U. S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
| [X] | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) | |
| OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: September 30, 2003
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) | |
| OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-25972
FIRST COMMUNITY CORPORATION
| Tennessee | 62-1562541 | |
| (State of Incorporation) | (I.R.S. Employer | |
| Identification No.) | ||
| 809 West Main Street | ||
| Rogersville, Tennessee | 37857 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(423) 272-5800
None
1,889,945
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
FIRST COMMUNITY CORPORATION
INDEX
| Number | Page | |||||||
| PART I. | FINANCIAL INFORMATION | |||||||
| Item 1. | Financial Statements | |||||||
Consolidated Balance Sheets September 30, 2003 (Unaudited) and December 31, 2002 | 3 | |||||||
Consolidated Statements of Income and Comprehensive Income Nine months ended September 30, 2003 and 2002 (Unaudited) | 4 | |||||||
Consolidated Statements of Income and Comprehensive Income Three months ended September 30, 2003 and 2002 (Unaudited) | 5 | |||||||
Consolidated Statements of Cash Flows Nine months ended September 30, 2003 and 2002 (Unaudited) | 6 | |||||||
Notes to Consolidated Financial Statements (Unaudited) | 7 | |||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||||
| Item 3. | Controls and Procedures | 14 | ||||||
| PART II. | OTHER INFORMATION | |||||||
| Item 1. | Legal Proceedings | 15 | ||||||
| Item 2. | Changes in Securities | 15 | ||||||
| Item 3. | Default Upon Senior Securities | 15 | ||||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||||||
| Item 5. | Other Information | 15 | ||||||
| Item 6. | Exhibits and Reports on Form 8-K | 15 | ||||||
| SIGNATURES | 16 | |||||||
| CERTIFICATIONS | 17 | |||||||
2
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
($ amounts in thousands)
| September 30, | December 31, | ||||||||||
| 2003 | 2002 | ||||||||||
Assets | |||||||||||
| Cash and due from banks | $ | 4,696 | 7,264 | ||||||||
| Federal funds sold | 0 | 13,705 | |||||||||
| Securities available-for-sale | 15,440 | 8,992 | |||||||||
| Loans | 151,094 | 124,388 | |||||||||
| Allowance for loan losses | (1,687 | ) | (1,351 | ) | |||||||
Loans, net | 149,407 | 123,037 | |||||||||
| Premises and equipment | 5,953 | 6,046 | |||||||||
| Accrued income receivable | 1,078 | 1,110 | |||||||||
| Federal Home Loan Bank stock | 1,564 | 1,520 | |||||||||
| Cash surrender value of life insurance | 3,416 | 3,292 | |||||||||
| Computer software, net of amortization | 433 | 471 | |||||||||
| Other assets | 589 | 962 | |||||||||
| $ | 182,576 | 166,399 | |||||||||
Liabilities and Shareholders’ Equity | |||||||||||
Liabilities: | |||||||||||
Deposits: | |||||||||||
| Noninterest-bearing | $ | 15,857 | 17,580 | ||||||||
| Interest-bearing | 127,953 | 118,593 | |||||||||
Total deposits | 143,810 | 136,173 | |||||||||
| Securities sold under agreements to repurchase | 2,283 | 2,373 | |||||||||
| Federal funds purchased | 2,225 | 0 | |||||||||
| Advances from FHLB | 18,400 | 12,000 | |||||||||
| Trust Preferred Securities | 4,000 | 4,000 | |||||||||
| Note payable | 350 | 803 | |||||||||
| Accrued interest payable | 594 | 545 | |||||||||
| Dividend payable | 132 | 131 | |||||||||
| Other liabilities | 612 | 1,137 | |||||||||
Total liabilities | 172,406 | 153,162 | |||||||||
Shareholders’ equity: | |||||||||||
| Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 1,889,945 in 2003 and 1,917,167 in 2002 | 7,178 | 6,984 | |||||||||
| Accumulated other comprehensive income, net | (87 | ) | 136 | ||||||||
| Retained earnings | 3,079 | 2,117 | |||||||||
Total shareholders’ equity | 10,170 | 9,237 | |||||||||
| $ | 182,576 | 166,399 | |||||||||
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
($ amounts in thousands except earnings per share)
Nine Months Ended September 30, 2003
| 2003 | 2002 | ||||||||||
Interest income: | |||||||||||
| Loans, including fees | $ | 7,261 | 6,602 | ||||||||
| Securities: | |||||||||||
| Taxable | 276 | 411 | |||||||||
| Tax exempt | 43 | 39 | |||||||||
| Federal funds sold | 63 | 74 | |||||||||
Total interest income | 7,643 | 7,126 | |||||||||
Interest expense: | |||||||||||
| Deposits | 2,198 | 1,949 | |||||||||
| Other borrowings | 621 | 630 | |||||||||
Total interest expense | 2,819 | 2,579 | |||||||||
Net interest income | 4,824 | 4,547 | |||||||||
Provision for loan losses | 394 | 339 | |||||||||
Net interest income after provision for loan losses | 4,430 | 4,208 | |||||||||
Other income: | |||||||||||
| Service charges on deposit accounts | 839 | 663 | |||||||||
| Gain on sale of securities | 98 | — | |||||||||
| Gain on sale of other real estate | 20 | — | |||||||||
| Other service charges, commissions and fees | 478 | 308 | |||||||||
Total other income | 1,435 | 971 | |||||||||
Other expenses: | |||||||||||
| Salaries, directors’ fees and employee benefits | 1,983 | 1,847 | |||||||||
| Occupancy expense | 702 | 563 | |||||||||
| Other operating expenses | 1,019 | 1,209 | |||||||||
Total other expenses | 3,704 | 3,619 | |||||||||
Income before income taxes | 2,161 | 1,560 | |||||||||
Income taxes | 804 | 568 | |||||||||
Net income | $ | 1,357 | 992 | ||||||||
Other comprehensive income: | |||||||||||
Unrealized gains/(losses) on securities, net | (223 | ) | 119 | ||||||||
Comprehensive income | $ | 1,134 | $ | 1,111 | |||||||
Basic earnings per share | $ | 0.72 | 0.52 | ||||||||
Basic average shares outstanding | 1,878,309 | 1,917,273 | |||||||||
Diluted earnings per share | $ | 0.71 | 0.51 | ||||||||
Diluted average shares outstanding | 1,906,109 | 1,945,372 | |||||||||
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
($ amounts in thousands except earnings per share)
Three Months Ended September 30, 2003
| 2003 | 2002 | ||||||||||
Interest income: | |||||||||||
| Loans, including fees | $ | 2,500 | 2,249 | ||||||||
| Securities: | |||||||||||
| Taxable | 85 | 139 | |||||||||
| Tax exempt | 18 | 12 | |||||||||
| Federal funds sold | 1 | 28 | |||||||||
Total interest income | 2,604 | 2,428 | |||||||||
Interest expense: | |||||||||||
| Deposits | 695 | 677 | |||||||||
| Other borrowings | 210 | 211 | |||||||||
Total interest expense | 905 | 888 | |||||||||
Net interest income | 1,699 | 1,540 | |||||||||
Provision for loan losses | 83 | 50 | |||||||||
Net interest income after provision for loan losses | 1,616 | 1,490 | |||||||||
Other income: | |||||||||||
| Service charges on deposit accounts | 265 | 255 | |||||||||
| Other service charges, commissions and fees | 177 | 117 | |||||||||
Total other income | 442 | 372 | |||||||||
Other expenses: | |||||||||||
| Salaries, Directors’ fees and employee benefits | 653 | 711 | |||||||||
| Occupancy expense | 245 | 204 | |||||||||
| Other operating expenses | 313 | 493 | |||||||||
Total other expenses | 1,211 | 1,408 | |||||||||
Income before income taxes | 847 | 454 | |||||||||
Income taxes | 315 | 165 | |||||||||
Net income | $ | 532 | 289 | ||||||||
Other comprehensive income: | |||||||||||
Unrealized gains/(losses) on securities, net | (144 | ) | 33 | ||||||||
Comprehensive income | $ | 388 | $ | 322 | |||||||
Basic earnings per share | $ | 0.28 | 0.15 | ||||||||
Basic average shares outstanding | 1,882,438 | 1,942,594 | |||||||||
Diluted earnings per share | $ | 0.28 | 0.15 | ||||||||
Diluted average shares outstanding | 1,910,238 | 1,970,693 | |||||||||
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
| (In Thousands) | |||||||||||
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
Increase (decrease) in cash and due from banks | 2003 | 2002 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 1,357 | 992 | ||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 456 | 375 | |||||||||
| Provision for loan losses | 394 | 339 | |||||||||
| Decrease in accrued income receivable | 32 | 87 | |||||||||
| Other, net | (493 | ) | (408 | ) | |||||||
Net cash from operating activities | 1,746 | 1,385 | |||||||||
Cash flows from investing activities: | |||||||||||
| Decrease/increase in federal funds sold | 13,705 | (4,375 | ) | ||||||||
| Maturities and redemptions of securities available for sale | 10,061 | 3,259 | |||||||||
| Purchases of securities available-for-sale | (16,509 | ) | (3,463 | ) | |||||||
| Purchase of bank owned life insurance | — | (2,676 | ) | ||||||||
| Increase in loans | (26,764 | ) | (7,617 | ) | |||||||
| Purchases of premises and equipment | (325 | ) | (1,647 | ) | |||||||
Net cash from investing activities | (19,832 | ) | (16,519 | ) | |||||||
Cash flows from financing activities: | |||||||||||
| Cash dividends paid | (395 | ) | (403 | ) | |||||||
| Issuance of common stock | 194 | 1 | |||||||||
| Increase in federal funds purchased | 2,225 | ||||||||||
| Repayments of Note Payable | (453 | ) | (124 | ) | |||||||
| Increase in borrowings from FHLB | 6,400 | 1,500 | |||||||||
| Repayments of borrowings from FHLB | — | (1,500 | ) | ||||||||
| Decrease in securities sold under agreements to repurchase | (90 | ) | (573 | ) | |||||||
| Increase in deposits | 7,637 | 16,477 | |||||||||
Net cash from financing activities | 15,518 | 15,378 | |||||||||
Net increase (decrease) in cash | (2,568 | ) | 244 | ||||||||
Cash and due from banks at beginning of period | 7,264 | 4,866 | |||||||||
Cash and due from banks at end of period | $ | 4,696 | 5,110 | ||||||||
Cash payments for interest | $ | 2,770 | 2,762 | ||||||||
Cash payments for income taxes | $ | 810 | 916 | ||||||||
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
GENERAL
First Community Corporation (the “Company”), through its subsidiary, First Community Bank (the “Bank”), provides banking services to individuals and businesses from its five banking offices in Rogersville, Church Hill, and Kingsport, Tennessee. Its primary deposit products are demand, savings and certificates of deposit, and its primary lending products are commercial, real estate mortgage and installment loans. During 2002, the Bank opened a branch in Rogersville at the Super Wal-Mart in February and opened a branch in Kingsport, Tennessee in October. The significant policies are summarized as follows:
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
STATEMENTS OF CASH FLOWS
Cash and cash equivalents as presented in the statements include cash and due from banks.
CASH AND DUE FROM BANKS
Included in cash and due from banks are legal reserve requirements which must be maintained on an average basis in the form of cash and balances due from the Federal Reserve and other banks.
SECURITIES
Securities are classified into three categories: held to maturity, available for sale, and trading. Securities classified as held to maturity, which are those the Company has the positive intent and ability to hold to maturity, are reported at amortized cost. Securities classified as available for sale may be sold in response to changes in interest rates, liquidity needs, and for other purposes. These securities are reported at fair value and include securities not classified as held to maturity or trading. Trading securities are those held principally for the purpose of selling in the near future and are carried at fair value. The Company currently has no held to maturity or trading securities.
Unrealized holding gains and losses for available for sale securities are reported in other comprehensive income. Realized gains (losses) on securities available for sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on sales of securities are determined on the specific-identification method.
LOANS
Loans which management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balance. Interest on loans is computed daily based on the principal amount outstanding.
A loan is considered impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the loan agreement. Impaired loans
7
are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company recognizes an impairment by creating or adjusting a valuation allowance with a corresponding charge or credit to the provision for loan losses.
The Company considers all loans on non-accrual status to be impaired. Interest accrual on loans is discontinued when, in the opinion of management, it is not reasonable to expect that such interest will be collected, or generally, when collection of principal or interest becomes 90 days or more past due. Management may make exceptions to this policy when the estimated net realizable value of the collateral is sufficient to recover the principal and interest balance. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by charges to operations based on management’s evaluation of the assets, economic conditions and other factors considered necessary to maintain the allowance at an adequate level. In evaluating the adequacy of the allowance, management makes certain estimates and assumptions that are susceptible to change in the near term. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Uncollectible loans are charged to the allowance account in the period such determination is made. Recoveries on loans previously charged off are credited to the allowance account in the period received. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows, as discussed above.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and amortization. The provision for depreciation is computed principally on the straight-line method over the estimated useful lives of the assets, which range as follows: building- 40 years, equipment- 5 to 7 years.
OTHER REAL ESTATE
Other real estate, which consists of properties acquired through foreclosure, is recorded at the lower of the outstanding loan amount or fair value, determined by appraisal, at the date of foreclosure. Declines in value resulting from reappraisals, as well as losses resulting from disposition are charged to operations.
STOCK-BASED COMPENSATION
SFAS No. 123, “Accounting for Stock-Based Compensation”, defines a fair value-based method of measuring employee stock options or similar equity instruments. Under this method, compensation cost is measured at the option grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. In lieu of recording the value of such options, the Company has elected to continue to measure compensation cost using APB Opinion 25 and to provide pro forma disclosures quantifying the difference between compensation cost included in reported net income and the related cost measured by such fair value-based method. The following table illustrates the effect on net income and earning per share if expense was measured using the fair value recognition provision of FASB Statement No. 123:
| For the nine months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
| Net Income as reported | $ | 1,357 | $ | 992 | ||||
| Deduct: Stock-based compensation expense determined under fair value based method, net of tax | 4 | 6 | ||||||
| Pro forma net income | 1,353 | 986 | ||||||
8
| For the nine months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
| Basic Earnings per share as reported | .72 | .52 | ||||||
| Pro forma basic earnings per share | .72 | .51 | ||||||
| Diluted earnings per share as reported | .71 | .51 | ||||||
| Pro forma diluted earning per share | .71 | .51 | ||||||
| For the three months ended September 30, | ||||||||
| 2003 | 2002 | |||||||
| Net Income as reported | $ | 532 | $ | 289 | ||||
| Deduct: Stock-based compensation expense determined under fair value based method, net of tax | 1 | 2 | ||||||
| Pro forma net income | 533 | 291 | ||||||
| Basic Earnings per share as reported | .28 | .15 | ||||||
| Pro forma basic earnings per share | .28 | .15 | ||||||
| Diluted earnings per share as reported | .28 | .15 | ||||||
| Pro forma diluted earning per share | .28 | .15 | ||||||
No options were granted in 2003 and 2002.
PER SHARE AMOUNTS
Earnings per share (EPS) is calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, issued in February 1997. The statement requires the dual presentation of basic and diluted EPS on the income statement. Basic EPS excludes dilution, and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock that then shared in the earnings of the entity.
INCOME TAXES
The Company files a consolidated tax return with its subsidiary. Income taxes are allocated to members of the consolidated group on a separate return basis. Income taxes have been provided using the liability method as prescribed by SFAS No. 109, “Accounting for Income Taxes”.
EMPLOYEE BENEFITS
The Bank maintains a 401(k) profit-sharing plan, which covers substantially all employees.
9
ITEM NO. 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
First Community Corporation (the “Company”) is a registered bank holding company that was incorporated under Tennessee law in 1994. The Company’s activities are conducted through its wholly owned subsidiary, First Community Bank of East Tennessee (the “Bank”), which was acquired by the Company in 1994. The Bank, a state bank chartered under the laws of Tennessee, was organized in late 1992 shortly after the last locally owned bank in Hawkins County was acquired by a regional bank holding company. Since its opening in April 1993 through September 30, 2003, the Bank has grown to total assets of more than $182,000,000.
Operating as a full service commercial bank, the Bank provides a range of financial services that include checking accounts, NOW accounts, money market and savings accounts, certificates of deposit, individual retirement accounts, money transfers, and safe deposit facilities. Lending services include loans for business, agriculture, real estate, personal use, home improvements, and automobiles. The Bank is not authorized to provide trust services.
The Bank is subject to the regulatory authority of the Department of Financial Institutions of the State of Tennessee and the Federal Deposit Insurance Corporation (the “FDIC”), which currently insures the depositors of each member bank to a maximum of $100,000 per depositor. For this protection, the Bank pays a quarterly statutory assessment and is subject to the rules and regulations of the FDIC.
The Bank considers its primary market for loans and deposits to be individuals, small-to-medium size businesses and professionals in Hawkins County and Sullivan County, Tennessee. The Bank is actively soliciting business in this target market and considers the potential growth opportunities to be favorable. The bank has received approval from the Federal Deposit Insurance Corporation for a new branch office in the Colonial Heights area of Kingsport that should open in early 2004. No material portion of the Bank’s deposits has been obtained from any single person or group of persons, with the exception of a $9 million certificate of deposit from a local government entity.
The results of operations of the Bank and the Company are affected by credit policies of monetary authorities, particularly the Federal Reserve Board. The instruments of monetary policy employed by the Federal Reserve Board include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, as well as the effects of actions by monetary and fiscal authorities, including the Federal Reserve Board, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the effect of such matters on the business and earnings of the Company.
Securities available for sale increased $6.4 million or 71.7% during the first nine months of 2003. This increase reflects the purchases of additional securities (primarily mortgage backed securities) during the first nine months of 2003 to replace securities called during late 2002 and securities sold during 2003. These purchases were funded from federal funds sold which decreased $13.7 million or 100.0% in the first nine months and from the federal funds purchased which increased $2.2 million or 100.0%. The decrease in federal funds sold and increase in federal funds purchased was also affected by the increase in loans during the first nine months.
Loans have increased $26.7 million or 21.5% during the first nine months of 2003. Commercial real estate loans in the Sullivan County area comprise the majority of this increase. These loans were obtained primarily through customer contacts established by loan officers hired to develop the market area served by the Kingsport branch. Since 1999, the mix of loans in the Bank’s portfolio has reflected an increasing level of commercial real estate loans with a flat or declining proportion of loans in the residential mortgage and consumer loan areas. The Bank competes generally with other financial institutions, credit unions and insurance companies that have expanded into the quasi-financial market. Some of these competitors are much larger than the Bank and have greater resources by which to offer lower rates on consumer lending.
10
Deposits have increased $7.6 million or 5.6% from December 31, 2002 to September 30, 2003. This increase was attributable to deposit promotions and sales efforts at all Bank locations.
The Company has in effect a line of credit with a financial institution of $4,500,000, which is secured by all the shares of the Bank. The Company has reduced the principal balance $453,000 during the first nine months.
The Bank continually reviews its loan portfolio to determine deficiencies and the corrective actions to be taken. The review process is handled internally independent of loan origination responsibilities. A minimum of 30% of total loans is reviewed annually along with 100% of those borrowers with aggregate indebtedness in excess of $200,000. Past due loans are reviewed by an internal loan officer committee, and a summary report of such loans is reviewed monthly by the Board of Directors. A report of loan review findings is presented quarterly to the Bank’s Board of Directors.
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets consist of (1) nonaccrual loans for which the recognition of interest was discontinued, (2) loans past due 90 days or more and still accruing interest, (3) loans which have been restructured to provide for a reduction or deferral of interest or principal because the borrower’s financial condition deteriorated, and (4) foreclosed and repossessed assets. Accrual of interest is discontinued on any loan when principal and/or interest has not been paid for 90 days, unless the loan is well secured and in the process of collection. “In the process of collection” means that a definitive source is expected to pay the loan in full within 30 days. Nonperforming loans at September 30, 2003 amounted to $222,000 or 0.15% of total loans, an increase from $142,000 or 0.11% of total loans at December 31, 2002. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2003, the Bank had no concentrations of 10% or more of total loans in any single industry or in any geographical area outside the immediate market area of the Bank.
Other real estate owned is carried at fair value, determined by an appraisal. The Bank has no other real estate owned as of September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is adequate with cash and due from banks of $4.7 million. In addition, loans and securities repricing or maturing within one year or less exceed $62.3 million at September 30, 2003. The Bank has approximately $17.2 million in loan commitments that are expected to be funded within the next nine months and other commitments, primarily standby letters of credit, of approximately $679,000 at September 30, 2003. The Bank has established federal funds lines of credit with three correspondent banks totaling $14.4 million to meet unexpected liquidity demands. In addition, the Company has a line of credit with unused availability totaling $4.1 million, which can be used by the Company to supplement the Bank’s liquidity needs. With the exception of unfunded loan commitments, there are no known trends or any known commitments or uncertainties that will result in the Bank’s liquidity increasing or decreasing in a material way. In addition, the Company is not aware of any recommendations by any regulatory authorities that would have a material effect on the Company’s liquidity, capital resources or results of operations.
Total equity capital of the bank at September 30, 2003, is $14.2 million or approximately 7.8% of total assets. The Bank’s capital position is adequate to meet the minimum capital requirements for all regulatory agencies. The Bank’s capital ratios as of September 30, 2003, are as follows:
| Tier 1 leverage | 7.87 | % | ||
| Tier 1 risk-based | 9.15 | % | ||
| Total risk-based | 10.24 | % |
Total equity capital of the corporation at September 30, 2003, is $10.2 million or approximately 5.6% of total assets. The Corporation’s capital position is adequate to meet the minimum capital requirements for all regulatory agencies. The Corporation’s capital ratios as of September 30, 2003, are as follows:
11
| Tier 1 leverage | 7.47 | % | ||
| Tier 1 risk-based | 8.76 | % | ||
| Total risk-based | 10.22 | % |
Effective December 18, 2001, the Company, through a placement agent, sold to institutional investors $4,000,000 in trust preferred securities. The interest rate, which varies quarterly with LIBOR, was 4.74% at September 30, 2003. As of September 30, 2003, $3.4 million of trust preferred securities qualified as Tier 1 capital.
Capital adequacy in the banking industry is evaluated primarily by the use of ratios measuring capital against assets that are weighted based on risk characteristics. The Corporation and Bank were classified as “well capitalized” for regulatory purposes as of September 30, 2003.
RESULTS OF OPERATIONS
YEAR TO DATE
The Company had net income of $1,357,000 for the nine months ending September 30, 2003, compared with $992,000 for the same period last year, resulting in an increase of 36.8%. Between September 30, 2002 and September 30, 2003, average earning assets grew approximately $29.2 million or 22.4% while the average yield on the assets declined from 6.93% at September 30, 2002 to 5.96%% at September 30, 2003. During this same time period average interest bearing liabilities grew approximately $29.6 million or 25.7% while the cost of these funds decreased from 2.79% at September 30, 2002 to 2.44% at September 30, 2003. Consequently, net interest margin declined from 4.47% at September 30, 2002 to 3.74% at September 30, 2003. This resulted in net interest income increasing by $277,000 or 6.1% as of the nine months ending September 30, 2003, compared to the same period in 2002. Earning asset yield was affected by the current record low interest rates as customers refinanced their adjustable rate mortgages on the secondary market to lock in low fixed rates. Additional factors affecting earning asset yield included the decline in yield of loans tied to prime, and redemption of U.S. agency securities with rates above the current market. The yield has also been affected by the shift in the Company’s loan portfolio away from higher yielding consumer loans to commercial real estate loans.
The provision for loan losses was $394,000 during the nine months ending September 30, 2003 compared with $339,000 for the same period in 2002. Loans increased $26.7 million and $7.3 million during the nine months ending September 30, 2003 and September 30, 2002, respectively. During the second quarter of 2002, the Bank, along with a participating bank, was in the process of foreclosing on a motel in Greeneville, TN. The foreclosure was completed on July 23, 2002 at which time a charge of $182,000 was made against the allowance for loan losses. The loss had been provided for in the allowance in the quarter ending June 30, 2002. Non-performing assets as well as loan growth are two of several significant components taken into consideration by management in the determination of the adequacy of the allowance for loan losses. The allowance for loan losses of $1,687,000 at September 30, 2003 (approximately 1.12% of loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. Management evaluates the adequacy of the allowance for loan losses monthly and makes provisions for loan losses based on this evaluation.
Non-interest income for the nine months ending September 30, 2003 was $1,435,000 compared to $971,000 for the same period in 2002, reflecting an increase of $464,000 or 47.8%. Non-interest income consists mainly of service charges on deposit accounts, credit life insurance commissions, bank owned life insurance income and secondary mortgage processing fees. Service charges on deposit accounts for the nine months ending September 30, 2003 were $839,000 compared with $663,000 for the same period in 2002, reflecting an increase of $176,000 or 26.6%. This increase resulted primarily from continued growth of new services related to overdraft privileges offered by the Company, which began in March 2002. Earnings from bank owned life insurance in the face amount of $2.6 million, which was purchased in April 2002, added $100,000 to income in the nine-month period ending September 30, 2003 as compared to $62,000 for the same period in 2002. During May and June 2003, the company sold securities totaling $3,158,000 for a gain of $98,000.
12
No securities gains were realized in 2002.
Non-interest expenses for the nine months ending September 30, 2003 were $3,704,000 compared to $3,619,000 for the same period in 2002 reflecting an increase of $85,000 or 2.4%. This increase is primarily due to salaries, occupancy expense and other expenses related to the new branch in Kingsport, which opened in October 2002. Cost savings efforts beginning in January 2003, which focused on reducing other operating expenses, resulted in a decrease in advertising, office supplies, education and various other miscellaneous expenses. For the nine months ending September 30, 2003, these expenses were $211,000 compared to $279,000 for the same period in 2002 reflecting a decrease of $68,000 or 24.4%. Other operating expenses in 2002 included a $91,000 loss on the sale of other real estate owned. No losses on other real estate owned have occurred in 2003 to date.
QUARTER TO DATE
The Company had net income of $532,000 for the three months ending September 30, 2003, compared with $289,000 for the same period last year, resulting in an increase of 84.1%.
Net interest income increased $159,000 or 10.3%. See the above year to date discussion for the details concerning the impact of the current rate environment and changing asset mix on the Bank’s net interest margin.
The provision for loan losses was $83,000 during the three months ending September 30, 2003 compared with $50,000 for the same period in 2002. Nonperforming assets as well as loan growth are two of several significant components taken into consideration by management in the determination of the adequacy of the allowance for loan losses. The allowance for loan losses of $1,687,000 at September 30, 2003 (approximately 1.12% of loans) is considered by management to be adequate to cover losses inherent in the loan portfolio. Management evaluates the adequacy of the allowance for loan losses monthly and makes provisions for loan losses based on this evaluation.
Noninterest income for the three months ending September 30, 2003 was $442,000 compared to $372,000 for the same period in 2002, reflecting an increase of $70,000 or 18.8%. Noninterest income consists mainly of service charges on deposit accounts, credit life insurance commissions, bank owned life insurance income and secondary mortgage processing fees. Service charges on deposit accounts for the three months ending September 30, 2003 were $265,000 compared with $255,000 for the same period in 2002, reflecting an increase of $10,000 or 3.9%. This increase resulted from growth in usage of overdraft privileges offered by the Company. Other income at September 30, 2003 includes $54,000 of fees earned on mortgage loans sold to the secondary market. This represents an increase on $35,000 over the prior year fees. In addition, noninterest income at September 30, 2003 recognizes $15,000 in fees for title insurance policies.
Non-interest expenses for the three months ending September 30, 2003 were $1,211,000 compared to $1,408,000 for the same period in 2002 reflecting a decrease of $197,000 or 14.0%. Salaries, directors fees, and employee benefits decreased $58,000 from the prior year. This decrease is primarily due to a change made at the beginning of 2003 in the incentive and/or bonus plan for the Bank’s employees whereby payments are closely tied to sales results. Occupancy expenses increased $41,000 to $245,000 for the quarter ending September 30, 2003 as compared to $204,000 for the three months ending September 30, 2002. This increase is primarily due to depreciation on equipment and facilities for the Bank’s Kingsport branch which opened in October 2002. Cost savings efforts beginning in January 2003, which focused on reducing other operating expenses, resulted in a decrease in advertising, professional fees, office supplies, education and various other miscellaneous expenses. Overall these efforts decreased other operating expenses $180,000 for the quarter ending September 30, 2003 compared to the same quarter for 2002.
13
Item 3 Controls and Procedures
The Company’s management, including Mark A. Gamble, who is the principal executive officer, and Elizabeth O. Lollar, who is the principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a-14 and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended, within 90 days prior to the filing date of this Quarterly Report on Form 10-QSB. Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls, since the date on which the controls were evaluated.
14
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
| From time to time the Company and the Bank is each a party to claims and legal proceedings arising from normal and ordinary business operations. After taking into consideration the factors underlying these claims and the information provided by legal counsel regarding the current status of such claims or proceedings, in the opinion of management, the ultimate aggregate liability represented thereby will not have a material adverse effect on the Bank’s or the Company’s financial condition or results of operations. |
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are filed herewith:
| Exhibit Number | Description | |||||
| 11 | Statement Regarding Computation of Earning Per Share | |||||
| 31.1 | Certification of Principal Executive Officer | |||||
| 31.2 | Certification of Principal Financial Officer | |||||
| 32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
| 32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
There are no other matters required to be reported under this item.
b) The company did not file any reports on Form 8-K during the quarter ended September 30, 2003.
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST COMMUNITY CORPORATION
(Registrant)
| November 12, 2003 (Date) | /s/ Mark A. Gamble Mark A. Gamble, President & Principal Executive Officer | |
| November 12, 2003 (Date) | /s/ Elizabeth O. Lollar Elizabeth O. Lollar Chief Financial Officer & Principal Financial Officer |
