10-Q 1 form10q-081106.htm 081106

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the

 

 

quarterly period ended June 30, 2006

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period

 

 

from ___________ to _____________

Commission file number 000-28344

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

               South Carolina               

   

               57-1010751               

(State of Incorporation)

   

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

 

5455 Sunset Boulevard, Lexington, South Carolina 29072
(Address of Principal Executive Offices)

(803) 951-2265
(Registrant's Telephone Number, Including Area Code)

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

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

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
                                   Large accelerated filer                           Accelerated filer                      Non-accelerated filer   

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

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: On July 31, 2006, 3,279,376 shares of the issuer’s common stock, par value $1.00 per share, were issued and outstanding.

    TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
    Item 1. Financial Statements.
                  Consolidated Balance Sheets
                  Consolidated Statements of Income
                  Consolidated Statements of Shareholders’ Equity and Comprehensive Income (loss)
                  Consolidated Statements of Cash Flows
                  Notes to Consolidated Financial Statements

   Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Item 4. Controls and Procedures

PART II – OTHER INFORMATION
   Item 1. Legal Proceedings
   Item 1A. Risk Factors
   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Item 3. Defaults Upon Senior Securities
   Item 4. Submission of Matters to a Vote of Security Holders
   Item 5.  Other Information
   Item 6. Exhibits

INDEX TO EXHIBITS
SIGNATURES
EX-31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
EX-31.2 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
EX-32 SECTION 1350 CERTIFICATIONS





2

PART I
FINANCIAL INFORMATION

Item 1.   Financial Statements

FIRST COMMUNITY CORPORATION
CONSOLIDATED BALANCE SHEETS

 

June 30, 2006

December 31, 2005

 

(Unaudited)

 

                                          ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

$

10,719,405

 

$

11,701,764

 

Interest-bearing bank balances

 

 

 

57,729

 

 

83,178

 

Federal funds sold and securities purchased under

 

 

 

 

 

 

 

 

  agreements to resell

 

 

 

16,929,310

 

 

1,079,204

 

Investment securities - available for sale

 

 

 

176,431,224

 

 

170,657,770

 

Investment securities - held to maturity (market value of

 

 

 

 

 

 

 

 

  $5,581,066 and $5,746,448 at June 30, 2006 and

 

 

 

 

 

 

 

 

  December 31, 2005, respectively)

 

 

 

5,701,240

 

 

5,713,830

 

Loans

 

 

 

262,078,942

 

 

221,667,632

 

Less, allowance for loan losses

 

 

 

3,128,065

 

 

2,700,647

 

 

 

 

   Net loans

 

 

 

258,950,877

 

 

218,966,985

 

Property, furniture and equipment - net

 

 

 

20,420,810

 

 

15,982,029

 

Goodwill

 

 

 

29,574,031

 

 

24,256,020

 

Intangible assets

 

 

 

2,987,736

 

 

2,767,074

 

Other assets

 

 

 

16,303,035

 

 

16,247,239

 

 

 

 

    Total assets

 

 

$

538,075,397

 

$

467,455,093

 

 

 

 

                                     LIABILITIES

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

  Non-interest bearing demand

 

 

$

65,336,383

 

$

57,326,637

 

  NOW and money market accounts

 

 

 

115,194,679

 

 

106,337,887

 

  Savings

 

 

 

30,952,150

 

 

29,818,705

 

  Time deposits less than $100,000

 

 

 

114,804,937

 

 

100,612,256

 

  Time deposits $100,000 and over

 

 

 

82,503,610

 

 

55,508,666

 

 

 

 

     Total deposits

 

 

 

408,791,759

 

 

349,604,151

 

Securities sold under agreements to repurchase

 

 

 

17,772,122

 

 

13,806,400

 

Federal Home Loan Bank Advances

 

 

 

31,482,500

 

 

34,524,409

 

Long term debt

 

 

 

15,464,000

 

 

15,464,000

 

Other borrowed money

 

 

 

164,997

 

 

169,233

 

Other liabilities

 

 

 

4,159,278

 

 

3,120,115

 

 

 

 

    Total liabilities

 

 

 

477,834,656

 

 

416,688,308

 

 

 

 

            SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, par value $1.00 per share; 10,000,000

 

 

 

 

 

 

 

 

     shares authorized; none issued and outstanding

 

 

 

 

 

 

 

 

Common stock, par value $1.00 per share;

 

 

 

 

 

 

 

 

    10,000,000 shares authorized; issued and outstanding

 

 

 

 

 

 

 

 

    3,259,376 and 2,848,627 at June 30, 2006 and December 31,

 

 

 

 

 

 

 

 

    2005, respectively

 

 

 

3,259,376

 

 

2,848,627

 

Additional paid in capital

 

 

 

49,915,453

 

 

42,352,205

 

Retained earnings

 

 

 

10,661,275

 

 

9,240,088

 

Accumulated other comprehensive income (loss)

 

 

 

(3,595,363

)

 

(3,674,135

)

 

 

 

    Total shareholders’ equity

 

 

 

60,240,741

 

 

50,766,785

 

 

 

 

    Total liabilities and shareholders' equity

 

 

$

538,075,397

 

$

467,455,093

 

 

 

 

 

3

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

 

Six Months Ended

Six Months Ended

 

June 30, 2006

June 30, 2005

 

(Unaudited)

(Unaudited)

Interest income:

 

 

 

 

 

 

 

 

  Loans, including fees

 

 

$

8,349,538

 

$

6,292,892

 

  Investment securities

 

 

 

3,692,874

 

 

3,686,323

 

  Federal funds sold and securities purchased

 

 

 

 

 

 

 

 

    under resale agreements

 

 

 

396,075

 

 

106,570

 

  Other

 

 

 

36,398

 

 

23,015

 

 

 

 

       Total interest income

 

 

 

12,474,885

 

 

10,108,800

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

  Deposits

 

 

 

4,290,839

 

 

2,452,690

 

  Federal funds purchased and securities sold

 

 

 

 

 

 

 

 

   under agreement to repurchase

 

 

 

291,922

 

 

83,637

 

  Other borrowed money

 

 

 

1,094,706

 

 

1,143,133

 

 

 

 

      Total interest expense

 

 

 

5,677,467

 

 

3,679,460

 

 

 

 

Net interest income

 

 

 

6,797,418

 

 

6,429,340

 

Provision for loan losses

 

 

 

248,329

 

 

138,000

 

 

 

 

Net interest income after provision for loan losses

 

 

 

6,549,089

 

 

6,291,340

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

  Deposit service charges

 

 

 

1,122,566

 

 

586,459

 

  Mortgage origination fees

 

 

 

246,581

 

 

170,785

 

  Commission on sale of non deposit investment products

 

 

 

206,630

 

 

63,508

 

  Gain (loss) on sale of securities

 

 

 

(69,382

)

 

188,419

 

  Gain on early extinguishment of debt

 

 

 

159,416

 

 

-

 

  Other

 

 

 

612,737

 

 

360,804

 

 

 

 

      Total non-interest income

 

 

 

2,278,548

 

 

1,369,975

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

  Salaries and employee benefits

 

 

 

3,380,294

 

 

3,030,340

 

  Occupancy

 

 

 

412,402

 

 

372,376

 

  Equipment

 

 

 

575,053

 

 

651,067

 

  Marketing and public relations

 

 

 

146,955

 

 

171,164

 

  Amortization of intangibles

 

 

 

301,723

 

 

297,371

 

  Other

 

 

 

1,535,128

 

 

1,130,878

 

 

 

 

      Total non-interest expense

 

 

 

6,351,555

 

 

5,653,196

 

 

 

 

Net income before tax

 

 

 

2,476,082

 

 

2,008,119

 

Income taxes

 

 

 

738,475

 

 

521,030

 

 

 

 

Net income

 

 

$

1,737,607

 

$

1,487,089

 

 

 

 

Basic earnings per common share

 

 

$

0.59

 

$

0.53

 

 

 

 

Diluted earnings per common share

 

 

$

0.57

 

$

0.50

 

 

 

 

 

4

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

 

Three Months Ended

Three Months Ended

 

June 30, 2006

June 30, 2005

 

(Unaudited)

(Unaudited)

Interest income:

 

 

 

 

 

 

 

 

  Loans, including fees

 

 

$

4,334,016

 

$

3,278,256

 

  Investment securities

 

 

 

1,923,149

 

 

1,920,909

 

  Federal funds sold and securities purchased

 

 

 

 

 

 

 

 

    under resale agreements

 

 

 

254,758

 

 

32,813

 

  Other

 

 

 

25,945

 

 

12,447

 

 

 

 

       Total interest income

 

 

 

6,537,868

 

 

5,244,425

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

  Deposits

 

 

 

2,362,547

 

 

1,346,357

 

  Federal funds purchased and securities sold

 

 

 

 

 

 

 

 

   under agreement to repurchase

 

 

 

164,911

 

 

47,293

 

  Other borrowed money

 

 

 

540,431

 

 

591,215

 

 

 

 

      Total interest expense

 

 

 

3,067,889

 

 

1,984,865

 

 

 

 

Net interest income

 

 

 

3,469,979

 

 

3,259,560

 

Provision for loan losses

 

 

 

128,629

 

 

72,000

 

 

 

 

Net interest income after provision for loan losses

 

 

 

3,341,350

 

 

3,187,560

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

  Deposit service charges

 

 

 

578,029

 

 

304,426

 

  Mortgage origination fees

 

 

 

132,238

 

 

92,233

 

  Commission on sale of non deposit investment products

 

 

 

105,446

 

 

35,859

 

  Gain on sale of securities

 

 

 

-

 

 

7,322

 

  Other

 

 

 

311,976

 

 

190,832

 

 

 

 

      Total non-interest income

 

 

 

1,127,689

 

 

630,672

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

  Salaries and employee benefits

 

 

 

1,685,836

 

 

1,520,888

 

  Occupancy

 

 

 

204,708

 

 

187,070

 

  Equipment

 

 

 

289,890

 

 

321,484

 

  Marketing and public relations

 

 

 

75,564

 

 

83,535

 

  Amortization of intangibles

 

 

 

153,038

 

 

148,686

 

  Other

 

 

 

773,707

 

 

606,346

 

 

 

 

      Total non-interest expense

 

 

 

3,182,743

 

 

2,868,009

 

 

 

 

Net income before tax

 

 

 

1,286,296

 

 

950,223

 

Income taxes

 

 

 

384,975

 

 

243,400

 

 

 

 

Net income

 

 

$

901,321

 

$

706,823

 

 

 

 

Basic earnings per common share

 

 

$

0.30

 

$

0.25

 

 

 

 

Diluted earnings per common share

 

 

$

0.29

 

$

0.24

 

 

 

 

 

5

FIRST COMMUNITY CORPORATION
Consolidated Statement of Changes in Shareholder’s Equity and Comprehensive Income
Six Months ended June 30, 2006 and June 30, 2005

 

 

 

 

 

Accumulated

 

 

 

 

Additional

 

Other

 

 

Shares

Common

Paid-in

Retained

Comprehensive

 

 

Issued

Stock

Capital

Earnings

Income (Loss)

Total

 

 

 

 

 

 

 

Balance, December 31, 2004

 

 

 

2,788,902

 

$

2,788,902

 

$

41,832,090

 

$

6,712,849

 

$

(871,152

)

$

50,462,689

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

 

 

 

 

 

 

 

 

 

 

 

1,487,089

 

 

 

 

 

1,487,089

 

  Accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive loss net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income tax benefit of $625,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,162,472

)

 

 

 

   Less: reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   for gains included in net income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   net of tax of $65,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(122,472

)

 

 

 

 

 

 

 

 

 

  Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,284,944

)

 

(1,284,944

)

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

202,145

 

 

 

 

 

 

 

 

Dividends paid ($0.10 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(281,092

)

 

 

 

 

(281,092

)

Options exercised

 

 

 

47,595

 

 

47,595

 

 

361,064

 

 

 

 

 

 

 

 

408,659

 

Dividend reinvestment plan

 

 

 

3,363

 

 

3,363

 

 

58,495

 

 

 

 

 

 

 

 

61,858

 

 

 

Balance, June 30, 2005

 

 

 

2,839,860

 

$

2,839,860

 

$

42,251,649

 

$

7,918,846

 

$

(2,156,096

)

$

50,854,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

 

 

2,848,627

 

$

2,848,627

 

$

42,352,205

 

$

9,240,088

 

$

(3,674,135

)

$

50,766,785

 

Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Net income

 

 

 

 

 

 

 

 

 

 

 

 

1,737,607

 

 

 

 

 

1,737,607

 

  Accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   comprehensive income net of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   income tax of $18,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,674

 

 

 

 

   Add: reclassification adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   for gains included in net income,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   net of tax of $24,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,098

 

 

 

 

 

 

 

 

 

 

  Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78,772

 

 

78,772

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,816,379

 

 

 

 

 

 

 

 

Stock issued in acquisition

 

 

 

364,034

 

 

364,034

 

 

7,212,859

 

 

7,576,893

 

 

 

 

 

 

 

Dividends paid ($0.11 per share)

 

 

 

 

 

 

 

 

 

 

 

 

(316,420

)

 

 

 

 

(316,420

)

Options exercised

 

 

 

42,629

 

 

42,629

 

 

282,136

 

 

 

 

 

 

 

 

324,765

 

Dividend reinvestment plan

 

 

 

4,086

 

 

4,086

 

 

68,253

 

 

 

 

 

 

 

 

72,339

 

 

 

Balance, June 30, 2006

 

 

 

3,259,376

 

$

3,259,376

 

$

49,915,453

 

$

10,661,275

 

$

(3,595,363

)

$

60,240,741

 

 

 




6

FIRST COMMUNITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Six months ended June 30,

 

2006   

2005 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 Net income

 

 

$

1,737,607

 

$

1,487,089

 

 Adjustments to reconcile net income to

 

 

 

 

 

 

 

 

   net cash provided in operating activities:

 

 

 

 

 

 

 

 

       Depreciation

 

 

 

444,423

 

 

488,564

 

       Discount accretion

 

 

 

(157,728

)

 

(64,555

)

       Provision for loan losses

 

 

 

248,329

 

 

138,000

 

       Amortization of intangibles

 

 

 

301,723

 

 

297,370

 

       (Gain) loss on sale of securities

 

 

 

69,382

 

 

(188,418

)

       Gain on early extinguishment of debt

 

 

 

(159,416

)

 

-

 

       Increase in other assets

 

 

 

(10,321

)

 

(257,414

)

       Increase (decrease) in other liabilities

 

 

 

34,238

 

 

(69,947

)

 

 

 

         Net cash provided in operating activities

 

 

 

2,508,237

 

 

1,830,689

 

 

 

 

Cash flows form investing activities:

 

 

 

 

 

 

 

 

 Purchase of investment securities available-for-sale

 

 

 

(24,301,838

)

 

(48,284,585

)

 Maturity of investment securities available-for-sale

 

 

 

13,930,617

 

 

15,057,001

 

 Proceeds from sale of securities

 

 

 

14,758,934

 

 

39,071,729

 

 Purchase of investment securities held-to-maturity

 

 

 

-

 

 

(50,000

)

 Maturity of investment securities held-to-maturity

 

 

 

-

 

 

325,000

 

 Increase in loans

 

 

 

(13,916,912

)

 

(16,104,839

)

 Purchase of property and equipment

 

 

 

(2,270,507

)

 

(538,509

)

 Net cash disbursed in business combination

 

 

 

(1,229,598

)

 

-

 

 

 

 

         Net cash used in investing activities

 

 

 

(13,029,304

)

 

(10,524,203

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 Increase (decrease) in deposit accounts

 

 

 

31,885,560

 

 

(1,024,551

)

 Increase in securities sold under agreements to repurchase

 

 

 

988,722

 

 

2,951,300

 

 Decrease in other borrowings

 

 

 

(4,236

)

 

(14,248

)

 Advances from the FHLB

 

 

 

9,000,000

 

 

5,480,000

 

 Repayment of Advances FHLB

 

 

 

(16,587,365

)

 

(1,004,230

)

 Proceeds from exercise of stock options

 

 

 

324,765

 

 

408,659

 

 Dividends paid

 

 

 

(316,420

)

 

(281,092

)

 Dividend reinvestment plan

 

 

 

72,339

 

 

61,858

 

 

 

 

        Net cash provided from financing activities

 

 

 

25,363,365

 

 

6,577,696

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 

14,842,298

 

 

(2,115,818

)

Cash and cash equivalents at beginning
 of period

 

 

 

12,864,146

 

 

19,325,645

 

 

 

 

Cash and cash equivalents at end of period

 

 

$

27,706,444

 

$

17,209,827

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 

 

 Cash paid during the period for:

 

 

 

 

 

 

 

 

   Interest

 

 

$

5,289,141

 

$

3,101,763

 

   Income taxes

 

 

$

395,000

 

$

120,000

 

 Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

   Unrealized gain on securities available-for-sale

 

 

$

142,416

 

$

1,976,833

 

 

7

Notes to Consolidated Financial Statements
June 30, 2006

Note 1 – Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated balance sheets, the consolidated statements of income, the consolidated statements of changes in shareholders’ equity and comprehensive income (loss), and the consolidated statements of cash flows of First Community Corporation (“the Company”), present fairly in all material respects First Community Corporation’s financial position at June 30, 2006 and December 31, 2005, First Community Corporation’s results of operations for the three and six months ended June 30, 2006 and 2005, and First Community Corporation’s cash flows for the six months ended June 30, 2006 and 2005. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.



 

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 2005 Annual Report on Form 10-K should be referred to in connection with these unaudited interim financial statements. As of December 31, 2004, the Company no longer met the requirements to qualify as a small business issuer as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”). All reports of the Company, beginning with the Form 10-Q for the quarter ended March 31, 2005, are presented in accordance with Regulation S-K. The Company, however, is not an accelerated filer as defined in Rule 12b-2 of the Exchange Act. As a result, the Company qualifies for the extended compliance period with respect the accountants report on management’s assessment of internal control over financial reporting and management’s annual report on internal control over financial reporting required by PCAOB Auditing Standards No.2.



Note 2 – Earnings per share

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

 

 

Six months ended

Three months ended

 

 

June 30,

June 30,

 

 

2006

2005

2006

2005

 

 

 

Numerator (Included in basic and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

diluted earnings per share)

 

 

$ 1,737,607

 

 

$ 1,487,089

 

 

$ 901,321

 

 

$ 706,823

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Outstanding for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Basic earnings per share

 

 

2,926,953

 

 

2,824,586

 

 

2,982,406

 

 

2,836,208

 

 

 

 

 

     Dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      Stock options - Treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Stock method

 

 

101,502

 

 

134,329

 

 

96,033

 

 

129,528

 

 

 

 

 

 

 

 

    Diluted earnings per share

 

 

3,028,455

 

 

2,958,915

 

 

3,078,439

 

 

2,965,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The average market price used in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

calculating assumed number of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Shares

 

 

$ 18.17

 

 

$ 19.38

 

 

$ 17.99

 

 

$ 18.99

 

 

 

 

 

 

8

Note 3 – Stock Based Compensation

In December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award. Public companies are required to adopt, and the Company has adopted effective January 1, 2006, the new standard using a modified prospective method. Under the modified prospective method, companies are allowed to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively on the nonvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method.

At December 31, 2005, the Company had a stock-based payment plan for directors, officers and other key employees, which is described below. Prior to December 31, 2005, the Company, as permitted under SFAS 123, applied the intrinsic value method under APB 25, and related interpretations in accounting for its stock-based compensation plan.

Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) which requires expensing employee stock-based compensation using the fair value method prospectively for all awards granted, modified, or settled on or after January 1, 2006. The fair value at date of grant of the stock option is estimated using the Black-Scholes option-pricing model based on assumptions noted in a table below. The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are based on historical volatilities. The expected term of share options granted is generally derived from historical experience.

As of June 30, 2006 there was no unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan. There was no compensation cost recognized during the three and six month periods ended June 30, 2006 as all options had vested prior to January 1, 2006.

The Company’s stock option plan (“the Plan”), which was approved by shareholders, provides for stock options to be granted primarily to directors, officers and other key employees. Options granted under the stock option plan may be incentive stock options or non-incentive stock options. Share option awards have previously all been granted with an exercise price equal to the market price of the Company’s shares at the date of grant. The shares reserved under the option plan at June 30, 2006 amounted to approximately 190,000 shares.

Effective December 31, 2005, the vesting period for approximately 67,000 options awarded during 2003, 2004 and 2005 that would otherwise vest at various times through fiscal 2010 was accelerated, as more fully described in note 15 of the 2005 Annual Report to Shareholders. All other terms and conditions of the accelerated options remained unchanged as a result of the acceleration.

There were no options granted under the option plan during the six months ended June 30, 2006. There were 63,500 options granted to officers and employees during the six months ended June 30, 2005. The assumptions used in estimating the weighted average fair value for these options (using the Black-Sholes pricing model)included dividend yield of 1.0%, volatility of 24.3%, risk free interest rate of 4.3% and an expected life of 8 years.

At December 31, 2005 there were 328,092 options outstanding and exercisable with a weighted average exercise price of $11.87. During the six months ended June 30, 2006 42,629, options were exercised at an average exercise price of $7.62. At June 30, 2006 there were 285,463 options outstanding and exercisable with a weighted average exercise price of $12.50 (excluding options issued in connection with consummation of the merger with DeKalb Bancshares, Inc. on June 9, 2006). Cash received during the six months ended June 30, 2006 from share option exercises amounted to $325,000.

In connection with the merger with DeKalb Bancshares, Inc. (“DeKalb”) the company assumed the equivalent of 71,227 fully vested options issued to employees of DeKalb at an average exercise price of $13.33.

 

9

Prior to adoption of SFAS 123R the company used the intrinsic value method to account for stock options in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. The following summarizes pro-forma data in accordance with Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation” for the six and three months ended June 30, 2005.

 

Six months ended   

Three months ended  

 

June 30, 2005  

June 30, 2005

Net income as reported

 

 

$

1,487,089

 

$

706,823

 

Less: Stock based compensation

 

 

 

 

 

 

 

 

using fair value method (net of tax)

 

 

 

63,651

 

 

32,002

 

 

 

Pro forma net income

 

 

$

1,423,438

 

$

674,821

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

         As reported

 

 

$

0.53

 

$

0.25

 

         Pro forma

 

 

$

0.50

 

$

0.24

 

Diluted earnings per share

 

 

 

 

 

 

 

 

         As reported

 

 

$

0.50

 

$

0.24

 

         Pro forma

 

 

$

0.48

 

$

0.23

 

Note 4 – Acquisition

On June 9, 2006, we acquired 100 percent of the outstanding shares of DeKalb Bancshares, Inc., the parent company of The Bank of Camden. The Bank of Camden became a branch of First Community Bank, NA, and our wholly owned banking subsidiary. The aggregate acquisition cost was $10,223,000 including $2,369,000 of cash, 364,064 shares of our common stock valued at $7,577,000, stock options valued at $585,000 and direct acquisition costs of $277,000. The value of the 364,064 shares of common stock issued at $19.22 per share was determined based on the average closing price of our common shares over the two-day period before and after December 8, 2005 the date the terms were agreed to and announced.

The primary intangible assets acquired in conjunction with the purchase of DeKalb Bancshares, Inc. are core deposit intangible assets with an estimated useful life of approximately seven years and goodwill. The transaction was a tax-free reorganization for federal income tax purposes and intangible assets are not deductible in determining taxable income.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed June 9, 2006. We obtained third party evaluations of certain intangible assets.

 

(Dollars in thousands)

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

1,015

 

 

 

 

Federal funds sold

 

 

 

402

 

 

 

 

Investment securities

 

 

 

10,152

 

 

 

 

Loans, net of allowance

 

 

 

26,315

 

 

 

 

Premises and equipment

 

 

 

2,613

 

 

 

 

Core deposit intangible asset

 

 

 

522

 

 

 

 

Goodwill

 

 

 

4,903

 

 

 

 

Other assets

 

 

 

524

 

 

 

 

 

 

 

Total assets acquired

 

 

 

46,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

27,302

 

 

 

 

Advances from the Federal Home Loan Bank

 

 

 

4,939

 

 

 

 

Other borrowed money

 

 

 

2,977

 

 

 

 

Other liabilities

 

 

 

1,005

 

 

 

 

 

 

 

Total liabilities assumed

 

 

 

36,223

 

 

 

 

 

 

 

Net assets acquired

 

 

$

10,223

 

 

 

 

 

10

Note 5 – Recently Issued Accounting Pronouncements

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

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This Statement amends FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.






11

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

This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors, which are beyond our control. The words “may,”  “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate,” as well as similar expressions, are meant to identify such forward-looking statements. Potential risks and uncertainties include, but are not limited to those described below under Item 1A- Risk Factors and the following:

 

•

the businesses of First Community and DeKalb Bancshares may not be integrated successfully or such integration may take longer to accomplish than expected;

 

 

•

the expected cost savings and any revenue synergies from the merger may not be fully realized within the expected timeframes;

 

 

•

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

 

 

•

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

 

 

•

changes in political conditions or the legislative or regulatory environment;

 

 

•

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

 

 

•

changes occurring in business conditions and inflation;

 

 

•

changes in technology;

 

 

•

the level of allowance for loan loss;

 

 

•

the rate of delinquencies and amounts of charge-offs;

 

 

•

the rates of loan growth;

 

 

•

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

 

 

•

changes in monetary and tax policies;

 

 

•

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

 

 

•

changes in the securities markets; and

 

 

•

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

Overview

        The following discussion describes the our results of operations for the three and six month periods ended June 30, 2006, as compared to the three and six month periods ended June 30, 2005, and also analyzes our financial condition as of June 30, 2006 as compared to December 31, 2005. Like most community banks, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities. Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section we have included a detailed discussion of this process. In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this non-interest income, as well as our non-interest expense, in the following discussion.

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

 

12

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 audited consolidated financial statements as of December 31, 2005, as filed in our annual report on Form 10-K

        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 judgments 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 judgments 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 judgments 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.

Merger Completed on June 9, 2006

On June 9, 2006 we consummated the merger with DeKalb Bancshares, Inc. (“DeKalb”). Pursuant to the merger we issued 364,064 shares of common stock valued at $7.6 million and paid $2.4 million in cash to shareholders of DeKalb. Other cost related to the merger included stock options valued at $585,000 and direct acquisition cost of $277,000. Periods prior to June 9, 2006 do not include the effect of the merger and, as a result, the six and three months ended June 30, 2005 does not reflect any results from the former DeKalb.

Comparison of Results of Operations for Six Months Ended June 30, 2006 to the Six Months Ended June 30, 2005:

Net Income

Our net income for the six months ended June 30, 2006 was $1.7 million, or $.57 diluted earnings per share, as compared to $1.5 million, or $.50 diluted earnings per share, for the six months ended June 30, 2005. The increase in net income is due to an increase in net interest income due to additional earning assets as well as an increase in non-interest income. These increases were somewhat offset by an increase in non-interest expense during the two periods. Average earning assets were $419.0 million during the six months ended June 30, 2006 as compared to $387.2 million during the six months ended June 30, 2005. The increase in average earning assets resulted in an increase in net interest income of $368,000 in the first six months of 2006 as compared to the first six months of 2005. Non-interest income increased $909,000 in the first six months of 2006 as compared to the first six months of 2005. Non-interest expense increased $698,000 in the first six months of 2006 as compared to the first six months of 2005.

The table on page 21 shows yield and rate data for interest-bearing balance sheet components during the six month periods ended June 30, 2006 and 2005, along with average balances and the related interest income and interest expense amounts.

Net interest income was $6.8 million for the six months ended June 30, 2006 as compared to $6.4 million for the six months ended June 30, 2005. This again was primarily due to increase in the level of earning assets. The yield on earning assets increased by 73 basis points due to the continued increasing rate environment throughout 2005 and the first six months of 2006. In addition, we continue to make progress in changing the mix of the earning asset portfolios. The investment portfolio and short term investments represented 44.7% of the average interest earning assets in the six months ended June 30, 2006 as compared to 50.3% during the comparable period in 2005. Since the consummation of the merger with DutchFork Bankshares in October 2004 our objective has been to increase the percentage of earning assets in the loan portfolio as compared to other earning assets. This began by restructuring the investment portfolio in late 2004 and early 2005 in order to shorten the maturity and

 

13

purchase investments that provided ongoing cash flow. Yields on loans are typically higher then yields on other types of earning assets and thus one of our goals continues to be to grow the loan portfolio as a percentage of earning assets.

The yield on earning assets for the six months ended June 30, 2006 and 2005 was 6.00% and 5.27%, respectively. The cost of interest-bearing liabilities during the first six months of 2006 was 3.10% as compared to 2.12% in the same period of 2005. The increase in the cost of interest-bearing liabilities was a result of increasing interest rates throughout 2005 and the first six months of 2006. The net interest margin was 3.27% for the six months ended June 30, 2006 and 3.35% for the six months ended June 30, 2005. On a fully taxable equivalent basis the net interest margin was 3.36% and 3.50% for the six months ended June 30, 2006 and 2005, respectively.

Provision and Allowance for Loan Losses

At June 30, 2006 the allowance for loan losses amounted to $3.1 million, or 1.19% of total loans, as compared to $2.7 million, or 1.22% of total loans, at December 31, 2005. In the merger with DeKalb, we acquired an allowance for loan losses of $320,000. In December 2003, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position No. 03-3 (SOP No. 03-3), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” SOP No. 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer or business combination if those differences are attributable, at least in part, to credit quality. SOP No. 03-3 prohibits the carry over or creation of valuation allowances in the initial accounting of all loans acquired that are within the scope of the SOP. SOP No. 03-3 was effective for loans acquired in years beginning after December 15, 2004. At the date of our acquisition of DeKalb the acquired loan portfolio had no loans that were impaired and none that were delinquent greater than 30 days. Therefore, there were no loans acquired that were deemed to be within the scope of SOP No. 03-3.

Our provision for loan loss was $248,000 for the six months ended June 30, 2006, as compared to $138,000 for the six months ended June 30, 2005. The provision is made based on our assessment of general loan loss risk and asset quality. The allowance for loan losses represent an amount which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in the lending policies and procedures, changes in the local/national economy, changes in volume or type of credits, changes in volume/severity of problem loans, quality of loan review and board of director oversight, concentrations of credit. Periodically, we adjust the amount of the allowance based on changing circumstances. We charge recognized losses to the allowance and add subsequent recoveries back to the allowance for loan losses.

We perform an analysis quarterly to assess the risk within the loan portfolio. The portfolio is segregated into similar risk components for which historical loss ratios are calculated and adjusted for identified changes in current portfolio characteristics. Historical loss ratios are calculated by product type and by regulatory credit risk classification. The allowance consists of an allocated and unallocated allowance. The allocated portion is determined by types and ratings of loans within the portfolio. The unallocated portion of the allowance is established for losses that exist in the remainder of the portfolio and compensates for uncertainty in estimating the loan losses.

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

At June 30, 2006 we had no loans delinquent more than 90 days and still accruing interest, and loans totaling $2.4 million that were delinquent 30 days to 89 days. We had two loans in a nonaccrual status in the amount of $23,000 at June 30, 2006. Our management continuously monitors non-performing, classified and past due loans, to identify deterioration regarding the condition of these loans. We identified 9 loans in the amount of $201,000 that are current as to principal and interest and not included in non-performing assets that could be a potential problem loan.

 

14

Allowance for Loan Losses

(Dollars in thousands)

Six Month Ended

 

              June 30,              

 

2006   

2005

Average loans outstanding

 

 

$

231,759

 

$

192,539

 

 

 

 

Loans outstanding at period end

 

 

$

262,079

 

$

202,533

 

 

 

 

Non-performing assets:

 

 

 

 

 

 

 

 

     Nonaccrual loans

 

 

$

23

 

$

433

 

     Loans 90 days past due still accruing

 

 

 

-

 

 

-

 

     Foreclosed real estate

 

 

 

50

 

$

404

 

 

 

 

Total non-performing loans

 

 

$

73

 

$

837

 

 

 

 

Beginning balance of allowance

 

 

$

2,701

 

$

2,764

 

Loans charged-off:

 

 

 

 

 

 

 

 

  1-4 family residential mortgage

 

 

 

67

 

 

274

 

   Non-residential real estate

 

 

 

44

 

 

-

 

  Home equity

 

 

 

-

 

 

-

 

  Commercial

 

 

 

-

 

 

12

 

  Installment & credit card

 

 

 

84

 

 

28

 

 

 

 

     Total loans charged-off

 

 

 

195

 

 

314

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

  1-4 family residential mortgage

 

 

 

1

 

 

-

 

  Non-residential real estate

 

 

 

6

 

 

7

 

  Home equity

 

 

 

-

 

 

-

 

  Commercial

 

 

 

26

 

 

56

 

  Installment & credit card

 

 

 

21

 

 

17

 

 

 

 

     Total recoveries

 

 

 

54

 

 

80

 

 

 

 

Net loan charge offs

 

 

 

141

 

 

234

 

 

 

 

Acquired in business combination

 

 

 

320

 

 

-

 

 

 

 

Provision for loan losses

 

 

 

248

 

 

138

 

 

 

 

Balance at period end

 

 

$

3,128

 

$

2,668

 

 

 

 

Net charge -offs to average loans

 

 

 

0.06

%

 

0.12

%

Allowance as percent of total loans

 

 

 

1.19

%

 

1.32

%

Non-performing assets as % of total assets

 

 

 

0.01

%

 

0.18

%

Allowance as % of non-performing loans

 

 

 

N/A

 

 

616.2

%



15

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

Composition of the Allowance for Loan Losses

 

June 30, 2006

December 31, 2005

 

 

% of loans

 

% of loans

 

Amount

in Category

Amount

in Category

 

 

 

 

 

Commercial, Financial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   and Agricultural

 

 

$

269

 

 

8.1

%

$

574

 

 

10.0

%

Real Estate - Construction

 

 

 

411

 

 

9.5

%

 

611

 

 

9.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Commercial

 

 

 

1,831

 

 

51.8

%

 

953

 

 

50.9

%

  Residential

 

 

 

358

 

 

18.1

%

 

275

 

 

16.8

%

Consumer

 

 

 

171

 

 

12.5

%

 

213

 

 

13.3

%

Unallocated

 

 

 

88

 

 

N/A

 

 

75

 

 

N/A

 

 

 

Total

 

 

$

3,128

 

 

100.0

%

$

2,701

 

 

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 six months of 2006 was $2.3 million as compared to $1.4 million during the same period in 2005. The growth in non-interest income consisted of increases in deposit service charges of $536,000, mortgage origination fees of $76,000, commissions on the sale of non-deposit investment products of $143,000 and an increase in ATM debit card fees transaction and surcharge fees of $58,000. The increase in deposit service charges as well as ATM transaction and surcharge fees resulted from an increase in deposit balances and number of accounts between the two periods. In addition, during the fourth quarter of 2005 we introduced a formalized overdraft privilege program, which contributed to the increase in deposit service charges in the first quarter of 2006 as compared to the same period in 2005. Mortgage origination fees increased due to the continued relatively low mortgage loan rate environment as well as continued emphasis on this source of revenue. The increase in commissions on the sale of non-deposit investment products also resulted from a continued emphasis on this source of revenue. During the first six months of 2005 the company realized gains on the sale of securities in the amount of $188,000 as compared to a loss of $69,000 during the same period of 2006. The proceeds from the sale of securities in the first quarter of 2006 were used to pay down approximately $5.0 million in a Federal Home Loan Bank advance, which resulted in a gain on the early extinguishment of debt of $159,000. These advances were acquired in the DutchFork merger. Other non-interest income also increased by approximately $129,000 in the first six months of 2006 as a result of recognizing the increase in the market value of the interest rate cap agreement acquired in the third quarter of 2005, discussed further in the “Market Risk Management” section.

Total non-interest expense increased by $698,000 during the first six months of 2006 as compared to the same period of 2005. Salaries and employee benefits increased $350,000 in the six months ended June 30, 2006 as compared to the same period in 2005. There was a $404,000 increase in other expenses in the first six months of 2006 as compared to the same period in 2005. This increase primarily results from an increase of $170,000 in consulting and professional fees and an increase of $54,000 in telephone and data communication expenses as a result of upgrading our network system. Expenses related to ATM/debit card processing increased by $36,000 as a result of increased usage volume and number of outstanding cards.

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

 

16

(In thousands)

    Six months ended

 

               June 30,            

 

2006

 2005

ATM/debit card processing

 

 

$

123

 

$

87

 

Supplies

 

 

 

120

 

 

136

 

Telephone

 

 

 

200

 

 

146

 

Correspondent services

 

 

 

84

 

 

82

 

Insurance

 

 

 

126

 

 

121

 

Postage

 

 

 

78

 

 

73

 

Professional fees

 

 

 

353

 

 

183

 

Other

 

 

 

451

 

 

303

 

 

 

 

 

 

 

$

1,535

 

$

1,131

 

 

 

 

Income Tax Expense

Our effective tax rate was to 29.8% in the first six months of 2006 as compared to 25.9% during the same period of 2005. The increase in the effective tax rate is primarily a result of the sale of certain available-for-sale investments, during the first quarter of 2006. The investments paid dividends, a portion of which were non-taxable for federal tax purposes. Our effective tax rate is currently expected to remain 30.0% to 32.0% throughout the remainder of 2006.

Comparison of Results of Operations for Three Months Ended June 30, 2006 to the Three Months Ended June 30, 2005:

Net Income

Net income for the second quarter of 2006 was $901,000, or $0.29 per diluted share, as compared to $707,000, $0.24 per diluted share during the comparable period in 2005. Net interest income increased by $210,000 for the three months ended June 30, 2006 from $3.3 million in 2005 to $3.5 million in 2006. The increase in net interest income is primarily due to an increase in the level of average earning assets. Average earning assets were $432.5 million during the second quarter of 2006 as compared to $388.3 million during the second quarter of 2005. The table on page 22 shows yield and rate data for interest-bearing balance sheet components during the three month periods ended June 30, 2006 and 2005, along with average balances and the related interest income and interest expense amounts. The yield on average earning assets increased to 6.06% in the second quarter of 2006 as compared to 5.42% in the second quarter of 2005. The cost of interest bearing liabilities also increased to 3.25% in second quarter of 2006 as compared to 2.27% in the second quarter of 2005. The net interest margin was 3.22% for the three months ended June 30, 2006 and 3.37% for the three months ended June 30, 2005. On a fully taxable equivalent basis the net interest margin was 3.30% and 3.51% for the three months ended June 30, 2006 and 2005, respectively.

Non-interest Income and Non-interest Expense

Non-interest income increased by $497,000 from $631,000 for the three months ended June 30, 2005 to $1.1 million in the same period of 2006. Deposit service charges increased by $274,000, mortgage loan fees increased by $40,000, commissions on the sale of non-deposit investment products increased by $70,000 and other income increased $121,000 in the three months ended June 30, 2006 as compared to the same period in 2005. Included in this increase in other income for the three month ended June 30, 2006 is an increase in the market value of an interest rate cap of $64,000.

Total non-interest expense increased by $315,000 in the second quarter of 2006 as compared to the same quarter of 2005. This increase was primarily due to a $165,000 increase in salary and benefits expense and an increase of $167,000 in other expenses. The increase in other expenses primarily relates to increased fees for professional and consulting services in the second quarter of 2006 for establishing the overdraft privilege program and consulting services related to the investment portfolio. This increase in the consulting and professional fees will continue throughout the balance of 2006 in relation to comparable periods in 2005.

Financial Position

Assets totaled $538.1 million at June 30, 2006 as compared to $467.5 million at December 31, 2005, an increase of $70.6 million, or 15.1%. The merger with DeKalb, which was consummated on June 9, 2006, accounted for approximately $46.4 million of this increase. Short-term investments (Federal funds sold and securities purchased under agreements to resell and

 

17

interest-bearing bank balances) grew $15.8 million during the first six months of 2006 from $1.2 million at December 31, 2005 to $17.0 million at June 30, 2006. Loans grew by $40.4 million during the six months ended June 30, 2006 from $221.7 million at December 31, 2005 to $262.1 million at June 30, 2006. Organic growth (increases excluding the impact of the DeKalb merger) accounted for approximately $13.8 million (12.5% annualized) of this increase in loans. At June 30, 2006, loans accounted for 56.8% of earning assets, as compared to 55.5% at December 31, 2005. The loan to deposit ratio at June 30, 2006 was 64.1% as compared to 63.4% at December 31, 2005. Investment securities increased from $176.4 million at December 31, 2005 to $182.1 million at June 30, 2006. We acquired approximately $10.2 million in investment securities as a result of the DeKalb merger. Throughout 2006, we will continue to focus on investing more of our assets in the higher earning loan portfolio as compared to the investment portfolio. Associated with the higher loan yields are the inherent credit and liquidity risks, which we attempt to control and counterbalance. We are committed to achieving our asset mix goals without sacrificing asset quality. The increase in earning assets was primarily funded by a $31.9 million (18.2% annualized) organic deposit growth from December 31, 2005 to June 30, 2006. In addition, we acquired approximately $27.3 million in deposit accounts in the DeKalb merger. We currently do not accept brokered deposits and therefore our balance sheet continues to be primarily funded from deposit relationships within the markets we serve.

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

(In thousands)

    June 30, 2006

       December 31, 2005

 

Amount

Percent

Amount

Percent

 

 

 

 

 

Commercial, financial & agricultural

 

 

$

21,316

 

 

8.1

%

$

22,091

 

 

10.0

%

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Construction

 

 

 

24,914

 

 

9.5

%

 

19,955

 

 

9.0

%

   Mortgage - residential

 

 

 

47,420

 

 

18.1

%

 

37,251

 

 

16.8

%

   Mortgage - commercial

 

 

 

135,752

 

 

51.8

%

 

112,915

 

 

50.9

%

Consumer

 

 

 

32,677

 

 

12.5

%

 

29,456

 

 

13.3

%

 

 

 

     Total gross loans

 

 

 

262,079

 

 

100.0

%

 

221,668

 

 

100.0

%

 

 

 

 

 

Allowance for loan losses

 

 

 

(3,128

)

 

 

 

 

(2,701

)

 

 

 

 

 

 

 

 

     Total net loans

 

 

$

258,951

 

 

 

 

$

218,967

 

 

 

 

 

 

 

 

 

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.

 

18

We are currently liability sensitive within one year. However, neither the “gap” analysis nor asset/liability modeling is a precise indicator of the interest sensitivity position of the company 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.

During the quarter ended September 30, 2005, we entered into an interest rate cap agreement with a notional amount of $10.0 million expiring on September 1, 2009. The cap rate of interest is 4.50% and the index is the three-month LIBOR. The agreement was entered into to protect assets and liabilities from the negative effects of increasing interest rates. The agreement provides for a payment to us of the difference between the cap rate of interest and the market rate of interest. Our exposure to credit risk is limited to the ability of the counter party to make potential future payments required pursuant to the agreement. Our exposure to market risk of loss is limited to the market value of the cap. At June 30, 2006, the market value of this cap was $321,000. The gain or loss on the value of this contract is recognized in earnings on a current basis. We received payments of approximately $9,000 in the second quarter of 2006 under the terms of the contract. During the six months ended June 30, 2006, we recognized $129,000 in other income to reflect the increase in the value 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 June 30, 2006, March 31, 2006 and December 31, 2005 over the subsequent twelve months.

Net Interest Income Sensitivity

Change in

 

 

 

short-term

 

 

 

  interest

June 30,

March 31,

December 31,

    rates

  2006

   2006

     2005

+200bp

 

 

-0.06%

 

 

+1.27%

 

 

+0.74%

 

 

+100bp

 

 

-1.47%

 

 

+0.95%

 

 

+0.75%

 

 

 Flat

 

 

       -

 

 

       -

 

 

       -

 

 

-100bp

 

 

+0.30%

 

 

-1.46%

 

 

-2.79%

 

 

-200bp

 

 

-2.46%

 

 

-6.65%

 

 

-8.30%

 

 

As a result of the size of the investment portfolio that was acquired in the DutchFork merger and the amount and type of fixed rate longer-term investments that were in the portfolio, we emphasized restructuring the portfolio in the fourth quarter of 2004 and continuing into the first quarter of 2005. The purpose was to shorten the average life of the portfolio and acquire investments that provided cash flow and/or were adjustable rate instruments. Although this resulted in a reduction in investment yield, we believe that the restructuring positioned us more appropriately for interest rate volatility and continues to provide a significant amount of additional cash flow to fund desired loan growth.

We also perform a valuation analysis projecting future cash flows from assets and liabilities to determine the Present Value of Equity (PVE) over a range of changes in market interest rates. The sensitivity of PVE to changes in interest rates is a measure of the sensitivity of earnings over a longer time horizon. At June 30, 2006 the PVE exposure in a plus 200 basis point increase in market interest rates was estimated to be 10.1% as compared to 8.4% at March 31, 2006 and 8.0% at December 31, 2005.



19

Liquidity and Capital Resources

Our liquidity remains adequate to meet operating and loan funding requirements. Federal funds sold and investment securities available-for-sale represented 36.0% of total assets at June 30, 2006. 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 for the payment of operating expenses. Sources of liquidity in addition to deposit gathering activities include maturing loans and investments, purchase of federal funds from other financial institutions and selling securities under agreements to repurchase. We monitor closely the level of large certificates of deposits in amounts of $100,000 or more as they tend to be more sensitive to interest rate levels, and thus less reliable sources of funding for liquidity purposes. At June 30, 2006, the amount of certificates of deposits of $100,000 or more represented 20.2% of total deposits. These deposits are issued to local customers many of whom have other product relationships with the bank. In the past, we have not funded assets with brokered deposits. At June 30, 2006 we had one certificate account in the amount of $2.1 million which was acquired in the merger with DeKalb and is a brokered account. This account matured and was not renewed subsequent to June 30, 2006.

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 June 30, 2006, we had issued commitments to extend credit of $46.9 million, including $23.3 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.

We are not aware of any trends, events or uncertainties that may 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.

With the successful completion of the common stock offering in 1995, the secondary offering completed in 1998, and the trust preferred offering completed in September 2004, we have maintained a high level of liquidity that has been adequate to meet planned capital expenditures, as well as providing the necessary cash requirements needed for operations.

Total shareholders’ equity as of June 30, 2006 was $60.2 million as compared to $50.8 million at December 31, 2005. During the first and second quarter of 2006 we paid a $.05 and $.06 per share dividend, respectively. We anticipate that the bank will remain a well-capitalized institution.

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%.

The bank’s risked-based capital ratios of Tier 1, total capital and leverage ratio were 11.8%, 12.8% and 8.5%, respectively at June 30, 2006 as compared to 11.8%, 12.6% and 8.2%, respectively at December 31, 2005. The company’s risked-based capital ratios of Tier 1, total capital and leverage ratio were13.2%, 14.1% and 9.5%, respectively at June 30, 2006 as compared to 13.2%, 14.1% and 9.3%, respectively at December 31, 2005. This compares to required OCC and Federal Reserve regulatory capital guidelines for Tier 1 capital, total capital and leverage capital ratios of 4.0%, 8.0% and 4.0%, respectively.

 

20

Yields on Average Earning Assets and Rates
on Average Interest-Bearing Liabilities

 

Six months ended June 30, 2006

Six months ended June 30, 2005

 

Average

Interest

Yield/

Average

Interest

Yield/

 

Balance

Earned/Paid

Rate

Balance

Earned/Paid

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Loans

 

 

$

231,758,986

 

$

8,349,538

 

 

7.27

%

$

192,538,980

 

$

6,292,892

 

 

6.59

%

  Securities:

 

 

 

170,318,013

 

 

3,692,874

 

 

4.37

%

 

185,795,479

 

 

3,686,323

 

 

4.00

%

  Federal funds sold and securities purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    under agreements to resell

 

 

 

16,894,801

 

 

432,473

 

 

5.16

%

 

8,835,165

 

 

129,585

 

 

2.96

%

 

 

        Total earning assets

 

 

 

418,971,800

 

 

12,474,885

 

 

6.00

%

 

387,169,624

 

 

10,108,800

 

 

5.27

%

 

 

Cash and due from banks

 

 

 

10,084,258

 

 

 

 

 

 

 

 

11,664,137

 

 

 

 

 

 

 

Premises and equipment

 

 

 

17,376,853

 

 

 

 

 

 

 

 

14,422,097

 

 

 

 

 

 

 

Other assets

 

 

 

43,585,117

 

 

 

 

 

 

 

 

42,521,298

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

(2,807,569

)

 

 

 

 

 

 

 

(2,838,913

)

 

 

 

 

 

 

 

 

 

 

 

 

 

       Total assets

 

 

$

487,210,459

 

 

 

 

 

 

 

$

452,938,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest-bearing transaction accounts

 

 

$

57,448,596

 

 

149,886

 

 

0.53

%

$

55,412,190

 

 

82,529

 

 

0.30

%

  Money market accounts

 

 

 

47,907,738

 

 

749,214

 

 

3.15

%

 

40,275,276

 

 

301,558

 

 

1.51

%

  Savings deposits

 

 

 

29,864,589

 

 

107,287

 

 

0.72

%

 

32,621,533

 

 

105,273

 

 

0.65

%

  Time deposits

 

 

 

171,426,209

 

 

3,284,452

 

 

3.86

%

 

155,651,920

 

 

1,963,330

 

 

2.54

%

  Other borrowings

 

 

 

62,497,856

 

 

1,386,628

 

 

4.47

%

 

66,572,956

 

 

1,226,770

 

 

3.72

%

 

 

     Total interest-bearing liabilities

 

 

 

369,144,988

 

 

5,677,467

 

 

3.10

%

 

350,533,875

 

 

3,679,460

 

 

2.12

%

 

 

Demand deposits

 

 

 

60,934,003

 

 

 

 

 

 

 

 

49,945,823

 

 

 

 

 

 

 

Other liabilities

 

 

 

4,107,020

 

 

 

 

 

 

 

 

2,146,181

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

53,024,448

 

 

 

 

 

 

 

 

50,312,364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total liabilities and shareholders' equity

 

 

$

487,210,459

 

 

 

 

 

 

 

$

452,938,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

2.90

%

 

 

 

 

 

 

 

3.15

%

Net interest income/margin

 

 

 

 

 

$

6,797,418

 

 

3.27

%

 

 

 

$

6,429,340

 

 

3.35

%

 

 

 

 

 

 

 

Net interest income/margin FTE basis

 

 

 

185,515

 

$

6,982,933

 

 

3.36

%

 

283,324

 

$

6,712,664

 

 

3.50

%



21

Yields on Average Earning Assets and Rates
On Average Interest-Bearing Liabilities

 

Three months ended June 30, 2006

Three months ended June 30, 2005

 

Average

Interest

Yield/

Average

Interest

Yield/

 

Balance

Earned/Paid

Rate

Balance

Earned/Paid

Rate

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Loans

 

 

$

237,465,856

 

$

4,334,016

 

 

7.32

%

$

196,374,470

 

$

3,278,256

 

 

6.70

%

  Securities:

 

 

 

174,004,049

 

 

1,923,149

 

 

4.43

%

 

186,889,118

 

 

1,920,909

 

 

4.12

%

  Federal funds sold and securities purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    under agreements to resell

 

 

 

21,020,688

 

 

280,703

 

 

5.36

%

 

5,022,885

 

 

45,260

 

 

3.61

%

 

 

        Total earning assets

 

 

 

432,490,593

 

 

6,537,868

 

 

6.06

%

 

388,286,473

 

 

5,244,425

 

 

5.42

%

 

 

Cash and due from banks

 

 

 

10,362,798

 

 

 

 

 

 

 

 

11,579,976

 

 

 

 

 

 

 

Premises and equipment

 

 

 

18,148,138

 

 

 

 

 

 

 

 

14,392,872

 

 

 

 

 

 

 

Other assets

 

 

 

43,869,956

 

 

 

 

 

 

 

 

42,911,558

 

 

 

 

 

 

 

Allowance for loan losses

 

 

 

(2,879,329

)

 

 

 

 

 

 

 

(2,879,923

)

 

 

 

 

 

 

 

 

 

 

 

 

 

       Total assets

 

 

$

501,992,156

 

 

 

 

 

 

 

$

454,290,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest-bearing transaction accounts

 

 

$

57,982,643

 

$

76,982

 

 

0.53

%

$

54,340,500

 

$

41,904

 

 

0.31

%

  Money market accounts

 

 

 

47,856,552

 

 

380,620

 

 

3.19

%

 

40,851,226

 

 

164,433

 

 

1.61

%

  Savings deposits

 

 

 

30,000,392

 

 

54,437

 

 

0.73

%

 

32,718,400

 

 

53,170

 

 

0.65

%

  Time deposits

 

 

 

181,613,967

 

 

1,850,508

 

 

4.09

%

 

156,273,279

 

 

1,086,849

 

 

2.79

%

  Other borrowings

 

 

 

61,671,554

 

 

705,342

 

 

4.59

%

 

66,620,141

 

 

638,508

 

 

3.84

%

 

 

     Total interest-bearing liabilities

 

 

 

379,125,108

 

 

3,067,889

 

 

3.25

%

 

350,803,546

 

 

1,984,864

 

 

2.27

%

 

 

Demand deposits

 

 

 

64,007,322

 

 

 

 

 

 

 

 

51,046,872

 

 

 

 

 

 

 

Other liabilities

 

 

 

5,047,447

 

 

 

 

 

 

 

 

2,431,730

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

53,812,279

 

 

 

 

 

 

 

 

50,008,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total liabilities and shareholders' equity

 

 

$

501,992,156

 

 

 

 

 

 

 

$

454,290,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread

 

 

 

 

 

 

 

 

 

2.81

%

 

 

 

 

 

 

 

3.15

%

Net interest income/margin

 

 

 

 

 

$

3,469,979

 

 

3.22

%

 

 

 

$

3,259,561

 

 

3.37

%

 

 

 

 

 

 

 

Net interest income/margin FTE basis

 

 

 

87,800

 

$

3,557,779

 

 

3.30

%

 

137,145

 

$

3,396,706

 

 

3.51

%

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 June 30, 2006 from that presented in our annual report on Form 10-K for the year ended December 31, 2005. See “Market Risk Management 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.

 

22

Item 4.   Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective as of June 30, 2006. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II
OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.   Risk Factors

        There were no material changes from the risk factors presented in our annual report on Form 10-K for the year ended December 31, 2005.

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

        Not applicable

Item 3.   Defaults Upon Senior Securities

        Not Applicable

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

The Annual Meeting of Shareholders was held on May 17, 2006. The following five directors were elected at the meeting:

VOTES

 

For

Against or Withheld

Chimin J. Chao

 

 

 

2,184,895

 

 

21,909

 

James C. Leventis

 

 

 

2,185,458

 

 

21,346

 

Loretta R. Whitehead

 

 

 

2,185,458

 

 

21,346

 

J Thomas Johnson

 

 

 

2,184,797

 

 

22,007

 

Alexander Snipe, Jr

 

 

 

2,183,487

 

 

23,317

 

The term of office for the following nine directors continued after the meeting:

 

 

Richard K. Bogan, MD

 

 

O.A. Ethridge, DMD

 

 

Thomas C. Brown

 

 

George H. Fann, Jr. DMD

 

 

Michael C. Crapps

 

 

W. James Kitchens, Jr.

 

 

Hinton G. Davis

 

 

Mitchell M. Willoughby

 

 

Anita B. Easter

 

 

 

 

 

There were no other matters submitted to security holders for a vote during the three months ended June 30, 2006.

 

23

Item 5.   Other Information.

        None

Item 6.   Exhibits

Exhibit        Description

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

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

32                Section 1350 Certifications





24

SIGNATURES

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

  

 

FIRST COMMUNITY CORPORATION
               (REGISTRANT)

 

Date:  August 11, 2006

 

By:   /s/  Michael C. Crapps

 

 

         Michael C. Crapps

 

 

         President and Chief Executive Officer
         (Principal Executive Officer)

 

Date:  August 11, 2006

 

By:   /s/  Joseph G. Sawyer

 

 

         Joseph G. Sawyer

 

 

         Senior Vice President, Principal Financial Officer
         (Principal Financial and Accounting Officer)





25

INDEX TO EXHIBITS

Exhibit
Number     Description

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

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

32                Section 1350 Certifications