Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the quarterly period ended September 30, 2013

 

o

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

 

for the transition period from          to         

 

Commission File No. 000-28344

 

FIRST COMMUNITY CORPORATION

(Exact name of registrant as specified in its charter)

 

South Carolina

 

57-1010751

(State of Incorporation)

 

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

 

5455 Sunset Boulevard, Lexington, South Carolina 29072

(Address of Principal Executive Offices, Including Zip Code)

 

(803) 951-2265

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

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

 

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

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company   x

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  On November 8, 2013, 5,296,288 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

Consolidated Balance Sheets

3

Consolidated Statements of Income

4

Consolidated Statements of Comprehensive Income (Loss)

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

40

Item 3. Quantitative and Qualitative Disclosures About Market Risk

55

Item 4. Controls and Procedures

55

 

 

PART II — OTHER INFORMATION

56

Item 1. Legal Proceedings

56

Item 1A. Risk Factors

56

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

56

Item 3. Defaults Upon Senior Securities

56

Item 4. Mine Safety Disclosures

56

Item 5. Other Information

56

Item 6. Exhibits

56

 

 

SIGNATURES

57

INDEX TO EXHIBITS

58

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

 

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

 

EX-32 SECTION 1350 CERTIFICATIONS

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

 

 

 

2013

 

December 31,

 

(Dollars in thousands, except par value)

 

(Unaudited)

 

2012

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

10,992

 

$

11,517

 

Interest-bearing bank balances

 

9,332

 

6,779

 

Federal funds sold and securities purchased under agreements to resell

 

626

 

412

 

Investment securities - available for sale

 

228,443

 

203,445

 

Other investments, at cost

 

2,269

 

2,527

 

Loans held for sale

 

2,529

 

9,658

 

Loans

 

345,064

 

332,111

 

Less, allowance for loan losses

 

4,323

 

4,621

 

Net loans

 

340,741

 

327,490

 

Property, furniture and equipment - net

 

17,025

 

17,258

 

Bank owned life insurance

 

10,989

 

10,868

 

Other real estate owned

 

3,607

 

3,987

 

Intangible assets

 

32

 

160

 

Goodwill

 

571

 

571

 

Other assets

 

8,768

 

8,253

 

Total assets

 

$

635,924

 

$

602,925

 

LIABILITIES

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing demand

 

$

106,078

 

$

97,526

 

NOW and money market accounts

 

185,767

 

150,874

 

Savings

 

51,307

 

41,100

 

Time deposits less than $100,000

 

98,995

 

111,182

 

Time deposits $100,000 and over

 

66,445

 

74,295

 

Total deposits

 

508,592

 

474,977

 

Securities sold under agreements to repurchase

 

17,076

 

15,900

 

Federal Home Loan Bank advances

 

34,330

 

36,344

 

Junior subordinated debt

 

15,464

 

15,464

 

Other liabilities

 

7,593

 

6,057

 

Total liabilities

 

583,055

 

548,742

 

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 5,296,288 at September 30, 2013 5,227,300 at December 31, 2012

 

5,296

 

5,227

 

Common stock warrants issued

 

50

 

50

 

Additional paid in capital

 

62,179

 

61,615

 

Restricted stock

 

(518

)

(152

)

Accumulated Deficit

 

(12,460

)

(14,915

)

Accumulated other comprehensive income (loss)

 

(1,678

)

2,358

 

Total shareholders’ equity

 

52,869

 

54,183

 

Total liabilities and shareholders’ equity

 

$

635,924

 

$

602,925

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Nine

 

Nine

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

(Dollars in thousands, except per share data)

 

(Unaudited)

 

(Unaudited)

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

13,202

 

$

13,804

 

Taxable securities

 

2,096

 

3,194

 

Non taxable securities

 

780

 

475

 

Federal funds sold and securities purchased under resale agreements

 

24

 

30

 

Other

 

25

 

31

 

Total interest income

 

16,127

 

17,534

 

Interest expense:

 

 

 

 

 

Deposits

 

1,395

 

2,473

 

Federal funds sold and securities sold under agreement to repurchase

 

27

 

26

 

Other borrowed money

 

1,433

 

1,746

 

Total interest expense

 

2,855

 

4,245

 

Net interest income

 

13,272

 

13,289

 

Provision for loan losses

 

379

 

416

 

Net interest income after provision for loan losses

 

12,893

 

12,873

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

1,115

 

1,159

 

Mortgage banking income

 

2,968

 

2,993

 

Investment advisory fees and non-deposit commissions

 

695

 

492

 

Gain (loss) on sale of securities

 

152

 

(62

)

Gain (loss) on sale of other assets

 

7

 

(8

)

Fair value loss adjustments

 

(2

)

(57

)

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

 

 

(200

)

Loss on early extinguishment of debt

 

(141

)

(121

)

Other

 

1,525

 

1,524

 

Total non-interest income

 

6,319

 

5,720

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

8,934

 

8,179

 

Occupancy

 

1,023

 

1,032

 

Equipment

 

907

 

877

 

Marketing and public relations

 

311

 

367

 

FDIC assessments

 

309

 

497

 

Other real estate expense

 

395

 

559

 

Amortization of intangibles

 

128

 

153

 

Other

 

2,712

 

2,679

 

Total non-interest expense

 

14,719

 

14,343

 

Net income before tax

 

4,493

 

4,250

 

Income taxes

 

1,206

 

1,303

 

Net income

 

$

3,287

 

$

2,947

 

Preferred stock dividends and accretion

 

 

557

 

Preferred stock redemption costs

 

 

119

 

Net income available to common shareholders

 

$

3,287

 

$

2,271

 

Basic earnings per common share

 

$

0.62

 

$

0.60

 

Diluted earnings per common share

 

$

0.62

 

$

0.60

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three

 

Three

 

 

 

Months Ended

 

Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

(Dollars in thousands, except per share data)

 

(Unaudited)

 

(Unaudited)

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

4,379

 

$

4,548

 

Taxable securities

 

784

 

853

 

Non taxable securities

 

294

 

226

 

Federal funds sold and securities purchased under resale agreements

 

9

 

13

 

Other

 

8

 

10

 

Total interest income

 

5,474

 

5,650

 

Interest expense:

 

 

 

 

 

Deposits

 

425

 

738

 

Federal funds sold and securities sold under agreement to repurchase

 

9

 

8

 

Other borrowed money

 

470

 

575

 

Total interest expense

 

904

 

1,321

 

Net interest income

 

4,570

 

4,329

 

Provision for loan losses

 

129

 

115

 

Net interest income after provision for loan losses

 

4,441

 

4,214

 

Non-interest income:

 

 

 

 

 

Deposit service charges

 

387

 

395

 

Mortgage banking income

 

770

 

1,393

 

Investment advisory fees and non-deposit commissions

 

279

 

183

 

Gain (loss) on sale of securities

 

4

 

(35

)

Loss on sale of other assets

 

(23

)

(22

)

Fair value loss adjustments

 

 

(20

)

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

 

 

 

Loss on early extinguishment of debt

 

 

 

Other

 

524

 

508

 

Total non-interest income

 

1,941

 

2,402

 

Non-interest expense:

 

 

 

 

 

Salaries and employee benefits

 

2,948

 

2,874

 

Occupancy

 

343

 

352

 

Equipment

 

310

 

307

 

Marketing and public relations

 

106

 

73

 

FDIC assessment

 

108

 

117

 

Other real estate expense

 

189

 

173

 

Amortization of intangibles

 

32

 

51

 

Other

 

921

 

876

 

Total non-interest expense

 

4,957

 

4,823

 

Net income before tax

 

1,425

 

1,793

 

Income taxes (benefit)

 

379

 

573

 

Net income

 

$

1,046

 

$

1,220

 

Preferred stock dividends

 

 

220

 

Preferred stock redemption costs

 

 

119

 

Net income available to shareholders

 

$

1,046

 

$

881

 

Basic earnings per common share

 

$

0.20

 

$

0.19

 

Diluted earnings per common share

 

$

0.20

 

$

0.19

 

 

See Notes to Consolidated Financial Statements

 

5



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Nine months ended September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

3,287

 

$

2,947

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain(loss) during the period on available-for-sale securities, net of taxes of $2,027 and $418, respectively

 

(3,936

)

787

 

 

 

 

 

 

 

Less: Reclassification adjustment for (gain) loss included in net income, net of taxes of $52 and $21, respectively

 

(100

)

41

 

 

 

 

 

 

 

Reclassification adjustment for other-than-temporary-impairment on securities net of taxes of $0 and $68, respectively

 

 

132

 

Other comprehensive income (loss)

 

(4,036

)

960

 

Comprehensive income (loss)

 

$

(749

)

$

3,907

 

 

 

 

Three months ended September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Net income

 

$

1,046

 

$

1,220

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain (loss) during the period on available-for-sale securities, net of taxes of $411 and $420, respectively.

 

(795

)

791

 

 

 

 

 

 

 

Less: Reclassification adjustment for (gain) loss included in net income, net of taxes of $1 and $12, respectively.

 

(3

)

23

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

(798

)

814

 

Comprehensive income

 

$

248

 

$

2,034

 

 

See Notes to Consolidated Financial Statements

 

6



Table of Contents

 

FIRST COMMUNITY CORPORATION

Consolidated Statements of Changes in Shareholders’ Equity

Nine Months ended September 30, 2013 and September 30, 2012

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Common

 

Additional

 

Nonvested

 

 

 

Other

 

 

 

 

 

Preferred

 

Shares

 

Common

 

Stock

 

Paid-in

 

Restricted

 

Accumulated

 

Comprehensive

 

 

 

(Dollars and shares in thousands)

 

Stock

 

Issued

 

Stock

 

Warrants

 

Capital

 

Stock

 

Deficit

 

Income (Loss)

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

11,137

 

3,308

 

$

3,308

 

$

560

 

$

49,165

 

$

 

$

(17,603

)

$

1,329

 

$

47,896

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,947

 

 

 

2,947

 

Other comprehensive income net of tax expense of $329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

960

 

960

 

Issuance of restricted stock

 

 

 

33

 

33

 

 

 

239

 

(272

)

 

 

 

 

 

Amortization compensation restricted stock

 

 

 

 

 

 

 

 

 

 

 

75

 

 

 

 

 

75

 

Issuance of common stock

 

 

 

1,875

 

1,875

 

 

 

11,917

 

 

 

 

 

 

 

13,792

 

Dividends: Common ($0.12 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(397

)

 

 

(397

)

Preferred

 

 

 

 

 

 

 

 

 

 

 

 

 

(475

)

 

 

(475

)

Redemption of preferred stock

 

(10,535

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,535

)

Accretion and redemption costs

 

148

 

 

 

 

 

 

 

 

 

 

 

(201

)

 

 

(53

)

Dividend reinvestment plan

 

 

 

8

 

8

 

 

 

60

 

 

 

 

 

 

 

68

 

Balance, September 30, 2012

 

$

750

 

5,224

 

$

5,224

 

$

560

 

$

61,381

 

$

(197

)

$

(15,729

)

$

2,289

 

$

54,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

 

5,227

 

$

5,227

 

$

50

 

$

61,615

 

$

(152

)

$

(14,915

)

$

2,358

 

$

54,183

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

3,287

 

 

 

3,287

 

Other comprehensive loss net of tax benefit of $1,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,036

)

(4,036

)

Issuance of restricted stock

 

 

 

60

 

60

 

 

 

493

 

(553

)

 

 

 

 

 

Amortization compensation restricted stock

 

 

 

 

 

 

 

 

 

 

 

187

 

 

 

 

 

187

 

Dividends: Common ($0.17 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

(832

)

 

 

(832

)

Dividend reinvestment plan

 

 

 

9

 

9

 

 

 

71

 

 

 

 

 

 

 

80

 

Balance, September 30, 2013

 

$

 

5,296

 

$

5,296

 

$

50

 

$

62,179

 

$

(518

)

$

(12,460

)

$

(1,678

)

$

52,869

 

 

See Notes to Consolidated Financial Statements

 

7



Table of Contents

 

FIRST COMMUNITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine months ended September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

3,287

 

$

2,947

 

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

 

 

 

 

 

Depreciation

 

655

 

639

 

Premium amortization

 

3,239

 

2,096

 

Provision for loan losses

 

379

 

416

 

Writedowns of other real estate owned

 

41

 

266

 

(Gain) loss on sale of other real estate owned

 

(7

)

8

 

Sale of loans held-for sale

 

107,432

 

91,007

 

Originations of loans-held-for-sale

 

(100,303

)

(95,967

)

Amortization of intangibles

 

128

 

153

 

(Gain) loss on sale of securities

 

(152

)

62

 

Loss on early extinguishment of debt

 

141

 

121

 

Other-than-temporary-impairment on securities

 

 

200

 

Net decrease in fair value option instruments and derivatives

 

2

 

57

 

Writedown of land

 

109

 

 

Decrease in other assets

 

1,572

 

1,628

 

Increase (decrease) in other liabilities

 

1,541

 

(529

)

Net cash provided in operating activities

 

18,064

 

3,104

 

Cash flows from investing activities:

 

 

 

 

 

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

 

(80,972

)

(89,195

)

Maturity of investment securities available-for-sale

 

40,653

 

29,017

 

Proceeds from sale of securities available-for-sale

 

6,306

 

49,540

 

Proceeds from sale of other investments

 

257

 

1,208

 

Increase in loans

 

(14,744

)

(1,698

)

Proceeds from sale of other real estate owned

 

1,476

 

3,487

 

Purchase of property and equipment

 

(682

)

(452

)

Net cash used in investing activities

 

(47,706

)

(8,093

)

Cash flows from financing activities:

 

 

 

 

 

Increase in deposit accounts

 

33,615

 

9,879

 

Increase in securities sold under agreements to repurchase

 

1,176

 

2,036

 

Advances from the FHLB

 

16,500

 

1,500

 

Repayment of advances FHLB

 

(18,655

)

(6,992

)

Proceeds from sale Common Stock

 

 

13,792

 

Redemption of Preferred Stock

 

 

(10,535

)

Dividends paid: Common Stock

 

(832

)

(397

)

Preferred Stock

 

 

(475

)

Dividend reinvestment plan

 

80

 

68

 

Net cash provided from financing activities

 

31,884

 

8,876

 

Net increase in cash and cash equivalents

 

2,242

 

3,887

 

Cash and cash equivalents at beginning of period

 

18,708

 

16,492

 

Cash and cash equivalents at end of period

 

$

20,950

 

$

20,379

 

Supplemental disclosure:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,212

 

$

4,645

 

Income taxes

 

$

 

$

 

Non-cash investing and financing activities:

 

 

 

 

 

Unrealized gain (loss) on securities

 

$

(4,036

)

$

960

 

Transfer of loans to foreclosed property

 

$

1,135

 

$

1,980

 

 

See Notes to Consolidated Financial Statements

 

8



Table of Contents

 

Notes to Consolidated Financial Statements (unaudited)

Note 1    - Organization and Basis of Presentation

 

The unaudited condensed consolidated financial statements include the accounts of First Community Corporation (the “Company”) and its wholly owned subsidiary, First Community Bank (the “Bank”). The Company owns all of the common stock of FCC Capital Trust I. All material intercompany transactions are eliminated in consolidation. The Company was organized on November 2, 1994, as a South Carolina corporation, and was formed to become a bank holding company. The Bank opened for business on August 17, 1995.  FCC Capital Trust I is an unconsolidated special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

 

The following table summarizes the changes in accumulated other comprehensive income (loss) by component, net of tax impact, at the dates and for the periods indicated (in thousands). All amounts are net of income taxes.

 

 

 

Three months

 

 

 

ended September 30,

 

 

 

2013

 

2012

 

Beginning Balance

 

$

(880

)

$

1,475

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications(a)

 

(795

)

791

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)(a)

 

(3

)

23

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

(798

)

814

 

Ending Balance

 

$

(1,678

)

$

2,289

 

 

 

 

Nine months

 

 

 

ended September 30,

 

 

 

2013

 

2012

 

Beginning Balance

 

$

2,358

 

$

1,329

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications(a)

 

(3,936

)

787

 

 

 

 

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)(a)

 

(100

)

173

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

(4,036

)

960

 

Ending Balance

 

$

(1,678

)

$

2,289

 

 


(a)         All other comprehensive income (loss) and reclassifications are related to available-for-sale securities.

 

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 2012 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2013, should be referred to in connection with these unaudited interim financial statements.

 

9



Table of Contents

 

Note 2 — Earnings Per Common Share

 

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

 

 

 

Nine months

 

Three months

 

 

 

Ended September 30,

 

Ended September 30,

 

(In thousands, except price per share)

 

2013

 

2012

 

2013

 

2012

 

Numerator (Net income available to common shareholders)

 

$

3,287

 

$

2,271

 

$

1,046

 

$

881

 

Denominator

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

5,281

 

3,780

 

5,295

 

4,693

 

Dilutive securities:

 

 

 

 

 

 

 

 

 

Deferred compensation

 

 

 

 

2

 

Warrants — Treasury stock method

 

41

 

27

 

46

 

31

 

Diluted earnings per share

 

5,322

 

3,807

 

5,341

 

4,726

 

The average market price used in calculating assumed number of shares

 

$

9.50

 

$

7.84

 

$

10.33

 

$

8.27

 

 

At September 30, 2013, there were 73,022 outstanding options at an average exercise price of $20.23. None of these options has an exercise price below the average market price of $10.33 for the three-month period ended September 30, 2013 or $9.50 for the nine-month period ended September 30, 2013, and, therefore they are not deemed to be dilutive.  In the fourth quarter of 2011, we issued $2.5 million in 8.75% subordinated notes maturing on 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.  These warrants expire December 16, 2019 and are included in dilutive securities in the table above.

 

10



Table of Contents

 

Note 3—Investment Securities

 

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

 

AVAILABLE-FOR-SALE:

 

(Dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair Value

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

3,385

 

$

18

 

$

76

 

$

3,327

 

Mortgage-backed securities

 

123,691

 

1,219

 

1,410

 

123,500

 

Small Business Administration pools

 

58,403

 

397

 

839

 

57,961

 

State and local government

 

43,213

 

138

 

1,998

 

41,353

 

Corporate and other securities

 

2,348

 

 

46

 

2,302

 

 

 

$

231,040

 

$

1,772

 

$

4,369

 

$

228,443

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

1,522

 

$

12

 

$

 

$

1,534

 

Mortgage-backed securities

 

110,425

 

2,343

 

624

 

112,144

 

Small Business Administration pools

 

54,148

 

1,008

 

163

 

54,993

 

State and local government

 

31,483

 

936

 

46

 

32,373

 

Corporate and other securities

 

2,349

 

53

 

1

 

2,401

 

 

 

$

199,927

 

$

4,352

 

$

834

 

$

203,445

 

 

During the nine months ended September 30, 2013 and September 30, 2012, the Company received proceeds of $6.3 million and $49.5 million, respectively, from the sale of investment securities available-for-sale.  Gross realized gains amounted to $238 thousand and gross realized losses amounted to $86 thousand for the nine months ended September 30, 2013.  For the nine months ended September 30, 2012, gross realized gains amounted to $2.0 million and gross realized losses amounted to $2.1 million.   During the three months ended September 30, 2013 and September 30, 2012, the Company received proceeds of $2.8 million and $470 thousand, respectively, from the sale of investment securities available-for-sale. For the three months ended September 30, 2013, gross realized gains amounted to $90 thousand and gross realized losses amounted to $86 thousand.  Gross realized losses amounted to $35 thousand for the three months ended September 30, 2012.  There were no realized gains for the three months ended September 30, 2012.

 

At September 30, 2013, corporate and other securities available-for-sale included the following at fair value: corporate bonds at $1.0 million, mutual funds at $825.7 thousand, foreign debt of $59.5 thousand, and Corporate preferred stock in the amount of $416.7 thousand.  At December 31, 2012, corporate and other securities available-for-sale included the following at fair value: corporate bonds at $1.0 million, mutual funds at $884.5 thousand, foreign debt of $59.7 thousand, Federal Home Loan Mortgage Corporation preferred stock of $30.0 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 $2.3 million and $2.5 million at September 30, 2013 and December 31, 2012, respectively.

 

11



Table of Contents

 

Note 3—Investment Securities — continued

 

During the three month period ended September 30, 2012 and during the three and nine month periods ended September 30, 2013, the Company did not record any other-than-temporary impairment (OTTI) losses.  During the nine month period ended September 30, 2012, the Company recorded OTTI losses on available-for-sale securities as follows:

 

 

 

Nine months
ended
September 30,
2012

 

(Dollars in thousands)

 

Available-for-sale securities

 

Total OTTI charge realized and unrealized

 

$

415

 

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

 

215

 

Net impairment losses recognized in earnings (credit component)

 

$

200

 

 

During 2013 and 2012, OTTIs occurred for which only a portion was attributed to credit loss and recognized in earnings.  The remainder was reported in other comprehensive income.  The following is an analysis of amounts relating to credit losses on debt securities recognized in earnings during the nine months ended September 30, 2013 and 2012.

 

 

 

2013

 

2012

 

 

 

Available
for

 

Available
for

 

(Dollars in thousands) 

 

Sale

 

Sale

 

 

 

 

 

 

 

Balance at beginning of period

 

$

271

 

$

930

 

 

 

 

 

 

 

Other-than-temporary-impairment not previously recognized

 

 

173

 

 

 

 

 

 

 

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

 

 

27

 

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

 

 

(679

)

Realized losses during the period

 

(57

)

(159

)

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

 

$

214

 

$

292

 

 

12



Table of Contents

 

Note 3—Investment Securities — continued

 

In evaluating the non-agency mortgage-backed securities, relevant assumptions, such as prepayment rate, default rate and loss severity on a loan level basis, are used in determining the expected recovery of the contractual cash flows.  The balance of the underlying portfolio cash flows are evaluated using ongoing assumptions for loss severities, prepayment rates and default rates.  The ongoing assumptions for average prepayment rate, default rate and severity used in the valuations were approximately 16.9%, 4.9%, and 57.2%, respectively.   The underlying collateral on substantially all of these securities is fixed rate residential first mortgages located throughout the United States.  The underlying collateral includes various percentages of owner-occupied as well as investment related single-family, 2-4 family and condominium residential properties.  The securities were purchased at various discounts to par value.  Based on the assumptions used in valuing the securities, the Company believes the existing discount and remaining subordinated collateral provide coverage against future credit losses on the downgraded securities for which no OTTI has been recognized.

 

13



Table of Contents

 

Note 3—Investment Securities — continued

 

The following table shows gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous loss position at September 30, 2013 and December 31, 2012.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

September 30, 2013
(Dollars in thousands)

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Fair Value

 

Unrealized
Loss

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Government Sponsored Enterprises

 

$

1,423

 

$

76

 

$

 

$

 

$

1,423

 

$

76

 

Small Business Administration Pools

 

26,680

 

679

 

4,130

 

160

 

30,810

 

839

 

Government Sponsored Enterprise mortgage-backed securities

 

55,079

 

1,291

 

6,340

 

86

 

61,419

 

1,377

 

Non-agency mortgage-backed securities

 

784

 

21

 

739

 

12

 

1,523

 

33

 

Corporate bonds and other

 

872

 

45

 

50

 

1

 

922

 

46

 

State and local government

 

30,220

 

1,976

 

218

 

22

 

30,438

 

1,998

 

Total

 

$

115,058

 

$

4,088

 

$

11,477

 

$

281

 

$

126,535

 

$

4,369

 

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

December 31, 2012
(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

 

$

22,662

 

$

233

 

$

4,583

 

$

13

 

$

27,245

 

$

246

 

Small Business Administration pools

 

11,013

 

158

 

2,447

 

5

 

13,460

 

163

 

Non-agency mortgage-backed securities

 

 

 

2,363

 

378

 

2,363

 

378

 

State and local government

 

2,599

 

46

 

 

 

2,599

 

46

 

Corporate bonds and other

 

 

 

50

 

1

 

50

 

1

 

Total

 

$

36,274

 

$

437

 

$

9,443

 

$

397

 

$

45,717

 

$

834

 

 

Government Sponsored Enterprise, Mortgage-Backed Securities:  At September 30, 2013, the Company owned mortgage-backed securities (“MBSs”), including collateralized mortgage obligations (“CMOs”), with an amortized cost of $123.7 million and approximate fair value of $123.5 million issued by government sponsored enterprises (“GSEs”). As of September 30, 2013 and December 31, 2012, 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 September 30, 2013.

 

14



Table of Contents

 

Note 3—Investment Securities — continued

 

Non-agency mortgage—backed securities: The Company also held private label mortgage-backed securities (“PLMBS”), including CMOs, at September 30, 2013 with an amortized cost of $2.5 million and approximate fair value of $2.5 million.  Management monitors each of these securities on a quarterly basis to identify any deterioration in the credit quality, collateral values and credit support underlying the investments.

 

During the three and nine months ended September 30, 2013, no OTTI charges were recorded in earnings for the PLMBS portfolio.  During the nine months ended September 30, 2012, the Company identified two PLMBS with a fair value of $2.5 million that it considered other-than-temporarily-impaired.  As prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320-10-65, the Company recognized an impairment charge in earnings of $199.8 thousand (credit component) during the nine months ended September 30, 2012.  The $199.8 thousand represents the estimated credit losses on these securities for the nine months ended September 30, 2012. One of the securities identified as other-than-temporarily-impaired during the nine months ended September 30, 2012 was subsequently sold after the impairment was recognized.  The credit losses were estimated by projecting the expected cash flows estimating prepayment speeds, increasing defaults and collateral loss severities.  The credit loss portion of the impairment charge represents the difference between the present value of the expected cash flows and the amortized cost basis of the securities. During the three months ended September 30, 2012, no OTTI charges were recorded in earnings for the PLMBS portfolio.

 

The following table summarizes as of September 30, 2013 the number of CUSIPs, par value, carrying value and fair value of the non-agency MBSs/CMOs by credit rating. The credit rating reflects the lowest credit rating by any major rating agency.

 

(Dollars in thousands)

 

Credit
Rating

 

Number
of
CUSIPs

 

Par
Value

 

Amortized
Cost

 

Fair
Value

 

AA

 

2

 

$

168

 

$

168

 

$

170

 

BBB

 

3

 

210

 

210

 

210

 

Baa1

 

3

 

639

 

639

 

618

 

Baa2

 

1

 

6

 

6

 

6

 

Below Investment Grade

 

4

 

1,802

 

1,490

 

1,498

 

Total

 

13

 

$

2,825

 

$

2,513

 

$

2,502

 

 

Corporate Bonds:  Corporate bonds held by the Company are reviewed on a quarterly basis to identify downgrades by rating agencies as well as deterioration of the underlying collateral or the issuer’s ability to service the debt obligation.  As of September 30, 2013, the Company owns one corporate bond which is rated above investment grade.  The Company does not consider this investment to be OTTI.

 

Small Business Administration Pools: These pools are guaranteed pass-thru with the full faith and credit of the United States government.  Because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company does not consider the investments to be OTTI at September 30, 2013.

 

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 OTTI at September 30, 2013.

 

15



Table of Contents

 

Note 3—Investment Securities — continued

 

The amortized cost and fair value of investment securities at September 30, 2013 by contractual maturity are as follows. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay the obligations with or without prepayment penalties.  MBSs are based on average life at estimated prepayment speeds.

 

 

 

Available-for-sale

 

(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Due in one year or less

 

$

11,936

 

$

11,946

 

Due after one year through five years

 

94,602

 

94,910

 

Due after five years through ten years

 

93,098

 

90,685

 

Due after ten years

 

31,404

 

30,902

 

 

 

$

231,040

 

$

228,443

 

 

16



Table of Contents

 

Note 4—Loans

 

Loans summarized by category as of September 30, 2013 and December 31, 2012 are as follows:

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2013

 

2012

 

Commercial, financial and agricultural

 

$

19,940

 

$

20,924

 

Real estate:

 

 

 

 

 

Construction

 

16,110

 

13,052

 

Mortgage-residential

 

37,506

 

38,892

 

Mortgage-commercial

 

237,934

 

226,575

 

Consumer:

 

 

 

 

 

Home equity

 

26,011

 

27,173

 

Other

 

7,563

 

5,495

 

Total

 

$

345,064

 

$

332,111

 

 

At September 30, 2013 and December 31, 2012, there were $2.5 million and $9.7 million, respectively, of residential mortgage loans held for sale at fair value.  These loans are originated with firm purchase commitments from various investors at the time the loans are closed.  Generally, funds are received and the loans transferred to the investors within three to seven business days.

 

Activity in the allowance for loan losses for the nine months and three months ended September 30, 2013 and 2012 was as follows:

 

 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

Balance at the beginning of period

 

$

4,621

 

$

4,699

 

Provision for loan losses

 

379

 

416

 

Charged off loans

 

(808

)

(496

)

Recoveries

 

131

 

76

 

Balance at end of period

 

$

4,323

 

$

4,695

 

 

 

 

Three months ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

Balance at the beginning of period

 

$

4,439

 

$

4,742

 

Provision for loan losses

 

129

 

115

 

Charged off loans

 

(285

)

(189

)

Recoveries

 

40

 

27

 

Balance at end of period

 

$

4,323

 

$

4,695

 

 

17



Table of Contents

 

Note 4—Loans-continued

 

The detailed activity in the allowance for loan losses and the recorded investment in loans receivable as of and for the nine months ended September 30, 2013 and September 30, 2012 and the year ended December 31, 2012 is as follows:

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2012

 

$

338

 

$

 

$

235

 

$

1,322

 

$

400

 

$

17

 

$

2,309

 

$

4,621

 

Charge-offs

 

29

 

 

44

 

604

 

67

 

64

 

 

808

 

Recoveries

 

31

 

 

64

 

 

3

 

33

 

 

131

 

Provisions

 

(136

)

27

 

65

 

578

 

(188

)

119

 

(86

)

379

 

Ending balance September 30, 2013

 

$

204

 

$

27

 

$

320

 

$

1,296

 

$

148

 

$

105

 

$

2,223

 

$

4,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

4

 

$

165

 

$

 

$

 

$

 

$

169

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

204

 

27

 

316

 

1,131

 

148

 

105

 

2,223

 

4,154

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance-total

 

$

19,940

 

$

16,110

 

$

37,506

 

$

237,934

 

$

26,011

 

$

7,563

 

$

 

$

345,064

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

80

 

 

872

 

4,679

 

 

5

 

 

5,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

19,860

 

$

16,110

 

$

36,634

 

$

233,255

 

$

26,011

 

$

7,558

 

$

 

$

339,428

 

 

18



Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2011

 

$

331

 

$

 

$

514

 

$

1,475

 

$

521

 

$

57

 

$

1,801

 

$

4,699

 

Charge-offs

 

88

 

 

112

 

245

 

 

51

 

 

496

 

Recoveries

 

32

 

 

10

 

 

3

 

31

 

 

76

 

Provisions

 

67

 

 

80

 

(146

)

(147

)

16

 

546

 

416

 

Ending balance September 30, 2012

 

$

342

 

$

 

$

492

 

$

1,084

 

$

377

 

$

53

 

$

2,347

 

$

4,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

342

 

 

492

 

1,084

 

377

 

53

 

2,347

 

4,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance-total

 

$

19,469

 

$

11,739

 

$

36,861

 

$

223,595

 

$

26,778

 

$

5,092

 

$

 

$

323,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

15

 

$

 

$

477

 

$

9,041

 

$

 

$

11

 

$

 

$

9,544

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

19,454

 

$

11,739

 

$

36,384

 

$

214,554

 

$

26,778

 

$

5,081

 

$

 

$

313,990

 

 

19



Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance December 31, 2011

 

$

331

 

$

 

$

514

 

$

1,475

 

$

521

 

$

57

 

$

1,801

 

$

4,699

 

Charge-offs

 

258

 

 

112

 

293

 

 

79

 

 

742

 

Recoveries

 

42

 

 

86

 

 

3

 

37

 

 

168

 

Provisions

 

223

 

 

(253

)

140

 

(124

)

2

 

508

 

496

 

Ending balance December 31, 2012

 

$

338

 

$

 

$

235

 

$

1,322

 

$

400

 

$

17

 

$

2,309

 

$

4,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

338

 

 

235

 

1,322

 

400

 

17

 

2,309

 

4,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance-total

 

$

20,924

 

$

13,052

 

$

38,892

 

$

226,575

 

$

27,173

 

$

5,495

 

$

 

$

332,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

37

 

 

357

 

5,772

 

 

10

 

 

6,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

20,887

 

$

13,052

 

$

38,535

 

$

220,803

 

$

27,173

 

$

5,485

 

$

 

$

325,935

 

 

Loans outstanding to bank directors, executive officers and their related business interests amounted to $9.5 million and $10.5 million at September 30, 2013 and September 30, 2012, respectively. Repayments on these loans during the nine months ended September 30, 2013 were $1.8 million and loans made amounted to $500 thousand. Repayments on these loans during the nine months ended September 30, 2012 were $438 thousand and loans made amounted to $112 thousand during the same period.  Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and generally do not involve more than the normal risk of collectability.

 

20



Table of Contents

 

Note 4—Loans-continued

 

The detailed activity in the allowance for loan losses as of and for the three months ended September 30, 2013 and the three months ended September 30, 2012 is as follows:

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance June 30, 2013

 

$

264

 

$

25

 

$

319

 

$

1,082

 

$

226

 

$

96

 

$

2,427

 

$

4,439

 

Charge-offs

 

22

 

 

8

 

207

 

23

 

25

 

 

285

 

Recoveries

 

11

 

 

2

 

 

2

 

25

 

 

40

 

Provisions

 

(49

)

2

 

7

 

421

 

(57

)

9

 

(204

)

129

 

Ending balance September 30, 2013

 

$

204

 

$

27

 

$

320

 

$

1,296

 

$

148

 

$

105

 

$

2,223

 

$

4,323

 

 

 

 

 

 

 

 

Real estate

 

Real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

Mortgage

 

Mortgage

 

Consumer

 

Consumer

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Construction

 

Residential

 

Commercial

 

Home equity

 

Other

 

Unallocated

 

Total

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance June 30, 2012

 

$

249

 

$

 

599

 

$

1,313

 

$

445

 

$

45

 

$

2,091

 

$

4,742

 

Charge-offs

 

26

 

 

82

 

67

 

 

14

 

 

189

 

Recoveries

 

7

 

 

1

 

 

1

 

18

 

 

27

 

Provisions

 

112

 

 

(26

)

(162

)

(69

)

4

 

256

 

115

 

Ending balance September 30, 2012

 

$

342

 

$

 

$

492

 

$

1,084

 

$

377

 

$

53

 

$

2,347

 

$

4,695

 

 

21



Table of Contents

 

Note 4—Loans-continued

 

The following table presents at September 30, 2013 and December 31, 2012 loans individually evaluated and considered impaired under FAS ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands)

 

2013

 

2012

 

Total loans considered impaired

 

$

5,636

 

$

6,176

 

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

 

 

 

 

 

Outstanding loan balance

 

221

 

 

Related allowance

 

169

 

 

Loans considered impaired and previously written down to fair value

 

5,415

 

6,176

 

Average impaired loans

 

7,196

 

6,704

 

 

The following tables are by loan category and present at September 30, 2013, September, 2012 and December 31, 2012 loans individually evaluated and considered impaired under FAS ASC 310 “Accounting by Creditors for Impairment of a Loan.” Impairment includes performing troubled debt restructurings.

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

Average

 

Interest

 

(Dollars in thousands)

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

 

September 30, 2013

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Investment

 

Recognized

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

80

 

$

80

 

$

 

$

147

 

$

8

 

$

144

 

$

0

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

816

 

831

 

 

973

 

21

 

976

 

3

 

Mortgage-commercial

 

4,514

 

5,104

 

 

5,708

 

80

 

5,713

 

13

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

5

 

6

 

 

17

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

Mortgage-residential

 

56

 

56

 

4

 

57

 

8

 

57

 

1

 

Mortgage-commercial

 

165

 

285

 

165

 

294

 

 

291

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

80

 

$

80

 

$

 

$

147

 

$

8

 

$

144

 

$

0

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

872

 

887

 

4

 

1,030

 

29

 

1,033

 

4

 

Mortgage-commercial

 

4,679

 

5,389

 

165

 

6,002

 

80

 

6,004

 

13

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

5

 

6

 

 

17

 

 

16

 

 

 

 

 

$

5,636

 

$

6,362

 

$

169

 

$

7,196

 

$

117

 

$

7,197

 

$

17

 

 

22



Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

Average

 

Interest

 

(Dollars in thousands)

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

Recorded

 

Income

 

September 30, 2012

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

Investment

 

Recognized

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

15

 

$

46

 

$

 

$

92

 

$

1

 

87

 

$

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

Mortgage-residential

 

477

 

505

 

 

563

 

2

 

543

 

 

Mortgage-commercial

 

9,041

 

9,536

 

 

9,853

 

266

 

9,547

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

11

 

11

 

 

22

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

Mortgage-residential

 

 

 

 

 

 

 

 

Mortgage-commercial

 

 

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

15

 

$

46

 

$

 

$

92

 

$

1

 

87

 

$

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

Mortgage-residential

 

477

 

505

 

 

563

 

2

 

543

 

 

Mortgage-commercial

 

9,041

 

9,536

 

 

9,853

 

266

 

9,547

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

 

 

Other

 

11

 

11

 

 

22

 

 

19

 

 

 

 

$

9,544

 

$

10,098

 

$

 

$

10,530

 

$

269

 

$

10,196

 

$

 

 

23



Table of Contents

 

Note 4—Loans-continued

 

 

 

 

 

Unpaid

 

 

 

Average

 

Interest

 

(Dollars in thousands)

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

December 31, 2012

 

Investment

 

Balance

 

Allowance

 

Investment

 

Recognized

 

With no allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

37

 

$

50

 

$

 

$

53

 

$

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

357

 

381

 

 

442

 

1

 

Mortgage-commercial

 

5,772

 

6,162

 

 

6,188

 

178

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

10

 

10

 

 

21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

 

 

 

 

 

Mortgage-commercial

 

 

 

 

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

37

 

50

 

 

53

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

Mortgage-residential

 

357

 

381

 

 

442

 

1

 

Mortgage-commercial

 

5,772

 

6,162

 

 

6,188

 

178

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

 

 

 

 

Other

 

10

 

10

 

 

21

 

 

 

 

$

6,176

 

$

6,603

 

$

 

$

6,704

 

$

179

 

 

24



Table of Contents

 

Note 4—Loans-continued

 

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.

 

25



Table of Contents

 

Note 4—Loans-continued

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  As of September 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is shown in the table below.  As of September 30, 2013 and December 31, 2012, no loans were classified as doubtful.

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

 

September 30, 2013

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

Commercial, financial & agricultural

 

$

19,678

 

$

176

 

$

86

 

$

 

$

19,940

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

13,105

 

3,005

 

 

 

16,110

 

Mortgage — residential

 

34,988

 

1,105

 

1,413

 

 

37,506

 

Mortgage — commercial

 

223,469

 

5,330

 

9,135

 

 

237,934

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

25,670

 

205

 

136

 

 

26,011

 

Other

 

7,556

 

1

 

6

 

 

7,563

 

Total

 

$

324,466

 

$

9,822

 

$

10,776

 

$

 

$

345,064

 

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

 

December 31, 2012

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

Commercial, financial & agricultural

 

$

20,826

 

$

27

 

$

71

 

$

 

$

20,924

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Construction

 

8,595

 

2,047

 

2,410

 

 

13,052

 

Mortgage — residential

 

36,493

 

1,677

 

722

 

 

38,892

 

Mortgage — commercial

 

208,825

 

3,803

 

13,947

 

 

226,575

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

Home Equity

 

26,604

 

124

 

445

 

 

27,173

 

Other

 

5,475

 

3

 

17

 

 

5,495

 

Total

 

$

306,818

 

$

7,681

 

$

17,612

 

$

 

$

332,111

 

 

At September 30, 2013 and December 31, 2012, non-accrual loans totaled $5.1 million and $4.7 million, respectively.

 

Troubled debt restructurings that are still accruing and included in impaired loans at September 30, 2013 and December 31, 2012 amounted to $584 thousand and $1.5 million, respectively.  Troubled debt restructurings in nonaccrual status at September 30, 2013 and December 31, 2012 amounted to $2.2 million and $1.8 million, respectively.

 

Loans greater than ninety days delinquent and still accruing interest at September 30, 2013 and December 31, 2012 amounted to $54 thousand and $55 thousand, respectively.

 

26



Table of Contents

 

Note 4—Loans-continued

 

The following tables are by loan category and present loans past due and on non-accrual status as of September 30, 2013 and December 31, 2012:

 

(Dollars in thousands)
September 30, 2013

 

30-59
Days
Past Due

 

60-89 Days
Past Due

 

Greater
than 90
Days and
Accruing

 

Nonaccrual

 

Total Past
Due

 

Current

 

Total Loans

 

Commercial

 

$

60

 

$

9

 

$

 

$

80

 

$

149

 

$

19,791

 

$

19,940

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

16,110

 

16,110

 

Mortgage-residential

 

240

 

224

 

54

 

816

 

1,334

 

36,172

 

37,506

 

Mortgage-commercial

 

1,019

 

538

 

 

4,151

 

5,708

 

232,226

 

237,934

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

118

 

26

 

 

 

144

 

25,867

 

26,011

 

Other

 

21

 

3

 

 

5

 

29

 

7,534

 

7,563

 

Total

 

$

1,458

 

$

800

 

$

54

 

$

5,052

 

$

7,364

 

$

337,700

 

$

345,064

 

 

(Dollars in thousands)
December 31, 2012

 

30-59
Days
Past Due

 

60-89 Days
Past Due

 

Greater
than 90
Days and
Accruing

 

Nonaccrual

 

Total Past
Due

 

Current

 

Total Loans

 

Commercial

 

$

17

 

$

107

 

$

 

$

85

 

$

209

 

$

20,715

 

$

20,924

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

13,052

 

13,052

 

Mortgage-residential

 

311

 

378

 

 

357

 

1,046

 

37,846

 

38,892

 

Mortgage-commercial

 

627

 

898

 

55

 

4,263

 

5,843

 

220,732

 

226,575

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

211

 

 

 

 

211

 

26,962

 

27,173

 

Other

 

32

 

7

 

 

10

 

49

 

5,446

 

5,495

 

Total

 

$

1,198

 

$

1,390

 

$

55

 

$

4,715

 

$

7,358

 

$

324,753

 

$

332,111

 

 

27



Table of Contents

 

Note 4—Loans-continued

 

As a result of adopting the amendments in Accounting Standards Update (ASU) 2011-02 (Receivables-Topic 310), the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance.  The Company identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology.  Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35.  The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired.

 

The following tables, by loan category, present loans determined to be TDRs during the nine month periods ended September 30, 2013 and September 30, 2012.  There were no loans determined to be TDRs during the three month periods ended September 30, 2013 and September 30, 2012.

 

 

 

For the nine months ended September 30, 2013

 

Troubled Debt Restructurings
(Dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Nonaccrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

257

 

$

257

 

 

 

 

 

 

 

 

 

Total TDRs

 

1

 

$

257

 

$

257

 

 

 

 

For the nine months ended September 30, 2012

 

Troubled Debt
Restructurings
(Dollars in thousands)

 

Number
of
Contracts

 

Pre-Modification
Outstanding
Recorded
Investment

 

Post-Modification
Outstanding
Recorded
Investment

 

Nonaccrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

1

 

$

53

 

$

53

 

Total nonaccrual

 

1

 

$

53

 

$

53

 

 

 

 

 

 

 

 

 

Accrual

 

 

 

 

 

 

 

Mortgage-Commercial

 

2

 

$

596

 

$

596

 

Total Accrual

 

2

 

$

596

 

$

596

 

 

 

 

 

 

 

 

 

Total TDRs

 

3

 

$

649

 

$

649

 

 

One loan was determined to be a TDR during the nine months ended September 30, 2013.  The loan was modified to extend the terms outside the Company’s guidelines.  During the nine months ended September 30, 2012, the Company modified three loans that were considered to be TDRs.  The payment and interest rate were lowered for two of these loans and the payment was modified to interest only for one loan.

 

28



Table of Contents

 

Note 4—Loans-continued

 

There were no loans determined to be TDRs in the twelve months preceding September 30, 2013 or September 30, 2012 that subsequently defaulted during the three or nine month periods ended September 30, 2013 or September, 30 2012.  Defaulted loans are those loans that are greater than 89 days past due.

 

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

 

29



Table of Contents

 

Note 5 - Recently Issued Accounting Pronouncements

 

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

 

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively.  In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the FASB redeliberated the presentation requirements for the reclassification adjustments.  In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations.  Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements.  However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.  The amendments are effective for the Company on a prospective basis for reporting periods beginning after December 15, 2012.  These amendments did not have a material effect on the Company’s financial statements.

 

On July 17, 2013, the FASB issued guidance that permits the Fed Funds Effective Swap Rate (“Overnight Index Swap Rate” or “OIS”) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges.  The guidance will be effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The Company does not expect these amendments to have a material effect on its financial statements.

 

On July 18, 2013, the FASB issued guidance to eliminate the diversity in practice regarding presentation of unrecognized tax benefits in the statement of financial position.  Under the clarified guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, will be presented in the financial statements as a reduction to a deferred tax asset unless certain criteria are met.  The requirements should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.  The amendments will be effective for the Company for reporting periods beginning after December 15, 2013.  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.

 

30



Table of Contents

 

Note 6 — Fair Value of Financial Instruments

 

The Company adopted FASB ASC Fair Value Measurement Topic 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level l

 

Quoted prices in active markets for identical assets or liabilities.

 

 

 

Level 2

 

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

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

 

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

 

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

 

Loans Held for Sale— The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with an investor, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors at a locked in 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.

 

31



Table of Contents

 

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.  When the OREO value is based upon a current appraisal or when a current appraisal is not available or there is estimated further impairment, the measurement is considered a Level 3 measurement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The carrying amount and estimated fair value by classification Level of the Company’s financial instruments as of September 30, 2013 are as follows:

 

 

 

September 30, 2013

 

 

 

Carrying

 

Fair Value

 

(Dollars in thousands)

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and short term investments

 

$

20,950

 

$

20,950

 

$

20,950

 

$

 

$

 

Available-for-sale securities

 

228,443

 

228,443

 

826

 

227,200

 

417

 

Other investments, at cost

 

2,269

 

2,269

 

 

 

2,269

 

Loans held for sale

 

2,529

 

2,529

 

 

2,529

 

 

Net Loans receivable

 

340,741

 

341,004

 

 

335,537

 

5,467

 

Accrued interest

 

2,011

 

2,011

 

2,011

 

 

 

Interest rate swap

 

(87

)

(87

)

 

 

(87

)

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

106,078

 

$

106,078

 

$

 

$

106,078

 

$

 

NOW and money market accounts

 

185,767

 

185,767

 

 

185,767

 

 

Savings

 

51,307

 

51,307

 

 

51,307

 

 

Time deposits

 

165,440

 

166,877

 

 

166,877

 

 

Total deposits

 

508,592

 

510,029

 

 

510,029

 

 

Federal Home Loan Bank Advances

 

34,330

 

38,346

 

 

38,346

 

 

Short term borrowings

 

17,076

 

17,076

 

 

17,076

 

 

Junior subordinated debentures

 

15,464

 

15,464

 

 

15,464

 

 

Accrued interest payable

 

673

 

673

 

673

 

 

 

 

32



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, 2012 are as follows:

 

 

 

December 31, 2012

 

 

 

Carrying

 

Fair Value

 

(Dollars in thousands)

 

Amount

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and short term investments

 

$

18,708

 

$

18,708

 

$

18,708

 

$

 

$

 

Available-for-sale securities

 

203,445

 

203,445

 

914

 

202,114

 

417

 

Other investments, at cost

 

2,527

 

 

 

 

2,527

 

Loans held for sale

 

9,658

 

9,658

 

 

9,658

 

 

Net loans receivable

 

327,490

 

328,893

 

 

322,717

 

6,176

 

Accrued interest

 

2,098

 

2,098

 

2,098

 

 

 

Interest rate swap

 

(338

)

(338

)

 

 

(338

)

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing demand

 

$

97,526

 

$

97,526

 

$

 

$

97,526

 

$

 

NOW and money market accounts

 

150,874

 

150,874

 

 

150,874

 

 

Savings

 

41,100

 

41,100

 

 

41,100

 

 

Time deposits

 

185,477

 

187,313

 

 

187,313

 

 

Total deposits

 

474,977

 

476,813

 

 

476,813

 

 

Federal Home Loan Bank Advances

 

36,344

 

41,977

 

 

41,977

 

 

Short term borrowings

 

15,900

 

15,900

 

 

15,900

 

 

Junior subordinated debentures

 

15,464

 

15,464

 

 

15,464

 

 

Accrued interest payable

 

1,029

 

1,029

 

1,029

 

 

 

 

The following tables reflect the changes in fair values for the nine and three-month periods ended September 30, 2013 and 2012 and where these changes are included in the income statement:

 

(Dollars in thousands)

 

 

 

Nine months ended
September 30,

 

Three months ended
September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Description

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Non-interest
income:
Fair value
adjustment
loss

 

Interest rate swap

 

$

(2

)

$

(57

)

$

(0

)

$

(20

)

Total

 

$

(2

)

$

(57

)

$

(0

)

$

(20

)

 

33



Table of Contents

 

Note 6 — Fair Value of Financial Instruments — continued

 

The following table summarizes quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2013 and December 31, 2012 that are measured on a recurring basis.  There were no liabilities carried at fair value as of September 30, 2013 or December 31, 2012 that are measured on a recurring basis.

 

(Dollars in thousands)

 

Description

 

September 30,
2013

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

3,327

 

$

 

$

3,327

 

$

 

Mortgage-backed securities

 

123,500

 

 

123,500

 

 

Small Business Administration securities

 

57,961

 

 

57,961

 

 

State and local government

 

41,353

 

 

41,353

 

 

Corporate and other securities

 

2,302

 

826

 

1,059

 

417

 

 

 

228,443

 

826

 

227,200

 

417

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

(87

)

 

 

(87

)

Total

 

$

228,356

 

$

826

 

$

227,200

 

$

330

 

 

(Dollars in thousands)

 

Description

 

December
31, 2012

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Available for sale securities

 

 

 

 

 

 

 

 

 

Government sponsored enterprises

 

$

1,534

 

$

 

$

1,534

 

$

 

Mortgage-backed securities

 

112,144

 

 

112,144

 

 

Small Business Administration securities

 

54,993

 

 

54,993

 

 

State and local government

 

32,373

 

 

32,373

 

 

Corporate and other securities

 

2,401

 

914

 

1,070

 

417

 

 

 

203,445

 

914

 

202,114

 

417

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

(338

)

 

 

(338

)

Total

 

$

203,107

 

$

914

 

$

202,114

 

$

79

 

 

34



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The following tables reconcile the changes in Level 3 financial instruments for the nine and three months ended September 30, 2013, that are measured on a recurring basis.

 

(Dollars in thousands)

 

Interest rate Swap

 

Corporate Preferred
Stock

 

Beginning Balance December 31, 2012

 

$

(338

)

417

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

(2

)

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

 

 

 

Purchases, issuances, and settlements

 

253

 

 

 

 

 

 

 

 

Transfers in and/or out of Level 3

 

 

 

Ending Balance September 30, 2013

 

$

(87

)

$

417

 

 

(Dollars in thousands)

 

Interest rate Swap

 

Corporate Preferred
Stock

 

Beginning Balance June 30, 2013

 

$

(172

)

417

 

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

 

 

 

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

 

 

 

Purchases, issuances, and settlements

 

85

 

 

 

 

 

 

 

 

Transfers in and/or out of Level 3

 

 

 

Ending Balance September 30, 2013

 

$

(87

)

$

417

 

 

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

 

(Dollars in thousands)

 

Interest rate
Cap/Floor/Swap

 

Beginning Balance December 31, 2011

 

$

(602

)

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

Included in earnings

 

(57

)

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

Purchases, issuances, and settlements

 

241

 

 

 

 

 

Transfers in and/or out of Level 3

 

 

Ending Balance September 30, 2012

 

$

(418

)

 

35



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

(Dollars in thousands)

 

Interest rate
Cap/Floor/Swap

 

Beginning Balance June 30, 2012

 

$

(479

)

Total gains or losses (realized/unrealized)

 

 

 

 

 

 

 

Included in earnings

 

(20

)

 

 

 

 

Included in other comprehensive income

 

 

 

 

 

 

Purchases, issuances, and settlements

 

81

 

 

 

 

 

Transfers in and/or out of Level 3

 

 

Ending Balance September 30, 2012

 

$

(418

)

 

36



Table of Contents

 

Note 6 — Fair Value of Financial Instruments - continued

 

The following tables summarize quantitative disclosures about the fair value for each category of assets carried at fair value as of September 30, 2013 and December 31, 2012 that are measured on a non-recurring basis.

 

(Dollars in thousands)

 

Description 

 

September 30,
 2013

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

80

 

$

 

$

 

$

80

 

Real estate:

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

868

 

 

 

868

 

Mortgage-commercial

 

4,514

 

 

 

4,514

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

Other

 

5

 

 

 

5

 

Total impaired

 

5,467

 

 

 

5,467

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Construction

 

301

 

 

 

301

 

Mortgage-residential

 

143

 

 

 

143

 

Mortgage-commercial

 

3,163

 

 

 

3,163

 

Total other real estate owned

 

3,607

 

 

 

3,607

 

Total

 

$

9,074

 

$

 

$

 

$

9,074

 

 

(Dollars in thousands)

 

Description 

 

December 31,
 2012

 

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

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Commercial & Industrial

 

$

37

 

$

 

$

 

$

37

 

Real estate:

 

 

 

 

 

 

 

 

 

Mortgage-residential

 

357

 

 

 

357

 

Mortgage-commercial

 

5,772

 

 

 

5,772

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

Other

 

10

 

 

 

10

 

Total impaired

 

6,176

 

 

 

6,176

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Construction

 

301

 

 

 

301

 

Mortgage-residential

 

488

 

 

 

488

 

Mortgage-commercial

 

3,198

 

 

 

3,198

 

Total other real estate owned

 

3,987

 

 

 

3,987

 

Total

 

$

10,163

 

$

 

$

 

$

10,163

 

 

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Note 6 — Fair Value of Financial Instruments - continued

 

The Company has a large percentage of loans with real estate serving as collateral. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 3 inputs. Third party appraisals are generally obtained when a loan is identified as being impaired or at the time it is transferred to OREO.  This internal process 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 geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.  The aggregate amount of impaired loans was $5.6 million and $6.2 million for the nine months ended September 30, 2013 and year ended December 31, 2012, respectively.

 

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2013 and December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

 

Fair Value as of
September 30,
2013

 

Valuation Technique

 

Significant
Observable Inputs

 

Significant Unobservable
Inputs

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

$

(87

)

Discounted cash flows

 

Weighted Average Credit Factor

 

3.20%

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

$

417

 

Estimation based on comparable non-listed securities

 

Comparable transactions

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

OREO

 

$

3,607

 

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

 

$

5,467

 

Appraisal Value

 

Appraisals and or sales of comparable properties

 

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

 

 

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Note 6 — Fair Value of Financial Instruments - continued

 

(Dollars in thousands)

 

Fair Value as of
December 31,
2012

 

Valuation Technique

 

Significant
Observable Inputs

 

Significant Unobservable
Inputs

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap

 

$

(338

)

Discounted cash flows

 

Weighted Average Credit Factor

 

3.20%

 

 

 

 

 

 

 

 

 

 

 

Preferred stock

 

$

417

 

Estimation based on comparable non-listed securities

 

Comparable transactions

 

n/a

 

 

 

 

 

 

 

 

 

 

 

OREO

 

$

3,987

 

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

 

$

6,176

 

Appraisal Value

 

Appraisals and or sales of comparable properties

 

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

 

 

Note 7 — Agreement and Plan of Merger

 

On August 13, 2013, the Company, SRMS, Inc. (the “Merger Sub”), a wholly-owned subsidiary of the Company, and Savannah River Financial Corporation (“Savannah River”), the parent holding company for Savannah River Banking Company, entered into an agreement and plan of merger (the “Merger Agreement”).  The Merger Agreement provides that, subject to the terms and conditions set forth in the Agreement, the Merger Sub will merge with and into Savannah River, and Savannah River will then promptly merge with and into the Company, with the Company being the surviving corporation in the merger.  In addition, promptly following the merger of Merger Sub with and into Savannah River, Savannah River Banking Company will be merged with and into the Bank.

 

At consummation of the merger, each outstanding share of Savannah River common stock will be exchanged for either $11.00 in cash, a number of shares of the Company’s common stock equal to the exchange ratio, or a combination of cash and shares of the Company’s common stock. The exchange ratio, which is described in further detail in the Merger Agreement, will depend on the Company’s volume weighted average stock price during the ten consecutive trading days ending on the fifth business day immediately prior to the date on which the merger is to occur. Each shareholder of Savannah River will have the opportunity to elect to receive cash for his or her shares, the Company’s common stock for his or her shares, or a combination of cash for some of his or her shares and the Company’s common stock for the remainder of his or her shares, or he or she may choose no preference, in which case the merger consideration to be received by him or her will be determined by the exchange agent depending on the amount of cash and shares elected by those Savannah River shareholders who make an express election. Elections of the Company’s common stock, cash, or a combination of both are limited by a requirement that 60% of the total number of outstanding non-dissenting shares of Savannah River common stock will be exchanged for cash and 40% of the outstanding non-dissenting shares of Savannah River common stock will be exchanged for shares of the Company’s common stock.  No fractional shares will be issued in connection with the merger; cash (without interest) will be paid to any Savannah River shareholder otherwise entitled to fractional shares.  Based on the number of shares of Savannah River common stock outstanding as of September 30, 2013, and assuming all Savannah River warrants and options are cashed out prior to the merger, the Company will issue a minimum of approximately 1,274,000 shares and a maximum of approximately 1,597,000 shares of common stock and will pay approximately $19,802,640 in cash in the merger.  On October 10, 2013 the Company filed an S-4 Registration Statement with the Securities Exchange Commission to register up to the maximum number of shares to be issued under the terms of the Merger Agreement.

 

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Consummation of the merger is subject to the satisfaction of certain conditions, including approval of the Merger Agreement by the respective shareholders of Savannah River and the Company and approval by the appropriate regulatory agencies.  The merger is expected to close during the first quarter of 2014.

 

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 other than disclosed above occurred requiring accrual or disclosure.

 

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

 

This report contains statements which constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements may relate to, among other matters, the financial condition, results of operations, plans, objectives, future performance, and business of our Company.  Forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those anticipated in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors which are beyond our control. The words “may,” “would,” “could,” “should,” “will,” “expect,” “anticipate,” “predict,” “project,” “potential,” “continue,” “assume,” “believe,” “intend,” “plan,” “forecast,” “goal,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements.  Potential risks and uncertainties that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, without limitation, those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with 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 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;

 

·                  the potential inability to complete the proposed merger with Savannah River due to a failure to satisfy the conditions to completion, including the receipt of necessary shareholder and regulatory approvals;

 

·                  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;

 

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·                  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;

 

·                  changes in monetary and tax policies;

 

·                  changes in accounting policies and practices;

 

·                  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;

 

·                  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; and

 

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

 

These risks are exacerbated by the developments in national and international financial markets that have persisted over the past several years, and we are unable to predict what effect these uncertain market conditions will continue to have on us.  There can be no assurance that these challenging developments of the past few years will not further materially and adversely affect our business, financial condition and results of operations.

 

If any of these risks or uncertainties materialize, or if any of the assumptions underlying our forward-looking statements proves to be incorrect, our results could differ materially from those expressed in, implied or projected by, such forward-looking statements. Forward-looking statements in this Form 10-Q speak as of the date of this document, and we do not intend, and assume no obligation, to update such forward-looking statements or to update the reasons why actual results could differ from those expressed in, or implied or projected by, the forward-looking statements.

 

Overview

 

The following discussion describes our results of operations for the nine months and three months ended September 30, 2013 as compared to the nine month and three month period ended September 30, 2012 and also analyzes our financial condition as of September 30, 2013 as compared to December 31, 2012.  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

 

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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.

 

Recent Developments

 

On August 13, 2013, the Company, the Merger Sub, and Savannah River entered into Merger Agreement pursuant to which the Merger Sub will merge with and into Savannah River, and Savannah River will then promptly merge with and into the Company with the Company being the surviving corporation in the merger.  Promptly following the merger of Merger Sub with and into Savannah River, Savannah River Banking Company will be merged with and into the Bank.  Consummation of the merger is subject to the satisfaction of certain conditions, including approval of the Merger Agreement by the respective shareholders of Savannah River and the Company and approval by the appropriate regulatory agencies.  The merger is expected to close during the first quarter of 2014.  For more information on the merger with Savannah River, see “Note 7 — Agreement and Plan of Merger” to our Consolidated Financial Statements.

 

The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements.  We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

 

Critical Accounting Policies

 

We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States and with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to our unaudited consolidated financial statements as of September 30, 2013 and our notes included in the consolidated financial statements in our 2012 Annual Report on Form 10-K as filed with the SEC.

 

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

 

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

 

The evaluation and recognition of OTTI on certain investments, including our private label MBSs and other corporate debt security holdings, requires significant judgment and estimates.  Some of the more critical judgments supporting the evaluation of OTTI include projected cash flows including prepayment assumptions, default rates and severities of losses on the underlying collateral within the security.  Under different conditions or utilizing different assumptions, the actual OTTI recognized by us may be different from the actual amounts recognized in our consolidated financial statements.  See Note 3 to the financial statements for the disclosure of certain of the assumptions used as well as OTTI recognized in the financial statements during the nine and three months ended September 30, 2013 and 2012.

 

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Comparison of Results of Operations for Nine Months Ended September 30, 2013 to the Nine Months Ended September 30, 2012

 

Net Income

 

Our net income for the nine months ended September 30, 2013 was $3.3 million, or $0.62 diluted earnings per common share, as compared to $2.9 million, or $0.60 diluted earnings per common share, for the nine months ended September 30, 2012.  Net income available to common shareholders was $2.3 million for the nine months ended September 30, 2012 as a result of preferred stock dividend and redemption cost.  All outstanding preferred stock was redeemed in the third quarter of 2012.  The increase in net income between the two periods is primarily due to an increase of $599 thousand in non-interest income.  This was partially offset by an increase in non-interest expense of $376 thousand during the nine months ended September 30, 2013 as compared to the same period in 2012.  Average earning assets increased by $24.7 million in the first nine months of 2013 as compared to the same period in 2012. Average earning assets were $576.9 million during the nine months ended September 30, 2013 as compared to $552.2 million during the nine months ended September 30, 2012.  The increase in average earning assets was primarily a result of continued growth in our “pure deposit” balances (demand deposits, interest-bearing transaction accounts, money market and savings accounts).

 

Net Interest Income

 

Please refer to the table at the end of this Item 2 for the yield and rate data for interest-bearing balance sheet components during the nine-month periods ended September 30, 2013 and 2012, along with average balances and the related interest income and interest expense amounts.

 

Net interest income was $13.3 million for the nine months ended September 30, 2013 and 2012.  The net-interest margin on a fully tax equivalent basis was 3.26% for the nine months ended September 30, 2012 and 3.15% for the same period ending September 30, 2013.  The yield on earning assets decreased by 50 basis points in the nine months of 2013 as compared to the same period in 2012. The yield on earning assets for the nine months ended September 30, 2013 and 2012 was 3.74% and 4.24%, respectively.  The cost of interest-bearing liabilities during the first nine months of 2013 was 0.83% as compared to 1.25% in the same period of 2012, reflecting a 42 basis points decrease. The decrease in net-interest margin during the nine months ended September 30, 2013 as compared to the same period in 2012 was substantially offset by an increase of $24.7 million in average earning assets.  During the nine months ended September 30, 2013, we experienced an increase in loans outstanding which reflects an increase in loans outstanding for four consecutive quarters and a reversal of declining loan balances for a number of previous quarters.  Despite the growth in outstanding loans, as a percentage of average earning assets, loans comprised 59.3% of average earning assets in the first nine months of 2013 as compared to 59.8% in the same period of 2012.  The average balance of our securities portfolio was $220.7 million for the nine month period ended September 30, 2013 as compared to $204.2 million in the same period of 2012.  Our cost of funds has declined by 42 basis points on average in the first nine months of 2013 as compared to the same period of 2012.  Interest-bearing transaction accounts, money market accounts and savings deposits, which are typically our lower costing funds, represent 47.4% of our average interest bearing liabilities during the first nine months of 2013 as compared to 39.5% in the same period of 2012.  Time deposits and borrowed funds, typically the higher costing funds, represent 52.6% of our average interest-bearing funds in the first nine months of 2013 as compared to 60.5% during the same period in 2012.  Throughout 2012 and the first nine months of 2013, we continued to focus on shifting our funding from higher cost certificates of deposit to pure deposits.  The improvement in the overall mix of our funding sources has contributed to the reduction in our cost of funds and along with overall growth in earning assets, offset some of the impact of declining earning asset yields.

 

Provision and Allowance for Loan Losses

 

At September 30, 2013 and December 31, 2012, the allowance for loan losses was $4.3 and $4.6 million, respectively.  This represented 1.25% of total loans and 1.39% of loans at September 30, 2013 and December 31, 2012, respectively.  Our provision for loan losses was $379 thousand for the nine months ended September 30, 2013 as compared to $416 thousand for the nine months ended September 30, 2012.  This provision is made based on our assessment of general loan loss risk and asset quality.  The allowance for loan losses represents an amount that 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

 

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impaired loans, the quality, mix, and size of our overall loan portfolio, the experience ability and depth of lending personnel, economic conditions (local and national) that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans.  We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, and concentrations of credit.  Periodically, we adjust the amount of the allowance based on changing circumstances.  We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.

 

The decrease in the provision for loan losses for the first nine months of 2013 as compared to the same period in 2012 is a result of a continuation of moderating levels of classified and non-performing loans as well as continued moderate improvement in economic conditions in our markets, including stabilizing unemployment levels. Our loan portfolio consists of a large percentage of real estate secured loans.  Real estate values continue to be adversely impacted as a result of the economic downturn over the last several years.  Impaired values of the underlying real estate collateral as well as lower historical residential and commercial real estate sales impacts our ability to sell collateral upon foreclosure.  There is a risk that this trend will continue.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If real estate values continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.  If during a period of reduced real estate values we are required to liquidate the property collateralizing a loan to satisfy the debt or to increase the allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.

 

Non-performing assets were $8.7 million (1.37% of total assets) at September 30, 2013 as compared $8.8 million (1.45% of total assets) at December 31, 2012. While we believe these ratios are favorable in comparison to current industry results, we continue to be concerned about the impact of this economic environment on our customer base of local businesses and professionals.  There were 33 loans, totaling $5.1 million, included in non-performing status (non-accrual loans and loans past due 90 days and still accruing) at September 30, 2013. The largest non-performing loan, with a carrying value of $1.3 million, is secured by a first lien on an owner occupied commercial business property located in the midlands of South Carolina.  The average balance of the remaining 30 loans is approximately $118.9 thousand and the majority of these loans are secured by first mortgage liens. At the time the loans are placed in non-accrual status, we typically obtain an updated appraisal and, if the loan balance exceeds fair value, write the balance down to the fair value.  At September 30, 2013, we had one loan in the amount of $54.0 thousand delinquent more than 90 days and still accruing interest, and we had loans totaling $2.3 million that were delinquent 30 days to 89 days which represented 0.65% 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 two loan relationships in the amount of $1.4 million that is current as to principal and interest and not included in non-performing assets that could represent potential problem loans.  This balance is included as substandard loans in Note 4 of the financial statements.

 

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics.  Historical loss ratios are calculated by product type and by regulatory credit risk classification.  The allowance consists of an allocated and unallocated allowance.  The allocated portion is determined by types and 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 annualized weighted average loss ratios over the 24 month period ended September 30, 2013 for loans classified substandard, special mention and pass have been approximately 3.12%, 1.20% and 0.09%, respectively. The unallocated portion of the allowance as a percentage of the total allowance has grown over the last several years particularly as some of the higher loss quarters, in the early period of this economic cycle, began dropping out of the analysis. 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 as conditions change are adjusted to be directionally consistent with these changes. Due to the ongoing slow economic conditions and particularly slow recovery of real estate valuations, we do not believe it would be prudent to reduce substantially the overall level of our allowance at this time.

 

There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period.  The allowance is also subject to examination and testing for adequacy by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions.  Such regulatory agencies could require us to adjust our allowance based on information available to them at the time of their examination.

 

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

 

Allowance for Loan Losses

 

 

 

Nine months Ended
September 30,

 

(Dollars in thousands)

 

2013

 

2012

 

 

 

 

 

 

 

Average loans outstanding (including loans held for sale)

 

$

342,183

 

$

330,263

 

Loans outstanding at period end

 

$

345,064

 

$

323,534

 

Non-performing assets:

 

 

 

 

 

Nonaccrual loans

 

$

5,052

 

$

4,923

 

Loans 90 days past due still accruing

 

54

 

 

Foreclosed real estate

 

3,607

 

5,570

 

Total non-performing assets

 

$

8,713

 

$

10,493

 

 

 

 

 

 

 

Beginning balance of allowance

 

$

4,621

 

$

4,699

 

Loans charged-off:

 

 

 

 

 

Construction and development

 

 

 

1-4 family residential mortgage

 

44

 

112

 

Multi-family residential

 

 

 

Non-residential real estate

 

604

 

245

 

Home equity

 

67

 

 

Commercial

 

29

 

88

 

Installment & credit card

 

64

 

51

 

Total loans charged-off

 

808

 

496

 

Recoveries:

 

 

 

 

 

1-4 family residential mortgage

 

64

 

10

 

Non-residential real estate

 

 

 

Home equity

 

3

 

3

 

Commercial

 

31

 

32

 

Installment & credit card

 

33

 

31

 

Total recoveries

 

131

 

76

 

Net loan charge offs

 

677

 

420

 

Provision for loan losses

 

379

 

416

 

Balance at period end

 

$

4,323

 

$

4,695

 

 

 

 

 

 

 

Net charge -offs to average loans

 

0.20

%

0.13

%

Allowance as percent of total loans

 

1.25

%

1.45

%

Non-performing assets as % of total assets

 

1.37

%

1.73

%

Allowance as % of non-performing assets

 

49.62

%

44.74

%

 

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Table of Contents

 

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

 

Composition of the Allowance for Loan Losses

 

 

 

September 30,
2013

 

December 31, 2012

 

 

 

 

 

% of
loans in

 

 

 

% of
loans in

 

(Dollars in thousands)

 

Amount

 

Category

 

Amount

 

Category

 

Commercial, Financial and Agricultural

 

$

204

 

5.8

%

$

338

 

6.3

%

Real Estate — Construction

 

27

 

4.7

%

 

3.9

%

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

Commercial

 

1,296

 

68.9

%

1,322

 

68.2

%

Residential

 

320

 

10.9

%

235

 

11.7

%

Consumer:

 

 

 

 

 

 

 

 

 

Home Equity

 

148

 

7.5

%

400

 

8.2

%

Other

 

105

 

2.2

%

17

 

1.7

%

Unallocated

 

2,223

 

N/A

 

2,309

 

N/A

 

Total

 

$

4,323

 

100.0

%

$

4,621

 

100.0

%

 

Accrual of interest is discontinued on loans when management believes, after considering economic and business conditions and collection efforts that a borrower’s financial condition is such that the collection of interest is doubtful.  A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due.  At the time a loan is placed in nonaccrual status, all interest, which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income.  No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

 

Non-interest Income and Non-interest Expense

 

Non-interest income during the first nine months of 2013 was $6.3 million as compared to $5.7 million during the same period in 2012.  Deposit service charges decreased $44 thousand during the first nine months of 2013 as compared to the same period in 2012.  The decrease in deposit service charges is primarily a result of lower overdraft protection fees due to a continued decrease in the number of items being presented on insufficient funds accounts.  Mortgage origination fees decreased $25 thousand for the nine months ended September 30, 2013 as compared to the same period in 2012.  During the third quarter of 2013, mortgage interest rates began to rise and, as a result, mortgage loan production began to slow down.  This was particularly true as it relates to mortgage refinance activity.  The total average monthly production during the third quarter was approximately 72% of the average monthly production during the first six months of the year.  We believe, on an industry wide basis, the refinance activity will continue to decrease in volume.  The outcome of this change may result in less overall volume with a higher component of purchase transactions.  Monthly new purchase money mortgage production increased slightly during the third quarter as compared to the monthly production in the first six months but not to a level that offset the decline in refinance activity.  The decline in mortgage banking income was offset by an increase in investment advisory fees and non-deposit commissions.  For the nine months ended September 30, 2013 these fees amounted to $695 thousand as compared to $492 thousand in the same period of 2012.  Assets under management at September 30, 2013 were approximately $113.5 million as compared to approximately $86.4 at September 30, 2012.  In the nine months ended September 30, 2013, we had a gain on sales of securities in the amount of $152 thousand, as compared to a loss of $62 thousand in the first nine months of 2012.  The gain for the nine months ended September 30, 2013 was offset by paying down FHLB advances in the amount of $2.0 million which resulted in a loss in the amount of $141 thousand.  During the first nine months of 2012, we sold eight below investment grade non-agency MBSs with a total book value of approximately $11.2 million.  The loss on the sales amounted to $2.1 million and was offset by gains of the approximate same amount from the sale of certain agency MBSs and municipal securities.  In addition, we paid down FHLB advances in the amount of $4.0 million and incurred a loss in the amount of $121 thousand.  During the first nine months of 2012, we incurred OTTI charges of $200 thousand (credit component) on certain non-agency MBSs that were sold as part of the transactions noted above (see Note 3 — Investment Securities to our Consolidated Financial Statements for further information).

 

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Total non-interest expense increased by $376 thousand, or 2.62%, during the first nine months of 2013, as compared to the same period in 2012.  Salary and benefit expense increased $755 thousand from $8.2 million, during the first nine months of 2012, to $8.9 million during the first nine months of 2013.  At September 30, 2012, we had 157 full time equivalent employees as compared to 166 at September 30, 2013.  This increase in number of full time equivalent employees, normal salary adjustments as well as increased incentives and commissions account for the increase in salary and benefit expense between the two periods.  Marketing and public relations expense decreased from $367 thousand in the first nine months of 2012 to $311 thousand in the comparable period of 2013.  The timing of a media campaign in 2012 resulted in increased marketing costs as compared to the same period of 2013.  FDIC insurance assessments decreased $188 thousand in the first nine months of 2013 as compared to the same period in 2012.  The decrease results from our assessment rate changing from approximately 14 basis points on average total assets during the first half of 2012 to approximately 7.5 basis points of average total assets during the entire nine month period ended September 30, 2013.  Other real estate expenses decreased $164 thousand in the first nine months of 2013 as compared to the same period in 2012.  The decrease relates to moderating levels of accumulated delinquent taxes, insurance, legal fees and repair expenses incurred as the level of other real estate owned continues to decline.  Other professional fees decreased $235 thousand from $624 thousand during the first nine months of 2012 as compared to $389 thousand in the same period of 2013.  During the first nine months of 2012, the Bank’s primary regulator was the Office of the Comptroller of the Currency (the “OCC”).  On October 1, 2012, the Bank converted from a national bank charter to a South Carolina state bank charter (and the Bank’s name was changed from First Community Bank, N.A. to First Community Bank) and the Bank’s primary federal regulator is now the FDIC. The Bank is also regulated and examined by the South Carolina Board of Financial Institutions.  The OCC assessed a separate annual exam fee whereas the FDIC does not assess an exam fee outside of the annual FDIC insurance premiums.  This charter change reduced exam fees by approximately $118 thousand during the first nine months of 2013.  In addition professional fees in 2012, included approximately $115 thousand in consulting and non-compete expenses resulting from a previous acquisition.  This obligation, which was included in professional fees, terminated as of the beginning of the fourth quarter of 2012.  Audit and accounting expenses were also approximately $20 thousand higher in the first nine months of 2012 as compared to the same period in 2013.  The higher audit and accounting fees in 2012 as compared to 2013 primarily resulted due to cost associated with the common stock offering in the first half of 2012.  Shareholder expenses, which include costs associated with SEC filings and transfer agent fees, increased from $88 thousand in the nine months ended September 30, 2012 to $155 thousand in the same period of 2013.  This increase reflects significant increased cost and an increased number of items associated with edgarizing and XBRL annual and quarterly filings with the SEC.  “Other Miscellaneous” expense category increased by $149 thousand for the nine months ended September 30, 2013 to $574 thousand as compared to $425 thousand in the same period of 2012.  Prior to January 1, 2013, we printed and mailed our monthly account statements and notices.  Beginning in 2013, we outsourced the printing and mailing of these monthly and daily notices.  The cost for this during the first nine months was approximately $60 thousand and is included in the other miscellaneous expense category.  In 2012, these related costs were included primarily in supplies and postage.  Also included in the increase of other miscellaneous expense is approximately $58 thousand in higher costs associated data collection and processing mortgage loans originated for sale.  Other changes in non-interest expense categories reflect normal fluctuations between the two periods.

 

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

 

 

 

Nine months ended

 

 

 

September 30,

 

(In thousands)

 

2013

 

2012

 

Data processing

 

$

327

 

$

383

 

Supplies

 

77

 

118

 

Telephone

 

242

 

226

 

Correspondent services

 

131

 

120

 

Subscriptions and publications

 

85

 

40

 

Loss on limited partnership interest

 

156

 

141

 

Insurance

 

186

 

161

 

Postage

 

133

 

129

 

Professional fees

 

389

 

624

 

Director fees

 

224

 

224

 

Shareholder expenses

 

155

 

88

 

Merger related expenses

 

33

 

 

Other Miscellaneous

 

574

 

425

 

 

 

$

2,712

 

$

2,679

 

 

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Table of Contents

 

Income Tax Expense

 

Our effective tax rate was 26.8% and 30.7% in the first nine months of 2013 and 2012, respectively.  As a result of our current level of tax exempt securities in our investment portfolio, our effective tax rate is expected to remain at 26.5% to 28.0% throughout the remainder of 2013.

 

Comparison of Results of Operations for Three Months Ended September 30, 2013 to the Three Months Ended September 30, 2012:

 

Net Income

 

Please refer to the table “Yields on Average Earning Assets and Rates on Average Interest-Bearing Liabilities” appearing at the end of this Item for the yield and rate data for interest-bearing balance sheet components during the three-month periods ended September 30, 2013 and 2012, along with average balances and the related interest income and interest expense amounts.

 

Our net income for the third quarter of 2013 was $1.0 million, or $0.20 diluted earnings per common share, as compared to $1.2 million or $0.19 diluted earnings per common share, in the same period of 2012.  Net income available to common shareholders in the three month periods ended September 30, 2013 and 2012 was $1.0 million and $881 thousand, respectively.  During the third quarter of 2012, we redeemed all of our outstanding preferred shares.  Net interest income increased by $241 thousand for the three months ended September 30, 2013 compared to the same period in 2012.  Our taxable equivalent net interest margin in the third quarter of 2013 increased to 3.18% compared to 3.12% in the same period of 2012.  The increase in the net interest income was also positively impacted by an increase in average earning assets between the two periods.  The yield on average earning assets decreased to 3.71% in the third quarter of 2013 from 3.99% in the third quarter of 2012. The cost of interest bearing liabilities also decreased to 0.77% in the third quarter of 2013 as compared to 1.16% in the third quarter of 2012.  Average earning assets were $585.4 million during the third quarter of 2013 as compared to $563.2 million during the third quarter of 2012.

 

Provision for Loan Losses

 

The provision for loan losses for the three months ended September 30, 2013 was $129 thousand as compared to $115 thousand for the three months ended September 30, 2012.  The provision for loan losses for third quarters of 2013 and 2012 reflect moderating levels of classified and non-performing loans as well as continued moderate improvement in economic conditions in our markets, including stabilizing unemployment levels.

 

Non-interest Income and Non-interest Expense

 

For the three months ended September 30, 2013, we had non-interest income of $1.9 million as compared to non-interest income of $2.4 million in the same period of 2012.  Mortgage banking income decreased $623 thousand during the third quarter of 2013 as compared to the same period in 2012.  As noted previously, the increase in interest rates during the third quarter of 2013 significantly impacted the level of refinance activity as compared to the third quarter of 2012 as well as the most recent linked quarters.  We continue to focus on this source of revenue and have recently added one new mortgage loan producer.  Fees from investment advisory and sale of non-deposit products increased $96 thousand in the third quarter of 2013 as compared to the same period of 2012.  The increase is a result of increased level of assets under management.

 

Total non-interest expense increased $134 thousand in the third quarter of 2013, compared to the same period of 2012.  Salaries and benefits increased by $74 thousand in the third quarter of 2013 as compared to the same period in 2012.  This increase is a result of normal annual salary adjustments between the two periods.  All other variances in non-interest expenses during the three months ended September 30, 2013 as compared to the same period of 2012 reflect normal fluctuations in each of the categories.

 

Financial Position

 

Assets totaled $635.9 million at September 30, 2013, as compared to $602.9 million at December 31, 2012, an

 

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Table of Contents

 

increase of $33.0 million.  Loans (excluding loans held for sale) at September 30, 2013 were $345.1 million as compared to $332.1 million at December 31, 2012.  This increase of $13.0 million in loans resulted from funding in excess of $45.5 million in new loan production in the nine months ended September 30, 2013, less scheduled and unscheduled pay downs during the period.  At September 30, 2013 and December 31, 2012, loans (excluding loans held for sale) accounted for 58.7% and 59.8% of earning assets, respectively.  The loan-to-deposit ratio at September 30, 2013 was 67.8% as compared to 69.9% at December 31, 2012. Investment securities increased to $230.7 million at September 30, 2013 from $206.0 million at December 31, 2012.  Deposits increased by $33.6 million to $508.6 million at September 30, 2013 as compared to $475.0 million at December 31, 2012.  The growth in deposits is a result of a continued focus on pure deposit (deposits less certificates of deposits) growth while closely controlling the pricing on time deposits.  One of our goals as a community bank has been, and continues to be, to grow our assets through quality loan growth by providing credit to small and mid-size businesses, as well as individuals within the markets we serve. As a result of the growth in the third quarter of 2013, we have experienced moderate loan growth over the last four quarters.  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 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:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

(In thousands)

 

Amount

 

Percent

 

Amount

 

Percent

 

 

 

 

 

 

 

 

 

 

 

Commercial, financial & agricultural

 

$

19,940

 

5.8

%

$

20,924

 

6.3

%

Real estate:

 

 

 

 

 

 

 

 

 

Construction

 

16,110

 

4.7

%

13,052

 

3.9

%

Mortgage — residential

 

37,506

 

10.9

%

38,892

 

11.7

%

Mortgage — commercial

 

237,934

 

68.9

%

226,575

 

68.2

%

Consumer:

 

 

 

 

 

 

 

 

 

Home Equity

 

26,011

 

7.5

%

27,173

 

8.2

%

Other

 

7,563

 

2.2

%

5,495

 

1.7

%

Total gross loans

 

345,064

 

100.0

%

332,111

 

100.0

%

Allowance for loan losses

 

(4,323

)

 

 

(4,621

)

 

 

Total net loans

 

$

340,741

 

 

 

$

327,490

 

 

 

 

In the context of this discussion, a real estate mortgage loan is defined as any loan, other than loans for construction purposes and advances on home equity lines of credit, secured by real estate, regardless of the purpose of the loan.  Advances on home equity lines of credit are included in consumer loans. We follow the common practice of financial institutions in our market areas of obtaining a security interest in real estate whenever possible, in addition to any other available collateral.  This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan components.  Generally we limit the loan-to-value ratio to 80%.

 

Market Risk Management

 

The effective management of market risk is essential to achieving our strategic financial objectives.  Our most significant market risk is interest rate risk.  We have established an Asset/Liability Management Committee (“ALCO”) to monitor and manage interest rate risk.  The ALCO monitors and manages the pricing and maturity of assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income.  The ALCO has established policy guidelines and strategies with respect to interest rate risk exposure and liquidity.

 

A monitoring technique employed by the ALCO is the measurement of interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time.  Also, asset/liability simulation modeling is performed to assess the impact varying interest rates and balance sheet mix assumptions will have on net interest income.  Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability.  Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

 

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Table of Contents

 

We are currently slightly liability sensitive within one year.  However, neither the “gap” analysis nor the asset/liability modeling is a precise indicator of our interest sensitivity position due to the many factors that affect net interest income, including changes in the volume and mix of earning assets and interest-bearing liabilities.  Net interest income is also impacted by other significant factors, including changes in the volume and mix of earning assets and interest-bearing liabilities.  Through simulation modeling, we monitor the effect that an immediate and sustained change in interest rates of 100 basis points and 200 basis points up and down will have on net interest income over the next twelve months.

 

We entered into a five year interest rate swap agreement on October 8, 2008 which expired on October 8, 2013. The swap agreement had a $10.0 million notional amount. We received a variable rate of interest on the notional amount based on a three month LIBOR rate and paid a fixed rate interest of 3.66%. The contract was entered into to protect us from the negative impact of rising interest rates.  At September 30, 2013 and December 31, 2012, the fair value of the contract was a negative $87 thousand and $338 thousand, respectively.  A fair value adjustment for the swap of ($2 thousand) and ($57 thousand) was recognized in other income for the nine month periods ended September 30, 2013 and 2012, respectively. The fair value of the contract is the present value, over the remaining term of the contract, of the difference between the swap rate to maturity at the reporting date multiplied by the notional amount and the fixed interest rate of 3.66% multiplied by the notional amount of the contract.

 

Based on the many factors and assumptions used in simulating the effect of changes in interest rates, the following table estimates the percentage change in net interest income at September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012 over twelve months.

 

Net Interest Income Sensitivity

 

Change in
short-term
interest rates

 

September 30,
2013

 

June 30,
2013

 

March 31,
2013

 

December
31, 2012

 

+200bp

 

+3.04

%

+ 5.23

%

+ 6.52

%

+ 6.52

%

+100bp

 

+1.59

%

+ 2.64

%

+ 3.47

%

+ 3.83

%

Flat

 

 

 

 

 

-100bp

 

-6.68

%

- 6.44

%

- 7.92

%

- 9.05

%

-200bp

 

-11.79

%

- 11.19

%

- 11.73

%

- 13.58

%

 

The significant decrease in net interest income in a down 200 basis point environment primarily results from the current level of interest rates being paid on our interest bearing transaction accounts as well as money market accounts.  The interest rates on these accounts are at a level where they cannot be repriced in proportion to the change in interest rates.  The increase and decrease of 100 and 200 basis points assume a simultaneous and parallel change in interest rates along the entire yield curve.  At the current historically low interest rate levels, 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 September 30, 2013, June 30, 2013, March 31, 2013 and December 31, 2012 the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be -2.5%, 0.1%, 5.5% and 7.5%, respectively.

 

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Table of Contents

 

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 37.5% of total assets at September 30, 2013.  We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long-term and short-term liquidity needs successfully.  These needs include the ability to respond to short-term demand for funds caused by the withdrawal of deposits, maturity of repurchase agreements, extensions of credit and the payment of operating expenses.  Sources of liquidity, in addition to deposit gathering activities, include maturing loans and investments, purchase of federal funds from other financial institutions and selling securities under agreements to repurchase.  We monitor closely the level of large certificates of deposits in amounts of $100 thousand or more as they tend to be more sensitive to interest rate levels and, thus, less reliable sources of funding for liquidity purposes.  At September 30, 2013, the amount of certificates of deposits of $100 thousand or more represented 13.1% of total deposits.  These deposits are issued to local customers many of whom have other product relationships with the Bank and none are brokered deposits.

 

Through the operations of our Bank, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2013, we had issued commitments to extend credit of $108.0 million, including $24.6 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 8.3% and 9.0% of total assets at September 30, 2013 and December 31, 2012, respectively.  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 2012 or the first nine months of 2013.  In addition, the Bank has a repo line in the amount of $10.0 million with another financial institution.  Specific investment securities would be pledged if and when we were to utilize the line.  The FHLB of Atlanta has approved a line of credit of up to 25% of the Bank’s assets, which would be collateralized by a pledge against specific investment securities and/or eligible loans.  We regularly review the liquidity position of the Company and have implemented internal policies establishing guidelines for sources of asset based liquidity and evaluate and monitor the total amount of purchased funds used to support the balance sheet and funding from noncore sources.  We believe that our existing stable base of core deposits along with continued growth in this deposit base will enable us to meet our long term liquidity needs successfully.

 

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%.  Under the capital adequacy guidelines, regulatory capital is classified into two tiers.  These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets.  Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets.  In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset.  Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations.  We are also required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio.  At both the holding company and bank level, we are subject to various regulatory capital requirements administered by the federal banking agencies.  To be considered “well capitalized,” we must maintain total risk-based capital of at least 10%, Tier 1 capital of at least 6%, and a leverage ratio of at least 5%.  Generally, to be considered adequately capitalized, the Federal Deposit Insurance Corporation and the Federal Reserve regulatory capital guidelines for Tier 1 capital, total capital and leverage capital ratios are 4.0%, 8.0% and 4.0%, respectively.

 

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Table of Contents

 

The Bank’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.21%, 16.62%, and 17.74%, respectively, at September 30, 2013 as compared to 10.34%, 16.94%, and 18.19%, respectively, at December 31, 2012. The Company’s risk-based capital ratios of leverage ratio, Tier 1, and total capital were 10.64%, 17.29%, and 18.40%, respectively at September 30, 2013 as compared to 10.63%, 17.33% and 18.58%, respectively at December 31, 2012. 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.

 

In July 2013, the FDIC approved a final rule to implement the Basel III regulatory capital reforms among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. For the largest, most internationally active banking organizations, the rule includes a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. In terms of quality of capital, the final rule emphasizes common equity Tier 1 capital and implements strict eligibility criteria for regulatory capital instruments. It also changes the methodology for calculating risk-weighted assets to enhance risk sensitivity. The changes begin to take effect for the Bank in January 2015.  The ultimate impact of the new capital standards on the Company and the Bank is currently being reviewed.

 

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Table of Contents

 

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 

 

 

Nine months ended September 30, 2013

 

Nine months ended September 30, 2012

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

342,183

 

$

13,202

 

5.16

%

$

330,263

 

$

13,804

 

5.58

%

Securities:

 

220,712

 

2,876

 

1.74

%

204,212

 

3,669

 

2.40

%

Federal funds sold and securities purchased under agreements to resell

 

14,022

 

49

 

0.47

%

17,688

 

61

 

0.46

%

Total earning assets

 

576,917

 

16,127

 

3.74

%

552,163

 

17,534

 

4.24

%

Cash and due from banks

 

8,641

 

 

 

 

 

8,868

 

 

 

 

 

Premises and equipment

 

17,215

 

 

 

 

 

17,417

 

 

 

 

 

Other assets

 

23,716

 

 

 

 

 

27,032

 

 

 

 

 

Allowance for loan losses

 

(4,537

)

 

 

 

 

(4,741

)

 

 

 

 

Total assets

 

$

621,952

 

 

 

 

 

$

600,739

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

100,377

 

85

 

0.11

%

$

88,815

 

120

 

0.18

%

Money market accounts

 

72,634

 

127

 

0.23

%

51,932

 

120

 

0.31

%

Savings deposits

 

45,833

 

38

 

0.11

%

38,390

 

37

 

0.13

%

Time deposits

 

174,450

 

1,145

 

0.88

%

201,601

 

2,196

 

1.46

%

Other borrowings

 

68,798

 

1,460

 

2.84

%

72,710

 

1,772

 

3.26

%

Total interest-bearing liabilities

 

462,092

 

2,855

 

0.83

%

453,448

 

4,245

 

1.25

%

Demand deposits

 

100,596

 

 

 

 

 

89,915

 

 

 

 

 

Other liabilities

 

5,260

 

 

 

 

 

5,436

 

 

 

 

 

Shareholders’ equity

 

54,004

 

 

 

 

 

51,940

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

621,952

 

 

 

 

 

$

600,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funds, including demand deposits

 

 

 

 

 

0.68

%

 

 

 

 

1.04

%

Net interest spread

 

 

 

 

 

2.91

%

 

 

 

 

2.99

%

Net interest income/margin

 

 

 

$

13,272

 

3.08

%

 

 

$

13,289

 

3.21

%

Net interest income/margin FTE basis

 

$

329

 

$

13,601

 

3.15

%

$

190

 

$

13,479

 

3.26

%

 

53



Table of Contents

 

FIRST COMMUNITY CORPORATION

Yields on Average Earning Assets and Rates

on Average Interest-Bearing Liabilities

 

 

 

Three months ended September 30, 2013

 

Three months ended September 30, 2012

 

 

 

Average

 

Interest

 

Yield/

 

Average

 

Interest

 

Yield/

 

 

 

Balance

 

Earned/Paid

 

Rate

 

Balance

 

Earned/Paid

 

Rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

344,544

 

$

4,379

 

5.04

%

$

330,106

 

$

4,548

 

5.48

%

Securities:

 

225,922

 

1,078

 

1.89

%

208,769

 

1,079

 

2.06

%

Federal funds sold and securities purchased

 

14,953

 

17

 

0.45

%

24,315

 

23

 

0.38

%

Total earning assets

 

585,419

 

5,474

 

3.71

%

563,190

 

5,650

 

3.99

%

Cash and due from banks

 

8,781

 

 

 

 

 

8,698

 

 

 

 

 

Premises and equipment

 

17,193

 

 

 

 

 

17,394

 

 

 

 

 

Other assets

 

24,186

 

 

 

 

 

25,483

 

 

 

 

 

Allowance for loan losses

 

(4,421

)

 

 

 

 

(4,745

)

 

 

 

 

Total assets

 

$

631,158

 

 

 

 

 

$

610,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing transaction accounts

 

$

104,146

 

$

27

 

0.10

%

$

91,778

 

$

37

 

0.16

%

Money market accounts

 

80,839

 

48

 

0.24

%

53,328

 

36

 

0.27

%

Savings deposits

 

48,490

 

14

 

0.11

%

39,955

 

13

 

0.13

%

Time deposits

 

167,516

 

336

 

0.80

%

195,230

 

652

 

1.33

%

Other borrowings

 

67,484

 

479

 

2.81

%

72,460

 

583

 

3.20

%

Total interest-bearing liabilities

 

468,475

 

904

 

0.77

%

452,751

 

1,321

 

1.16

%

Demand deposits

 

104,944

 

 

 

 

 

93,098

 

 

 

 

 

Other liabilities

 

5,386

 

 

 

 

 

5,723

 

 

 

 

 

Shareholders’ equity

 

52,353

 

 

 

 

 

58,448

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

631,158

 

 

 

 

 

$

610,020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funds, including demand deposits

 

 

 

 

 

0.63

%

 

 

 

 

0.97

%

Net interest spread

 

 

 

 

 

2.94

%

 

 

 

 

2.83

%

Net interest income/margin

 

 

 

$

4,570

 

3.10

%

 

 

$

4,329

 

3.06

%

Net interest income/margin FTE basis

 

$

127

 

$

4,697

 

3.18

%

$

94

 

$

4,423

 

3.12

%

 

54



Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in our quantitative and qualitative disclosures about market risk as of September 30, 2013 from that presented in our Annual Report on Form 10-K for the year ended December 31, 2012.  See the “Market Risk Management” subsection in Item 2, Management Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.

 

Item 4. Controls and Procedures

 

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 September 30, 2013, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

55



Table of Contents

 

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

 

 

 

2.1

 

Agreement and Plan of Merger between First Community Corporation, SRMS, Inc. and Savannah River Financial Corporation dated August 13, 2013 (incorporated by reference to the Company’s Form 8-K filed on August 14, 2013).

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

Section 1350 Certifications.

 

 

 

101

 

The following materials from the Quarterly Report on Form 10-Q of First Community Corporation for the quarter ended September 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

 

56



Table of Contents

 

SIGNATURES

 

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

 

 

 

FIRST COMMUNITY CORPORATION

 

(REGISTRANT)

 

 

 

 

Date:

November 8, 2013

 

By:

/s/ Michael C. Crapps

 

Michael C. Crapps

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

Date:

November 8, 2013

 

By:

/s/ Joseph G. Sawyer

 

Joseph G. Sawyer

 

Executive Vice President (Principal Financial and Accounting Officer)

 

57



Table of Contents

 

INDEX TO EXHIBITS

 

Exhibit

 

 

Number

 

Description

 

 

 

2.1

 

Agreement and Plan of Merger between First Community Corporation, SRMS, Inc. and Savannah River Financial Corporation dated August 13, 2013 (incorporated by reference to the Company’s Form 8-K filed on August 14, 2013).

 

 

 

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32

 

Section 1350 Certifications.

 

 

 

101

 

The following materials from the Quarterly Report on Form 10-Q of First Community Corporation for the quarter ended September 30, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Changes in Shareholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

 

58