accretable yield, beginning of period	$	92		$	75
Additions		—			—
Accretion		(42	)		(437	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		—			390
Other changes, net		—			—
Accretable yield, end of period	$	50		$	28

The following tables are by loan category and present loans past due and on non-accrual status as of March 31, 2016 and December 31, 2015:

(Dollars in thousands) March 31, 2016	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	7	$	—	$	—	$	3	$	10	$	39,082	$	39,092
Real estate:
Construction		—		499		—		—		499		38,812		39,311
Mortgage-residential		211		13		24		829		1,077		46,691		47,768
Mortgage-commercial		730		367		—		5,181		6,278		322,815		329,093
Consumer:
Home equity		204		30		8		—		242		30,177		30,419
Other		20		10		—		—		30		8,308		8,338
Total	$	1,172	$	919	$	32	$	6,013	$	8,136	$	485,885	$	494,021

(Dollars in thousands) December 31, 2015	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Nonaccrual		Total Past Due		Current		Total Loans
Commercial	$	5	$	—	$	—	$	9	$	14	$	37,795	$	37,809
Real estate:
Construction		—		—		—		—		—		35,829		35,829
Mortgage-residential		126		195		—		799		1,120		47,957		49,077
Mortgage-commercial		1,180		290		—		4,031		5,501		321,477		326,978
Consumer:
Home equity		135		—		—		—		135		30,771		30,906
Other		4		4		—		—		8		8,584		8,592
Total	$	1,450	$	489	$	—	$	4,839	$	6,778	$	482,413	$	489,191

Note 4—Loans-continued

The Company identifies TDRs as impaired under the guidance in ASC 310-10-35. As shown in the table below, one loan was determined to be a TDR during the three months ended March 31, 2016. The loan was modified to extend the term of the loan due to financial hardship of the borrower. There were no loans determined to be TDRs that were restructured during the three-month period ended March 31, 2015.

Troubled Debt Restructurings	For the three months ended March 31, 2016
(Dollars in thousands)

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Accrual
Mortgage-Commercial		1	$	413	$	413
Total Accrual		1	$	—	$	—

Total TDRs		1	$	413	$	413

The following table, by loan category, presents loans determined to be TDRs in the twelve month period preceding March 31, 2015 that subsequently defaulted during the three month period ended March 31, 2015. During the three month period ended March 31, 2016, there were no loans determined to be TDRs in the previous twelve months that had payment defaults. Defaulted loans are those loans that are greater than 89 days past due.

Troubled Debt Restructurings that subsequently defaulted this period (Dollars in thousands)	For the three months ended March 31, 2015
	Number of Contracts		Recorded Investment
Mortgage-Commercial		1	$	1,391
Mortgage-Consumer		1		180
Total TDRs		2	$	1,571

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. All non-accrual loans are written down to their corresponding collateral value. All troubled TDR accruing loans that have a loan balance that exceeds the present value of cash flows 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:

In January 2014, the FASB amended the Equity Method and Joint Ventures topic of the Accounting Standards Codification. The amendments provide criteria that must be met in order to apply a proportional amortization method to Low-Income Housing Tax Credit investments and provide guidance on the method used to amortize the investment, the impairment approach, and the eligibility criteria for entities that have other arrangements (e.g., loans) with the limited liability entity. The amendments were effective for the Company for new investments in qualified affordable housing projects for interim and annual periods beginning after December 15, 2014. The Company continues to use the effective yield method for existing investments in qualified affordable housing projects. These amendments did not have a material effect on its financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments became effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the amendments are effective. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2015, the FASB issued guidance to eliminate from U.S. GAAP the concept of an extraordinary item, which is an event or transaction that is both (1) unusual in nature and (2) infrequently occurring. Under the new guidance, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; or (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company will apply the guidance prospectively. The Company does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 The Company does not expect these amendments to have a material effect on its financial statements.

5 - Recently Issued Accounting Pronouncements-continued

In April 2015, the FASB issued guidance which changes the presentation of debt issuance costs. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2015, the FASB issued guidance which provides a practical expedient that permits the Company to measure defined benefit plan assets and obligations using the month-end that is closest to the Company’s fiscal year-end. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

In April 2015, the FASB issued guidance which provides guidance to customers about whether a cloud computing arrangement includes a software license. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

In May 2015, the FASB issued guidance which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers. As a result of the deferral, the guidance in ASU 2014-09 will be effective for the Company for reporting periods beginning after December 15, 2017 The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

In September 2015, the FASB amended the Business Combinations topic of the Accounting Standards Codification to simplify the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. The amendments became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All entities are required to apply the amendments prospectively to adjustments to provisional amounts that occur after the effective date. The Company does not expect these amendments to have a material effect on its financial statements.

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

5 - Recently Issued Accounting Pronouncements-continued

In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.- The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

In March 2016, the FASB amended the Liabilities topic of the Accounting Standards Codification to address the current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is effectiveto each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.- The Company will apply the guidance prospectively to each period presented. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Derivatives and Hedging topic of the Accounting Standards Codification to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendments will be effective for financial statements issued for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company will apply the guidance using a modified retrospective transition to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Investments—Equity Method and Joint Ventures topic of the Accounting Standards Codification to eliminate the requirement to retroactively adopt the equity method of accounting. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company will apply the guidance prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The Company does not expect these amendments to have a material effect on its financial statements

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its 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.

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 MBSs issued both by government sponsored enterprises and PLMBSs. 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 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.

Note 6 – Fair Value of Financial Instruments - continued

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.

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

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.

Note 6 – Fair Value of Financial Instruments - continued

The carrying amount and estimated fair value by classification level of the Company’s financial instruments as of March 31, 2016 and December 31, 2015 are as follows:

	March 31, 2016
			Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	25,825	$	25,825	$	25,825	$	—	$	—
Held-to-maturity securities		17,327		17,806		—		17,806		—
Available-for-sale securities		266,779		266,779		817		265,545		417
Other investments, at cost		1,913		1,913		—		—		1,913
Loans held for sale		2,545		2,545		—		2,545		—
Net loans receivable		494,021		488,856		—		480,814		8,042
Accrued interest		2,681		2,681		2,681		—		—
Financial liabilities:
Non-interest bearing demand deposits	$	163,383	$	163,383	$	—	$	163,383	$	—
NOW and money market accounts		317,980		317,980		—		317,980		—
Savings		64,007		64,007		—		64,007		—
Time deposits		176,866		177,054		—		177,054		—
Total deposits		722,236		722,424		—		722,424		—
Federal Home Loan Bank Advances		24,432		25,925		—		25,925		—
Short term borrowings		20,697		20,697		—		20,697		—
Junior subordinated debentures		14,964		15,006		—		15,006		—
Accrued interest payable		670		670		670		—		—

	December 31, 2015
			Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and short term investments	$	22,941	$	22,941	$	22,941	$	—	$	—
Held-to-maturity securities		17,371		17,555		—		17,555		—
Available-for-sale securities		264,687		264,687		812		263,458		417
Other investments, at cost		1,783		1,783		—		—		1,783
Loans held for sale		2,962		2,962		—		2,962		—
Net loans receivable		484,595		484,669		—		478,195		6,474
Accrued interest		2,877		2,877		2,877		—		—
Financial liabilities:
Non-interest bearing demand deposits	$	156,247	$	156,247	$	—	$	156,247	$	—
NOW and money market accounts		318,308		318,308		—		318,308		—
Savings		60,699		60,699		—		60,699		—
Time deposits		180,897		181,325		—		181,325		—
Total deposits		716,151		716,579		—		716,579		—
Federal Home Loan Bank Advances		24,788		25,841		—		25,841		—
Short term borrowings		21,033		21,033		—		21,033		—
Junior subordinated debentures		14,964		14,954		—		14,954		—
Accrued interest payable		652		652		652		—		—

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 March 31, 2016 and December 31, 2015 that are measured on a recurring basis. There were no liabilities carried at fair value as of March 31, 2016 or December 31, 2015 that are measured on a recurring basis.

(Dollars in thousands)

Description	March 31, 2016		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
US Treasury Securities	$	1,564	$	—	$	1,564	$	—
Government sponsored enterprises		1,023		—		1,023		—
Mortgage-backed securities		149,455		—		149,455		—
Small Business Administration pools		57,427		—		57,427		—
State and local government		56,016		—		56,016		—
Corporate and other securities		1,294		817		60		417
Total	$	266,779	$	817	$	265,545	$	417

(Dollars in thousands)

Description	December 31, 2015		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
US Treasury Securities	$	1,522	$	—	$	1,522	$	—
Government sponsored enterprises		992		—		992		—
Mortgage-backed securities		146,261		—		146,261		—
Small Business Administration pools		57,328		—		57,328		—
State and local government		57,295		—		57,295		—
Corporate and other securities		1,289		812		60		417
Total	$	264,687	$	812	$	263,458	$	417

Note 6 – Fair Value of Financial Instruments - continued

The following table reconciles the changes in Level 3 financial instruments for the three months ended March 31, 2016 and March 31, 2015 that are measured on a recurring basis.

	March 31,
	2016		2015
(Dollars in thousands)	Corporate Preferred Stock		Corporate Preferred Stock
Beginning Balance	$	417	$	417
Total gains or losses (realized/unrealized) Included in earnings		—		—

Included in other comprehensive income		—		—

Purchases, issuances, and settlements		—		—

Transfers in and/or out of Level 3		—		—
Ending Balance	$	417	$	417

(Dollars in thousands)
Description	March 31, 2016		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	3	$	—	$	—	$	3
Real estate:
Mortgage-residential		874		—		—		874
Mortgage-commercial		7,165		—		—		7,165
Consumer:
Home equity		—		—		—		—
Other		—		—		—		—
Total impaired		8,042		—		—		8,042
Other real estate owned:
Construction		276		—		—		276
Mortgage-residential		156		—		—		156
Mortgage-commercial		1,052		—		—		1,052
Total other real estate owned		1,484		—		—		1,484
Total	$	9,526	$	—	$	—	$	9,526

Note 6 – Fair Value of Financial Instruments - continued

(Dollars in thousands)
Description	December 31, 2015		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial	$	9	$	—	$	—	$	9
Real estate:
Mortgage-residential		845		—		—		845
Mortgage-commercial		5,620		—		—		5,620
Consumer:
Home equity		—		—		—		—
Other		—		—		—		—
Total impaired		6,474		—		—		6,474
Other real estate owned:
Construction		276		—		—		276
Mortgage-residential		191		—		—		191
Mortgage-commercial		1,991		—		—		1,991
Total other real estate owned		2,458		—		—		2,458
Total	$	8,932	$	—	$	—	$	8,932

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 consists 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, among others, geographic sales trends, the value of comparable surrounding properties and the condition of the property. The aggregate amount of impaired loans was $8.0 million and $6.5 million as of March 31, 2016 and December 31, 2015, respectively.

Note 6 – Fair Value of Financial Instruments - continued

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2016 and December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

(Dollars in thousands)	Fair Value as of March 31, 2016	Valuation Technique	Significant Observable Inputs	Significant Unobservable Inputs
Preferred stock	$417	Estimation based on comparable non-listed securities	Comparable transactions	n/a
OREO	$1,484	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	$8,042	Appraisal Value	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost

(Dollars in thousands)	Fair Value as of December 31, 2015	Valuation Technique	Significant Observable Inputs	Significant Unobservable Inputs
Preferred stock	$417	Estimation based on comparable non-listed securities	Comparable transactions	n/a
OREO	$2,458	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	$6,474	Appraisal Value	Appraisals and or sales of comparable properties	Appraisals discounted 6% to 16% for sales commissions and other holding cost

Note 7 — Deposits

The Company’s total deposits are comprised of the following at the dates indicated:

	March 31,		December 31,
Dollars in thousands	2016		2015
Non-interest bearing demand deposits	$	163,383	$	156,247
NOW and money market accounts		317,980		318,308
Savings		64,007		60,699
Time deposits		176,866		180,897
Total deposits	$	722,236	$	716,151

As of March 31, 2016 and December 31, 2015, the Company had time deposits greater than $250,000 of $20.8 million and $21.2 million, respectively.

Note 8 – Subsequent Events

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 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 2015 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) and the following:

credit losses as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, changes in customer 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;

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

examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for loan losses or write-down assets;

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;

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 governmental initiatives affecting the financial services industry;

general economic conditions resulting in, among other things, a deterioration in credit quality;

changes occurring in business conditions and inflation;

changes in access to funding or increased regulatory requirements with regard to funding;

increased cybersecurity risk, including potential business disruptions or financial losses;

changes in deposit flows;

changes in technology;

our current and future products, services, applications and functionality and plans to promote them;

changes in monetary and tax policies;

changes in accounting standards, policies, estimates, practices and procedures;

our assumptions and estimates used in applying critical accounting policies, which may prove unreliable, inaccurate or not predictive of actual results;

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, including levels of capital required under the capital rules implementing Basel III;

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;

disruptions due to flooding, severe weather or other natural disasters; and

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

Because of these and other risks and uncertainties, our actual future results may be materially different from the results indicated by any forward-looking statements. For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our 2015 Annual Report on Form 10-K as filed with the SEC. In addition, our past results of operations do not necessarily indicate our future results. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

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 three months ended March 31, 2016 as compared to the three-month period ended March 31, 2015 and also analyzes our financial condition as of March 31, 2016 as compared to December 31, 2015. 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 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.

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.

Recent Developments

On February 18, 2015, the Bank entered into the Stipulation and Consent to the Issuance of a Consent Order with the FDIC consenting to the issuance by the FDIC of a Consent Order (the “Consent Order”). The Consent Order required the Bank to take certain actions with respect to the Bank Secrecy Act and anti-money laundering laws and regulations (collectively referred to as the “BSA”), including, among other things, enhancing its annual BSA risk assessment processes; revising certain internal controls related to BSA; and further developing and implementing certain BSA-related training programs. The Bank took immediate actions to correct and resolve all of the BSA issues included in the Consent Order and, on January 28, 2016, the FDIC advised the Bank that the Consent Order had been terminated.

On March 16, 2016, First Community Bank, the subsidiary of First Community Corporation, announced that it was expanding its loan production office in the Greenville, South Carolina market with the addition of three new commercial bankers.

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 March 31, 2016 and our notes included in the consolidated financial statements in our 2015 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.

Allowance for Loan Losses

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

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the carrying value of goodwill is less than fair value. These qualitative factors include but are not limited to overall deterioration in general economic conditions, industry and market conditions, and overall financial performance. If determined that it is more likely than not that there has been a deterioration in the fair value of the carrying value than the first of a two-step process would be performed. The first step, used to identify potential impairment, involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.

If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that the Company has one reporting unit.

Core deposit intangibles consist of costs that resulted from the acquisition of deposits from Savannah River and First South. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in this transaction. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.

Income Taxes and Deferred Tax Assets and Liabilities

Income taxes are provided for the tax effects of the transactions reported in our consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, write downs of OREO properties, accumulated depreciation, net operating loss carry forwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. A valuation allowance is recorded when it is “more likely than not” that a deferred tax asset will not be realized. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for the Bank. At March 31, 2016 and December 31, 2015, we were in a net deferred tax asset position.

Other-Than-Temporary Impairment

We evaluate securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value (See Note 3 to the Consolidated Financial Statements).

Business Combinations, Method of Accounting for Loans Acquired

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality. and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Comparison of Results of Operations for Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015

Net Income

Our net income for the three months ended March 31, 2016 was $1.5 million, or $0.22 diluted earnings per common share, as compared to $1.4 million, or $0.21 diluted earnings per common share, for the three months ended March 31, 2015. The slight increase in net income between the two periods is primarily due to a $266 thousand decrease in the provision for loan losses from $406 thousand in the three months ended March 31, 2015 to $140 thousand in the same period of 2016. Net interest income decreased $111 thousand for the quarter ended March 31, 2016 as compared to the same period 2015. As discussed below, the net interest income in the three months ended March 31, 2015 was positively impacted by two pay-offs on purchased impaired loans. Average earning assets increased by $48.1 million in the first quarter of 2016 as compared to the same period in 2015. Average earning assets were $744.0 million during the three months ended March 31, 2015 as compared to $792.1 million during the three months ended March 31, 2016. The net interest margin on a tax equivalent basis decreased to 3.33% during the first quarter of 2016 as compared to 3.62% during the first quarter of 2015.

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 three-month periods ended March 31, 2016 and 2015, along with average balances and the related interest income and interest expense amounts.

Net interest income was $6.3 million and $6.4 million for the three months ended March 31, 2016 and 2015, respectively. Interest rates over the last several years have remained at historically low levels, and this trend continued in the first quarter of 2016. Our tax equivalent net interest margin decreased by 29 basis points from 3.62% at March 31, 2015 to 3.33% at March 31, 2016. The net interest margin was positively impacted during the first quarter of 2015 as a result of two pay-offs on purchased credit impaired loans. These two payoffs accounted for approximately $420 thousand (22 basis points) in our taxable equivalent net-interest margin. Excluding the impact of these payoffs, our taxable equivalent net interest margin would have been approximately 3.40% for the three month period ended March 31, 2015. The yield on earning assets for the three months ended March 31, 2016 and 2015 was 3.62% and 3.97%, respectively. The cost of interest-bearing liabilities during the first three months of 2016 was 0.52% as compared to 0.57% in the same period of 2015. For the three months ended March 31, 2015, loans averaged 60.6% of average earning assets as compared to 62.1% in the same period of 2016. The yield on loans decreased 64 basis points in the first quarter of 2016 (4.64%) as compared to the same period in 2015 (5.28%). Absent the two payoffs mentioned above, the yield on loans for the period ended March 31, 2015 would have been approximately 4.85%. The yield on our securities portfolio remained relatively flat from 2.02% for the three months ended March 31, 2015 to 2.03% for the same period in 2016. Our cost of funds was 0.52% for the three months ended March 31, 2016 as compared to 0.57% for the three months ended March 31, 2015. During the first quarter of 2016, deposit account funding, excluding time deposits, represented 75.1% of total average deposits. For the first quarter of 2015, funding from these lower cost deposit sources represented 71.1% of total deposits on average.

Provision and Allowance for Loan Losses

At March 31, 2016 and December 31, 2015, the allowance for loan losses was $4.7 million, or 0.95% of total loans (excluding loans held for sale), and $4.6 million, or 0.94% of total loans (excluding loans held for sale), respectively. No allowance for loan losses related to the Savannah River acquired loans was recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk. Loans acquired were recorded at the acquisition date fair value, which was based on expected cash flows and included an estimation of expected future loan losses for the purchased credit-impaired loans, including principal and interest. There have been no material adjustments to our original fair value assumptions since the acquisition date. At March 31, 2016 and December 31, 2015, the allowance for loan losses plus the remaining fair value adjustment related to credit as a percentage of total loans (excluding loans held for sale) was 1.12% and 1.15%, respectively. Our provision for loan losses was $140 thousand and $406 thousand for the three months ended March 31, 2016 and 2015, respectively. 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.

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 (See Note 4 – Loans). The annualized weighted average loss ratios over the last 36 months for loans classified substandard, special mention and pass have been approximately 5.84%, 3.40% and 0.08%, respectively. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses. The allocated portion of the allowance is based on historical loss experience as well as certain qualitative factors as explained above. The qualitative factors have been established based on certain assumptions made as a result of the current economic conditions and are adjusted as conditions change to be directionally consistent with these changes. 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 economic conditions and sustained levels of high national unemployment. 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. As economic conditions show sustainable improvement, we believe the unallocated portion of the allowance should decrease as a percentage of the total allowance.

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 that began in late 2007. 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, and 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 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 $7.5 million (0.86% of total assets) at March 31, 2016 as compared to $7.3 million (0.85% of total assets) at December 31, 2015. While we believe the non-performing assets to total assets ratios are favorable in comparison to current industry results (both nationally and locally), we continue to be concerned about the impact of this economic environment on our customer base of local businesses and professionals. There were 42 loans, totaling $6.0 million, included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at March 31, 2016. The two largest loans included in non-accrual status are in the amount of $1.1 million and $1.0 million, respectively. The first of these is secured by a first mortgage on developed lots to be sold for residential use. The second loan is secured by a first lien on a hotel property that is currently operational. The average balance of the remaining 40 loans is approximately $100 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 March 31, 2016, we had loans totaling $2.1 million that were delinquent 30 days to 89 days representing 0.42% of total loans.

Our management continuously monitors non-performing, classified and past due loans to identify deterioration regarding the condition of these loans. We have identified one loan relationship in the aggregate amount of $422 thousand that is current as to principal and interest and not included in non-performing assets that could represent a potential problem loan. This loan is secured by a first lien on commercial real estate property. This balance is included as a substandard loan in Note 4 of the financial statements.

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

Allowance for Loan Losses

(Dollars in thousands)	Three Months Ended March 31,
	2016			2015
Average loans outstanding (including loans held for sale)	$	492,219		$	450,988
Loans outstanding at period end	$	494,021		$	454,301
Non-performing assets:
Nonaccrual loans	$	6,013		$	5,943
Loans 90 days past due still accruing		32			—
Foreclosed real estate		1,484			2,748
Repossessed-other		—			—
Total non-performing assets	$	7,529		$	8,691

Beginning balance of allowance	$	4,596		$	4,132
Loans charged-off:
Construction and development		—			—
1-4 family residential mortgage		—			56
Non-residential real estate		45			291
Home equity		18			—
Commercial		—			—
Installment & credit card		—			11
Total loans charged-off		63			358
Recoveries:
1-4 family residential mortgage		2			1
Non-residential real estate		6			4
Home equity		1			1
Commercial		2			2
Installment & credit card		3			64
Total recoveries		14			72
Net loan charge offs (recoveries)		49			286
Provision for loan losses		140			406
Balance at period end	$	4,687		$	4,252

Net charge -offs to average loans		.01	%		.06	%
Allowance as percent of total loans		0.95	%		0.94	%
Non-performing assets as % of total assets		0.87	%		1.04	%
Allowance as % of non-performing loans		77.5	%		71.5	%

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

(Dollars in thousands)	March 31, 2016					December 31, 2015
			% of loans in					% of loans in
	Amount		Category			Amount		Category
Commercial, Financial and Agricultural	$	73		7.9	%	$	75		7.7	%
Real Estate – Construction		57		8.0	%		51		7.3	%
Real Estate Mortgage:
Commercial		2,001		66.6	%		2,036		66.9	%
Residential		237		9.7	%		223		10.0	%
Consumer:
Home Equity		87		6.1	%		127		6.3	%
Other		26		1.7	%		37		1.8	%
Unallocated		2,206		N/A			2,047		N/A
Total	$	4,687		100.0	%	$	4,596		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 quarter of 2016 was $2.1 million as compared to $2.0 million during the same period in 2015. Mortgage banking income decreased $70 thousand, primarily resulting from the loss of one of our producers due to his resignation during the quarter. Investment advisory and commissions on sale of non-deposit investment products remained relatively flat in the first quarter of 2016 and totaled $291 thousand as compared to $296 thousand in the same period in 2015. Management continues to focus on increasing both the mortgage banking income as well as the investment advisory fees and commissions. In the mortgage banking area, we continue to seek to hire skilled producers. We also continue to put a significant emphasis on increasing the recurring investment advisory and commission revenue by increasing total assets under management. During the first quarter of 2015, we sold $7.0 million in MBSs that resulted in a gain of $104 thousand. This compares to gains on sales of investment securities of $59 thousand during the first quarter of 2016. The 2015 gains were substantially offset by a $103 thousand loss on the early payoff of $2.7 million in FHLB advances. Non-interest income “Other” increased by $126 thousand during the three months ended March 31, 2016, which was primarily due to an increase in ATM/debit card interchange fees of $42 thousand, a $27 thousand increase in rental income resulting from fully renting excess space in our Augusta office and a $47 thousand increase in bank owned life insurance income.

Total non-interest expense increased $242 thousand in first quarter of 2016 as compared to the same quarter in 2015 at $6.3 million and $6.1 million, respectively. Salary and benefit expense increased $186 thousand from $3.6 million in the first quarter of 2015 to $3.8 million in the first quarter of 2016. This increase is primarily a result of the addition normal salary adjustments, the addition of the new Greenville loan production office staff as well as increased medical benefit premiums. At March 31, 2016 and 2015, we had 193 and 185 full time equivalent employees, respectively. Occupancy expense increased $74 thousand in the first quarter of 2016 as compared to the first quarter of 2015. The increase in occupancy expense relates to repair costs associated with the fourth quarter 2015 flooding and rain that were not previously identified and determined not to be covered by insurance in the approximate amount of $50 thousand. Marketing and public relations expense decreased from $226 thousand in the first quarter of 2015 to $94 thousand in the first quarter of 2016. The timing of a media campaigns impact the recognition of marketing expense and, in 2015, these costs were primarily incurred in the first quarter. It is expected that we will have these higher media costs in the latter part of the second and third quarters of 2016. Other real estate expense decreased $104 thousand in the first quarter of 2016 as compared to the same period in 2015. This reflects the overall decrease in the level of our repossessed real estate assets between the two periods. Non-interest expense “Other” increased by $211 thousand in the first quarter of 2016 as compared to the same period in 2015. This increase is a result of $64 thousand in costs associated with the mass reissue of our debit cards to implement the new EMV (chip) card. Prior to the reissue, we also had higher levels of fraud activity on our card base in the first quarter of 2016 as compared to the same period in 2015. The higher level of losses in the first quarter of 2016 accounted for approximately $38 thousand of the “Other” non-interest expense increase. We believe this higher level of “chip” card technology will ultimately reduce the level of fraud activity on debit cards. Also included in the increase of “Other” non-interest expense were costs of approximately $23 thousand related to converting our current bill pay system to another vendor. This conversion is expected to become effective in the second quarter of 2016.

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

(In thousands)	Three months ended
	March 31,
	2016		2015
Data processing	$	278	$	139
Supplies		46		25
Telephone		89		85
Courier		23		21
Correspondent services		54		57
Insurance		71		68
Postage		48		49
Legal and professional fees		156		151
Loss on limited partnership interest		35		41
Director fees		111		109
Shareholder expense		35		39
Other		291		243
	$	1,237	$	1,027

Income Tax Expense

Our effective tax rate was 24.5% and 27.0% in the first quarter of 2016 and 2015, respectively. This decrease primarily relates to the increase in the amount of bank owned life insurance (“BOLI”) holdings between the two periods. Income recorded on these BOLI holdings is exempt from federal tax. As a result, of our current level of tax exempt securities in our investment portfolio and our BOLI holdings, the effective tax rate is expected to be 26.0% to 27.0% throughout the remainder of 2016.

Financial Position

Assets totaled $870.4 million at March 31, 2016 as compared to $862.7 million at December 31, 2015, an increase of $7.7 million. Loans increased by approximately $4.8 million during the quarter ended March 31, 2016. Loans (excluding loans held for sale) at March 31, 2016 were $494.0 million as compared to $489.2 million at December 31, 2015. Total loan production was $26.4 million during the first quarter of 2016. At March 31, 2016 and December 31, 2015, loans (excluding loans held for sale) accounted for 61.9% and 62.1% of earning assets, respectively. The loan-to-deposit ratio at March 31, 2016 was 68.8% as compared to 68.7% at December 31, 2015. Investment securities increased to $286.0 million at March 31, 2016 from $283.8 million at December 31, 2015. Deposits increased $6.0 million at March 31, 2016 as compared to December 31, 2015. Pure deposits (deposits less time deposits) represented 75.5% of total deposits as of March 31, 2016 as compared to 74.7% at December 31, 2015. We continue to focus on growing our pure deposits as a percentage of total deposits in order to better manage our overall cost of funds. Deposits were $722.2 million at March 31, 2016 as compared to $716.2 million at December 31, 2015. 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 and individuals within the markets we serve. Loan production and portfolio growth rates continue to be impacted by the current economic cycle 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 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.

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

(In thousands)	March 31,						December 31,
	2016						2015
	Amount			Percent			Amount			Percent

Commercial, financial & agricultural	$	39,092			7.9	%	$	37,809			7.7	%
Real estate:
Construction		39,311			8.0	%		35,829			7.3	%
Mortgage – residential		47,768			9.7	%		49,077			10.0	%
Mortgage – commercial		329,093			66.6	%		326,978			66.9	%
Consumer:
Home Equity		30,419			6.1	%		30,906			6.3	%
Other		8,338			1.7	%		8,592			1.8	%
Total gross loans		494,021			100.0	%		489,191			100.0	%
Allowance for loan losses		(4,687	)					(4,596	)
Total net loans	$	489,334					$	484,595

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. Simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income. We model the impact on net interest income for several different changes, to include a flattening, steepening and parallel shift in the yield curve. For each of these scenarios, we model the impact on net interest income in an increasing and decreasing rate environment of 100 and 200 basis points. Policies have been established in an effort to maintain the maximum anticipated negative impact of these modeled changes in net interest income at no more than 10% and 15% respectively, in a 100 and 200 basis point change in interest rates over a twelve month period. 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 asset sensitive within one year. However, neither the “gap” analysis nor asset/liability simulation 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.

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 March 31, 2016 and December 31, 2015 over twelve months.

Net Interest Income Sensitivity

Change in short term interest rates	Hypothetical percentage change in net interest income
	March 31, 2016			December 31, 2015
+200bp		1.68	%		1.61	%
+100bp		1.18	%		0.89	%
Flat		—			—
-100bp		-4.08	%		-3.55	%
-200bp		-6.27	%		-9.19	%

The 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. At the current historically low interest rate levels, we believe that 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 March 31, 2016, the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 3.49% as compared to (0.07%) at December 31, 2015.

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 represent 32.5% of total assets at March 31, 2016. 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. Other 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 interest rate changes and, thus, less reliable sources of funding for liquidity purposes. At March 31, 2016, the amount of certificates of deposits of $100 thousand or more represented 9.5% of total deposits and the amount of certificates of deposits of $250 thousand or more represented 2.9% of deposits. The majority of these deposits are issued to local customers many of whom have other product relationships with the Bank.

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 March 31, 2016, we had issued commitments to extend credit of $77 million, including $31 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 9.4% of total assets at March 31, 2016 and 9.2% at December 31, 2015. The Bank maintains federal funds purchased lines in the total amount of $20.0 million with two financial institutions, although these were not utilized in the first quarter of 2016. The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which when utilized is 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.

Regulatory capital rules released by the federal bank regulatory agencies in July 2013 to implement capital standards, referred to as Basel III and developed by an international body known as the Basel Committee on Banking Supervision, impose higher minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with $500 million or more in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations ‒ which are organizations with $250 billion or more in total consolidated assets, with $10 billion or more in total foreign exposures, or that have opted in to the Basel II capital regime. The new regulatory capital rules became effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain provisions), and all of the requirements in the rules will be fully phased in by January 1, 2019.

The final rule includes certain new and higher risk-based capital and leverage requirements than those previously in place. Specifically, the following minimum capital requirements apply to us:

a new Common Equity Tier 1 risk-based capital ratio of 4.5%;
a Tier 1 risk-based capital ratio of 6% (increased from the former 4% requirement);
a total risk-based capital ratio of 8% (unchanged from former requirements); and
a leverage ratio of 4% (also unchanged from the former requirement).

Under the rules, Tier 1 capital is redefined to include two components: Common Equity Tier 1 capital and additional Tier 1 capital. The new and highest form of capital, Common Equity Tier 1 capital, consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as noncumulative perpetual preferred stock. The rules permit bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions. Tier 2 capital consists of instruments that currently qualify in Tier 2 capital plus instruments that the rules have disqualified from Tier 1 capital treatment. Cumulative perpetual preferred stock, formerly includable in Tier 1 capital, is now included only in Tier 2 capital. Accumulated other comprehensive income (“AOCI”) is presumptively included in Common Equity Tier 1 capital and often would operate to reduce this category of capital. The rules provided a one-time opportunity at the end of the first quarter of 2015 for covered banking organizations to opt out of much of this treatment of AOCI. We elected to opt out from the inclusion of AOCI in Common Equity Tier 1 capital.

In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of Tier 1 Common Equity, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital). The capital conservation buffer will be phased in incrementally over time, becoming fully effective on January 1, 2019, and will consist of an additional amount of common equity equal to 2.5% of risk-weighted assets. As of January 1, 2016, we are required to hold a capital conservation buffer of 0.625%, increasing by that amount each successive year until 2019.

In general, the rules have had the effect of increasing capital requirements by increasing the risk weights on certain assets, including high volatility commercial real estate, certain loans past due 90 days or more or in nonaccrual status, mortgage servicing rights not includable in Common Equity Tier 1 capital, equity exposures, and claims on securities firms, that are used in the denominator of the three risk-based capital ratios.

The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 9.8%, 14.8%, and 15.6%, respectively, at March 31, 2016 as compared to 9.7%, 14.7%, and 15.5%, respectively, at December 31, 2015. The Bank’s CET1 ratio at March 31, 2016 was 14.8% and 14.7% at December 31, 2015. The Company’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.2%, 15.4%, and 16.2%, respectively at March 31, 2016 as compared to 10.2%, 15.4% and 16.2%, respectively at December 31, 2015. The Company’s CET1 ratio at March 31, 2016 and December 31, 2015 was 12.9%. Our management anticipates that the Bank and the Company will remain a well-capitalized institution for at least the next 12 months.

Since the Company is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Federal Reserve Board. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. The Federal Reserve Board’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. In addition, under the prompt corrective action regulations, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions.

In addition, since the Company is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of the Bank to pay dividends to it, which is also subject to regulatory restrictions. As a South Carolina chartered bank, the Bank is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the South Carolina Board of Financial Institutions, the Bank is generally permitted under South Carolina State banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions. The FDIC also has the authority under federal law to enjoin a bank from engaging in what in its opinion constitutes an unsafe or unsound practice in conducting its business, including the payment of a dividend under certain circumstances.

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

	Three months ended March 31, 2016								Three months ended March 31, 2015
	Average			Interest		Yield/			Average			Interest		Yield/
	Balance			Earned/Paid		Rate			Balance			Earned/Paid		Rate
Assets
Earning assets
Loans	$	492,219		$	5,681		4.64	%	$	450,988		$	5,874		5.28	%
Securities:		283,920			1,433		2.03	%		277,308			1,382		2.02	%
Other short-term investments		16,001			23		0.58	%		15,733			27		0.70	%
Total earning assets		792,140			7,137		3.62	%		744,029			7,283		3.97	%
Cash and due from banks		10,836								11,396
Premises and equipment		30,096								29,076
Intangibles		6,455								6,381
Other assets		30,600								26,587
Allowance for loan losses		(4,648	)							(4,240	)
Total assets	$	865,479							$	813,229
Interest-bearing liabilities
Interest-bearing transaction accounts		150,458			46		0.12	%		132,997			39		0.12	%
Money market accounts		165,631			109		0.26	%		152,797			96		0.25	%
Savings deposits		62,333			18		0.12	%		55,137			16		0.12	%
Time deposits		178,743			275		0.62	%		193,308			275		0.58	%
Other borrowings		61,945			352		2.29	%		62,977			409		2.63	%
Total interest-bearing liabilities		619,110			800		0.52	%		597,216			835		0.57	%
Demand deposits		159,479								134,596
Other liabilities		6,555								5,865
Shareholders’ equity		80,335								75,552
Total liabilities and shareholders’ equity	$	865,479							$	813,229


Cost of funds including demand deposits							0.41	%							0.46	%
Net interest spread							3.10	%							3.40	%
Net interest income/margin				$	6,337		3.22	%				$	6,448		3.51	%
Net interest income/margin (taxable equivalent)				$	6,556		3.33	%				$	6,635		3.62	%

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 March 31, 2016 from that presented in our 2015 Annual Report on Form 10-K. See the “Market Risk Management” subsection in Item 2, Management’s 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.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II -

OTHER INFORMATION

Item 1. Legal Proceedings.

We are a party to claims and lawsuits arising in the course of normal business activities. Management is not aware of any material pending legal proceedings against the Company which, if determined adversely, the Company believes would have a material adverse impact on the Company’s financial position, results of operations or cash flows.

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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.

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: May 12, 2016	By:	/s/ Michael C. Crapps
		Michael C. Crapps
		President and Chief Executive Officer


Date: May 12, 2016	By:	/s/ Joseph G. Sawyer
		Joseph G. Sawyer
		Executive Vice President, Principal Financial Officer

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 Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2016 and 2015, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015, and (vi) Notes to Consolidated Financial Statements.