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, 2004
OR
| o | 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
1,911,760
Transitional Small Business Disclosure Format (check one):
Yes o No x
FIRST COMMUNITY CORPORATION
INDEX
| Number | Page | |||||||
Item 1. Financial Statements | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| 10 | ||||||||
| 15 | ||||||||
| 16 | ||||||||
| 16 | ||||||||
| 16 | ||||||||
| 16 | ||||||||
| 16 | ||||||||
| 16 | ||||||||
| 17 | ||||||||
CERTIFICATIONS | 19 | |||||||
| EX-11 COMPUTATION OF EARNINGS PER SHARE | ||||||||
| EX-31.1 SECTION 302 CEO CERTIFICATION | ||||||||
| EX-31.2 SECTION 302 CFO CERTIFICATION | ||||||||
| EX-32.1 SECTION 906 CEO CERTIFICATION | ||||||||
| EX-32.2 SECTION 906 CFO CERTIFICATION | ||||||||
2
PART I — FINANCIAL INFORMATION
FIRST COMMUNITY CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
($ amounts in thousands )
| (Unaudited) | ||||||||
| September 30, | December 31, | |||||||
| 2004 | 2003 | |||||||
Assets | ||||||||
| Cash and due from banks | $ | 4,186 | 2,764 | |||||
| Federal funds sold | — | 6,572 | ||||||
Cash and cash equivalents | 4,186 | 9,336 | ||||||
| Investment securities | 17,726 | 14,515 | ||||||
| Total loans | 164,285 | 153,312 | ||||||
| Less loan loss allowance | (1,782 | ) | (1,736 | ) | ||||
Loans, net | 162,503 | 151,576 | ||||||
| Bank premises and equipment | 6,739 | 5,843 | ||||||
| Accrued income receivable | 1,013 | 1,155 | ||||||
| Federal Home Loan Bank stock | 1,625 | 1,579 | ||||||
| Cash surrender value of life insurance | 3,594 | 3,474 | ||||||
| Computer software, net of amortization | 489 | 449 | ||||||
| Other assets | 765 | 827 | ||||||
TOTAL ASSETS | $ | 198,640 | 188,754 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
| Noninterest-bearing | $ | 21,630 | 16,363 | |||||
| Interest-bearing | 138,532 | 141,862 | ||||||
Total deposits | 160,162 | 158,225 | ||||||
| Securities sold under agreements to repurchase | 2,009 | 1,920 | ||||||
| Fed funds purchased | — | — | ||||||
| Advances from FHLB | 15,910 | 12,000 | ||||||
| Subordinated debentures | 7,000 | 4,000 | ||||||
| Note payable | — | 350 | ||||||
| Accrued interest payable | 575 | 568 | ||||||
| Dividend payable | 134 | 132 | ||||||
| Other liabilities | 838 | 915 | ||||||
Total liabilities | 186,628 | 178,110 | ||||||
Shareholders’ equity: | ||||||||
| Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 1,911,760 in 2004 and 1,890,945 in 2003 | 7,297 | 7,182 | ||||||
| Accumulated other comprehensive loss, net | (32 | ) | (69 | ) | ||||
| Retained earnings | 4,747 | 3,531 | ||||||
Total shareholders’ equity | 12,012 | 10,644 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 198,640 | 188,754 | |||||
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FIRST COMMUNITY CORPORATION AND SUBSIDIARY
($ amounts in thousands except earnings per share)
| Nine Months Ended September 30, | ||||||||
| 2004 | 2003 | |||||||
Interest income: | ||||||||
| Loans, including fees | $ | 7,543 | 7,261 | |||||
| Securities: | ||||||||
| Taxable | 396 | 276 | ||||||
| Tax exempt | 57 | 43 | ||||||
| Federal funds sold | 24 | 63 | ||||||
Total interest income | 8,020 | 7,643 | ||||||
Interest expense: | ||||||||
| Interest on deposits | 2,118 | 2,198 | ||||||
| Interest on other borrowed funds | 636 | 621 | ||||||
Total interest expense | 2,754 | 2,819 | ||||||
Net interest income | 5,266 | 4,824 | ||||||
Provision for loan losses | 157 | 394 | ||||||
Interest income after provision for loan losses | 5,109 | 4,430 | ||||||
Other income: | ||||||||
| Service charge on deposit accounts | 775 | 839 | ||||||
| Other operating income | 437 | 478 | ||||||
| Gain on sale of other real estate | — | 20 | ||||||
| Gain (loss) on sale of securities | (6 | ) | 98 | |||||
Total other income | 1,206 | 1,435 | ||||||
Other expenses: | ||||||||
| Salaries, directors’ fees and employee benefits | 1,942 | 1,984 | ||||||
| Premises and equipment expense | 681 | 702 | ||||||
| Other operating expenses | 1,166 | 1,018 | ||||||
Total other expenses | 3,789 | 3,704 | ||||||
Income before income taxes | 2,526 | 2,161 | ||||||
Income taxes | 909 | 804 | ||||||
Net income | $ | 1,617 | 1,357 | |||||
Other comprehensive income: | ||||||||
Unrealized gains/(losses) on securities, net | 37 | (223 | ) | |||||
Comprehensive income | $ | 1,654 | 1,134 | |||||
Basic earnings per share | $ | 0.85 | 0.72 | |||||
Basic average shares outstanding | 1,903,553 | 1,878,309 | ||||||
Diluted earnings per share | $ | 0.83 | 0.71 | |||||
Diluted average shares outstanding | 1,953,788 | 1,906,109 | ||||||
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FIRST COMMUNITY CORPORATION AND SUBSIDIARY
($ amounts in thousands except earnings per share)
| Three Months Ended September 30, | ||||||||
| 2004 | 2003 | |||||||
Interest income: | ||||||||
| Loans, including fees | $ | 2,625 | 2,500 | |||||
| Securities: | ||||||||
| Taxable | 151 | 85 | ||||||
| Tax exempt | 19 | 18 | ||||||
| Federal funds sold | — | 1 | ||||||
Total interest income | 2,795 | 2,604 | ||||||
Interest expense: | ||||||||
| Interest on deposits | 694 | 695 | ||||||
| Interest on other borrowed funds | 239 | 210 | ||||||
Total interest expense | 933 | 905 | ||||||
Net interest income | 1,862 | 1,699 | ||||||
Provision for loan losses | 75 | 83 | ||||||
Interest income after provision for loan losses | 1,787 | 1,616 | ||||||
Other income: | ||||||||
| Service charge on deposit accounts | 272 | 266 | ||||||
| Other operating income | 150 | 176 | ||||||
| Gain (loss) on sale of securities | (3 | ) | — | |||||
Total other income | 419 | 442 | ||||||
Other expenses: | ||||||||
| Salaries, directors’ fees and employee benefits | 639 | 654 | ||||||
| Premises and equipment expense | 231 | 245 | ||||||
| Other operating expenses | 412 | 312 | ||||||
Total other expenses | 1,282 | 1,211 | ||||||
Income before income taxes | 924 | 847 | ||||||
Income taxes | 337 | 315 | ||||||
Net income | $ | 587 | 532 | |||||
Other comprehensive income: | ||||||||
Unrealized gains/(losses) on securities, net | 256 | (144 | ) | |||||
Comprehensive income | $ | 843 | 388 | |||||
Basic earnings per share | $ | 0.31 | 0.28 | |||||
Basic average shares outstanding | 1,911,562 | 1,882,438 | ||||||
Diluted earnings per share | $ | 0.30 | 0.28 | |||||
Diluted average shares outstanding | 1,961,797 | 1,910,238 | ||||||
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FIRST COMMUNITY CORPORATION AND SUBSIDIARY
| (In Thousands) | ||||||||
| Nine Month Ended | ||||||||
| September 30, | ||||||||
| 2004 | 2003 | |||||||
Increase (decrease) in cash and due from banks | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,617 | 1,357 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 482 | 456 | ||||||
| Provision for loan losses | 157 | 394 | ||||||
| Decrease in accrued income receivable | 142 | 32 | ||||||
| Other, net | (138 | ) | (493 | ) | ||||
Net cash from operating activities | 2,260 | 1,746 | ||||||
Cash flows from investing activities: | ||||||||
| Maturities and redemptions of securities available for sale | 10,783 | 10,061 | ||||||
| Purchases of securities available-for-sale | (13,994 | ) | (16,509 | ) | ||||
| Increase in loans | (11,085 | ) | (26,764 | ) | ||||
| Purchases of premises and equipment | (1,417 | ) | (325 | ) | ||||
Net cash from investing activities | (15,713 | ) | (33,537 | ) | ||||
Cash flows from financing activities: | ||||||||
| Cash dividends paid | (399 | ) | (395 | ) | ||||
| Issuance of common stock | 115 | 194 | ||||||
| Increase in federal funds purchased | — | 2,225 | ||||||
| Repayments of Note Payable | (350 | ) | (453 | ) | ||||
| Increase in borrowings from FHLB | 18,868 | 6,400 | ||||||
| Repayments of borrowings from FHLB | (14,958 | ) | — | |||||
| Issuance of trust preferred securities | 3,000 | — | ||||||
| Increase/(Decrease) in securities sold under agreements to repurchase | 89 | (90 | ) | |||||
| Increase in deposits | 1,938 | 7,637 | ||||||
Net cash from financing activities | 8,303 | 15,518 | ||||||
Net increase (decrease) in cash | (5,150 | ) | (16,273 | ) | ||||
Cash and due from banks at beginning of period | 9,336 | 20,969 | ||||||
Cash and due from banks at end of period | $ | 4,186 | 4,696 | |||||
Cash payments for interest | $ | 2,748 | 2,770 | |||||
Cash payments for income taxes | $ | 1,058 | 810 | |||||
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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. 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, 2004, are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting principles generally accepted 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 includes cash, deposits with other financial institutions under 90 days, and federal funds sold.
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 are
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measured at the fair value of the collateral if the loan is collateral dependent or at either the present value of expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price. 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, | ||||||||
| 2004 | 2003 | |||||||
| Net Income as reported | $ | 1,617 | $ | 1,357 | ||||
| Deduct: Stock-based compensation expense Determined under fair value based method, net of tax | 15 | 4 | ||||||
| Pro forma net income | 1,602 | 1,353 | ||||||
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| For the nine months ended September 30, | ||||||||
| 2004 | 2003 | |||||||
| Basic Earnings per share as reported | .85 | .72 | ||||||
| Pro forma basic earnings per share | .84 | .72 | ||||||
| Diluted earnings per share as reported | .83 | .71 | ||||||
| Pro forma diluted earning per share | .82 | .71 | ||||||
No options were granted in 2004 and 2003.
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.
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ITEM NO. 2 MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses (ALL), have been critical to the determination of our financial position, results of operations and cash flows.
Our management assesses the adequacy of the ALL prior to the end of each calendar quarter. This assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of the resulting balance. The ALL consists of two portions: (1) an amount representative of specifically identified credit exposure and exposures; and (2) an amount representative of incurred loss which is based in part on the consideration of historic loss histories which management believes is representative of the probable loss. Even though the allowance for loan losses is composed of two components, the entire allowance is available to absorb any credit losses.
We establish the amount separately for two different risk groups: (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogeneous loans (generally consumer loans). We base the amount for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, primarily based on past loan loss experience, the nature and volume of the portfolio, economic and other factors.
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, 2004, the Bank has grown to total assets of approximately $198 million.
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. 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 and $ 6.5 million in demand deposits from a local government entity.
The result 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
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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 $3.2 million or 22.1% during the first nine months of 2004. This increase reflects the purchase of $14.0 million of securities (primarily agency securities) and maturities and redemptions of $10.8 million during the first three quarters of 2004. These purchases were funded primarily from federal funds sold which decreased $6.6 million or 100.0% in the 2004.
Loans have increased $11.0 million or 7.2% during the first nine months of 2004. Commercial real estate loans comprise the majority of this increase. 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 or consumer loan areas, respectively. The Bank competes generally with insurance companies, credit unions and other financial institutions 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.
Deposits have increased $2.0 million or 1.2% as of September 30, 2004 from December 31, 2003. Due to the limited deposit growth year-to-date in 2004, new loans were funded from Federal Home Loan Bank advances of $3.9 million obtained during the first nine months of the year.
The Bank continually reviews its loan portfolio to determine deficiencies and the corrective actions to be taken. The review process is outsourced to an outside consultant. 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.
In September 2004, the Company, through Rogersville Statutory Trust II and with the assistance of it’s Placement Agent, sold to institutional investors $3,000,000 of trust preferred securities. The rate, which varies quarterly with LIBOR, was 4.16% as of September 30, 2004. The securities mature on September 20, 2034, however the maturity may be shortened to a date not earlier than September 20, 2009. They are presented in liabilities on the balance sheet and count as Tier 1 capital for regulatory purposes (subject to regulatory limitations of 25% of capital). Any remaining balance qualifies as Tier 2 capital up to applicable regulatory guidelines. A portion of the proceeds was used to payoff the outstanding balance of $350,000 on a note payable to an unrelated financial institution. The company had previously issued $4,000,000 of trust preferred securities in 2001. These securities remain outstanding and also qualify as capital for regulatory capital purposes. The rate on these securities was 5.51% at September 30, 2004 and varies quarterly with LIBOR.
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, 2004 amounted to $67,000 or 0.04% of total loans, a decrease from $260,000 or 0.17% of total loans at December 31, 2003. Diversification within the loan portfolio is an important means of reducing inherent lending risks. At September 30, 2004, 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.
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Other real estate owned is carried at fair value, determined by an appraisal. The Bank has $226,000 of other real estate owned as of September 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is adequate with cash and due from banks of $4.2 million. In addition, loans and securities repricing or maturing within one year or less exceed $72.5 million at September 30, 2004. The Bank has approximately $24.3 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 $2.7 million at September 30, 2004. In addition to the Federal Home Loan Bank membership from which the Bank has unused borrowing capacity of $16.9 million, the Bank has established federal funds lines of credit with three correspondent banks totaling $14.7 million to meet unexpected liquidity demands. 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, 2004, is $18.7 million or approximately 9.4% 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, 2004, are as follows:
| Tier 1 leverage | 9.45 | % | ||
| Tier 1 risk-based | 10.62 | % | ||
| Total risk-based | 11.63 | % |
Total equity capital of the corporation at September 30, 2004, is $12.0 million or approximately 6.1% 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, 2004, are as follows:
| Tier 1 leverage | 8.10 | % | ||
| Tier 1 risk-based | 9.10 | % | ||
| Total risk-based | 11.80 | % |
As of September 30, 2004, $4.0 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, 2004.
OFF-BALANCE SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was as follows at quarter end.
| September 30, 2004 | December 31, 2003 | |||||||||||||||
| Fixed | Variable | Fixed | Variable | |||||||||||||
| Rate | Rate | Rate | Rate | |||||||||||||
| Commitments to make loans | $ | 4,024,000 | $ | 20,243,000 | $ | 2,614,000 | $ | 13,861,000 | ||||||||
| Unused letters of credit | — | 2,751,219 | — | 3,012,550 | ||||||||||||
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Commitments to make loans are generally made for periods of 1 year or less. The fixed rate loan commitments have interest rates up to 21.00% and maturities ranging from 1 year to 5 years.
RESULTS OF OPERATIONS
YEAR TO DATE
The Company had net income of $1,617,000 for the nine months ending September 30, 2004, compared with $1,357,000 for the same period last year, resulting in an increase of 19.2%. Between September 30, 2003 and September 30, 2004, average earning assets grew approximately $19.5 million or 12.2% while the average yield on the assets declined from 6.39% at September 30, 2003 to 5.98% at September 30, 2004. During this same time period average interest bearing liabilities grew approximately $15.4 million or 10.3% while the cost of these funds decreased from 2.50% at September 30, 2003 to 2.22% at September 30, 2004. Consequently, net interest margin declined from 4.04% at September 30, 2003 to 3.93% at September 30, 2004. Although net interest margin declined, net interest income increased in 2004 due to the growth in average earning assets exceeding the growth in average interest bearing liabilities by approximately $4.1 million. This resulted in net interest income increasing $441,000 or 9.2% as of the nine months ending September 30, 2004, compared to the same period in 2003. Earning asset yield has been affected by the shift in the Company’s loan portfolio away from higher yielding consumer loans to commercial real estate loans. The yield has also been impacted by the current record low interest rates as customers refinanced their adjustable rate mortgages on the secondary market to lock in low fixed rates.
Noninterest income for the nine months ending September 30, 2004 was $1,207,000 compared to $1,435,000 for the same period in 2003, reflecting a decrease of $228,000 or 15.9%. 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 nine months ending September 30, 2004 were $775,000 compared with $839,000 for the same period in 2003, reflecting a decrease of $64,000 or 7.7%. This decrease resulted from a decrease in usage by customers of overdraft privileges offered by the Company, as well as a reduction taken in June 2003 of $50,000 in the allowance for uncollectible overdraft charges. Charge-offs related to the program had been lower than originally estimated. The nine-months ending September 30, 2003 included $20,000 from gains on the sale of foreclosed property and a $98,000 gain on the sale of securities. A $6,000 loss on the sale of securities was incurred in 2004. In 2003, the Company held securities that earned higher than market yields, yet had relatively short remaining lives. The Company determined that it was more advantageous to sell the securities and take the gains rather than hold them to maturity. In 2004, due to changes in the bond market, no additional opportunities to sell at gains have occurred. The Company has sold certain securities in 2004 at a small loss in an effort to better position the portfolio for a rising rate environment.
The provision for loan losses was $157,000 during the nine months ending September 30, 2004 compared with $394,000 for the same period in 2003. The provision for loan losses decreased in 2004 primarily due to lower loan growth during the nine months ending September 30, 2004 as compared to the same period in 2003. Loans increased $11.0 million and $26.7 million during the nine months ending September 30, 2004 and September 30, 2003, respectively. Loan growth is one of several significant components taken into consideration by management in the determination of the adequacy of the allowance for loan losses. Other factors which resulted in a lower provision in 2004 includes an improvement in the level of past due loans, as well as the continuing trend of loan growth in the commercial real estate area as opposed to higher risk consumer lending. The allowance for loan losses of $1,782,000 at September 30, 2004 (approximately 1.09% 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 expenses for the nine months ending September 30, 2004 were $3,788,000 compared to $3,704,000 for the same period in 2003 reflecting an increase of $ 84,000 or 2.3%. Non-interest expenses consist primarily of salaries and benefits, facilities operation expenses, advertising, legal fees, office supplies,
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software maintenance, FDIC and state banking assessments, financial institution bond insurance, and education. The Company continues to closely monitor expenses to control growth in this area.
The Company records a provision for income taxes currently payable and for taxes payable in the future because of differences in the timing of recognition of certain items for financial statement and income tax purposes. The major difference between the effective tax rate applied to the Company’s financial statement income and the federal statutory rate is caused by state income taxes, net of federal tax benefit. The Company’s effective tax rate was 36.0% in 2004, and 37.2% in 2003.
QUARTER TO DATE
The Company had net income of $588,000 for the three months ending September 30, 2004, compared with $532,000 for the same period last year, resulting in an increase of 10.6%.
Net interest income for the three months ending September 30, 2004 was $1,863,000 compared to $1,699,000 for the same period in 2003, reflecting an increase of $164,000 or 9.7%. See the above year to date discussion for details concerning the impact of the current rate environment and changing asset mix on the Bank’s net interest margin.
Provision for loan losses for the three months ending September 30, 2004 was $75,000 compared with $83,000 for the same period in 2003. Loan growth, the nature and volume of the portfolio, past due status and economic conditions are several components taken into consideration by management in the determination of the adequacy of the allowance for loan losses. Although loans grew approximately $5.5 million more in the quarter ending September 30, 2004 as compared to the same quarter in 2003, the Company’s past due percentage for loans has averaged .57% during 2004 as compared to 1.64% in 2003. Based on these and other considerations, management considered a lower provision in 2004 to be warranted.
Noninterest income for the three months ending September 30, 2004 was $419,000 compared to $442,000 for the same period in 2003, reflecting a decrease of $23,000 or 5.2%. 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, 2004 were $272,000 compared with $266,000 for the same period in 2003, reflecting an increase of $6,000 or 2.3%. Secondary mortgage processing fees for the three months ending September 30, 2004 were $15,000 compared with $52,000 for the same period in 2003. In 2003, the Company had two secondary market loan originators. Due to turnover, only one originator is on staff in 2004. This reduction in personnel combined with rising mortgage rates and increased competition in this area resulted in reduced income in 2004.
Non-interest expenses for the three months ending September 30, 2004 were $1,282,000 compared to $1,211,000 for the same period in 2003 reflecting an increase of $ 71,000 or 5.9%. Audit expense for the three months ending September 30, 2004 was $27,000 compared with $18,500 for the same period in 2003, reflecting an increase of $ 8,500. This is primarily due to the additional expense of outsourcing loan review. In addition, September 2004 includes a $30,000 loss related to a counterfeit official check received by the Company. While this may be eventually recovered from law enforcement officials, it appears doubtful at this time.
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Item 3 Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management, including Mark A. Gamble, the principal executive officer, and Elizabeth O. Lollar, the principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s management, including the principal executive officer and principal financial officer, concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. The Company has also evaluated its internal control over financial reporting (as defined in Rule 13a-15(e) under the Exchange Act), and there have been no changes in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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 Earnings Per Share | |
| 31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) | |
| 31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) | |
| 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, 2004.
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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 10, 2004 | /s/ Mark A. Gamble | |
| (Date) | Mark A. Gamble, President & Principal Executive Officer |
| November 10, 2004 | /s/ Elizabeth O. Lollar | |
| (Date) | Elizabeth O. Lollar | |
| Chief Financial Officer & Principal Financial Officer |
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